TheStreet, Inc.
THESTREET COM (Form: 10-Q, Received: 02/08/2010 17:07:01)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 

 
FORM 10-Q

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

For the quarterly period ended September 30, 2009
 
Commission File Number 000-25779

THESTREET.COM, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
06-1515824
(State or other jurisdiction of
 
(I.R.S. Employer Identification Number)
incorporation or organization)
   

14 Wall Street
New York, New York 10005
(Address of principal executive offices, including zip code)

(212) 321-5000
(Registrant's telephone number, including area code)
 
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant as required to submit and post such files).  Yes x   No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o    Accelerated filer x Non-accelerated filer o    Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
   
(Number of Shares Outstanding
(Title of Class)
 
as of February 2, 2010)
Common Stock, par value $0.01 per share
 
31,538,727
     
     


 
Explanatory Note

Along with this report TheStreet.com, Inc. (“we,” “us,” the “Company”), is filing its delayed quarterly report for the third quarter of fiscal year 2009 on Form 10-Q.   This Form 10-Q amends the third quarterly report on Form 10-Q for the fiscal year 2008 of TheStreet.com, Inc. which Form 10-Q originally was filed on November 7, 2008 (the “Original Form 10-Q”). The amendment is a result of the restatement of the Company’s interim condensed consolidated financial statements and related financial information for the three and nine months ended September 30, 2008 (“2008 Financial Information”).

The Company is restating its previously filed 2008 Financial Information to correct inaccuracies in its Promotions.com subsidiary (which the Company sold in December 2009) resulting from and requiring adjustments to revenue and expenses for transactions with certain third parties (including parties in which certain executives of the Promotions.com subsidiary had an interest), in which the Company contracted both to provide services to, and receive services from, such parties and due to errors in the timing of recognition of revenue.  The restatement of the 2008 Financial Information resulted in reduced revenue in certain quarters, and increased revenue in other quarters, as compared to results previously reported; reduced expense in certain quarters, as compared to results previously reported; and reduced net income (or increased net loss) in certain quarters, and reduced net loss in other quarters, as compared to results previously reported.  The restatement does not affect the Company’s previously reported cash, cash equivalents, restricted cash and marketable securities.

Restated balances for items of the 2008 Financial Information have been identified with the notation “As Restated” where appropriate.  Throughout the interim condensed consolidated financial statements, the term “as previously reported” will be used to refer to balances from the fiscal 2008 interim condensed consolidated financial statements as reported prior to this restatement.

 
ii

 

TheStreet.com, Inc.
Form 10-Q

For the Three Months Ended September 30, 2009

Part I - FINANCIAL INFORMATION
1
Item 1.
Interim Condensed Consolidated Financial Statements
1
 
Condensed Consolidated Balance Sheets
1
 
Condensed Consolidated Statements of Operations
2
 
Condensed Consolidated Statements of Cash Flows
3
 
Notes to Condensed Consolidated Financial Statements
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
29
     
PART II - OTHER INFORMATION
30
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
32
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
Submission of Matters to a Vote of Security Holders
32
Item 5.
Other Information
32
Item 6.
Exhibits
34
SIGNATURES
35
 
 
iii

 

Part I – FINANCIAL INFORMATION

Item 1.  Interim Condensed Consolidated Financial Statements.
 
THESTREET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
   
(As Restated - Note 1)
 
assets
           
Current Assets:
           
Cash and cash equivalents
  $ 60,486,534     $ 72,441,294  
Restricted cash
    500,000       516,951  
Marketable securities
    2,816,411       -  
Accounts receivable, net of allowance for doubtful accounts of $129,918 as of September 30, 2009 and $358,989 as of December 31, 2008
    5,508,175       11,167,297  
Other receivables
    268,841       647,596  
Deferred taxes
    -       2,546,743  
Prepaid expenses and other current assets
    1,817,184       1,884,247  
Assets held for sale
    5,208,494       -  
Total current assets
    76,605,639       89,204,128  
                 
Property and equipment, net of accumulated depreciation and amortization of $12,557,033 as of September 30, 2009 and $10,250,181 as of December 31, 2008
    8,011,657       9,672,779  
Marketable securities
    17,461,005       1,658,178  
Long term investment
    555,000       2,042,970  
Other assets
    77,710       122,197  
Goodwill
    20,181,000       40,024,076  
Other intangibles, net
    8,003,942       13,630,900  
Deferred taxes
    -       13,570,047  
Restricted cash
    1,660,371       1,762,079  
Total assets
  $ 132,556,324     $ 171,687,354  
                 
liabilities and stockholders’ equity
               
Current Liabilities:
               
Accounts payable
  $ 2,078,814     $ 280,469  
Accrued expenses
    5,791,362       2,784,902  
Deferred revenue
    16,918,187       16,495,712  
Other current liabilities
    181,431       205,838  
Liabilities of discontinued operations
    223,204       225,925  
Liabilities held for sale
    1,997,576       -  
Total current liabilities
    27,190,574       19,992,846  
Other liabilities
    885,447       79,896  
Total liabilities
    28,076,021       20,072,742  
                 
Stockholders’ Equity
               
Preferred stock; $0.01 par value; 10,000,000 shares authorized; 5,500 issued and outstanding as of September 30, 2009 and December 31, 2008; the aggregate liquidation preference totals $55,000,000 as of September 30, 2009 and December 31, 2008
    55       55  
Common stock; $0.01 par value; 100,000,000 shares authorized; 36,598,461 shares issued and 30,516,727 shares outstanding as of September 30, 2009, and 36,262,546 shares issued and 30,378,894 shares outstanding as of December 31, 2008
    365,985       362,625  
Additional paid-in capital
    270,621,024       271,271,574  
Accumulated other comprehensive income (loss)
    389,777       (290,000 )
Treasury stock at cost; 6,081,734 shares as of September 30, 2009 and 5,883,652 shares as of December 31, 2008
    (10,411,952 )     (9,900,284 )
Accumulated deficit
    (156,484,586 )     (109,829,358 )
Total stockholders’ equity
    104,480,303       151,614,612  
Total liabilities and stockholders’ equity
  $ 132,556,324     $ 171,687,354  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements
 
1

 

THESTREET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
         
( As   Restated -
Note   1 )
         
(As Restated -
Note 1)
 
   
(unaudited)
   
(unaudited)
 
Net revenue:
                       
Premium services
  $ 9,373,672     $ 10,244,212     $ 28,310,049     $ 31,293,620  
Marketing services
    5,861,932       6,804,425       15,418,258       22,150,864  
     Total net revenue
    15,235,604       17,048,637       43,728,307       53,444,484  
                                 
Operating expense:
                               
Cost of services
    7,156,120       8,359,563       22,666,527       24,290,969  
Sales and marketing
    3,005,218       3,550,363       8,768,054       10,944,352  
General and administrative
    5,213,582       4,589,851       13,185,493       13,024,218  
Depreciation and amortization
    1,206,916       1,481,670       3,885,363       4,330,054  
Impairment charges
    -       -       24,137,069       -  
Restructuring and other charges
    169,692       -       2,728,502       -  
     Total operating expense
    16,751,528       17,981,447       75,371,008       52,589,593  
     Operating (loss) income
    (1,515,924 )     (932,810 )     (31,642,701 )     854,891  
Net interest income
    186,342       345,675       775,896       1,432,112  
Gain on sales of marketable securities
    34,684       -       295,430       -  
Other income
    -       -       153,677       -  
     (Loss) income from continuing operations before income taxes
    (1,294,898 )     (587,135 )     (30,417,698 )     2,287,003  
(Benefit) provision for income taxes
    -       106,364       16,227,077       377,985  
     (Loss) income from continuing operations
    (1,294,898 )     (693,499 )     (46,644,775 )     1,909,018  
Discontinued operations:
                               
     Loss from discontinued operations
    1,846       3,079       10,453       7,895  
     Net (loss) income
    (1,296,744 )     (696,578 )     (46,655,228 )     1,901,123  
Preferred stock cash dividends
    96,424       96,424       289,272       289,272  
     Net (loss) income attributable to common stockholders
  $ (1,393,168 )   $ (793,002 )   $ (46,944,500 )   $ 1,611,851  
                                 
Basic net (loss) income per share
                               
  (Loss) income from continuing operations
  $ (0.05 )   $ (0.03 )   $ (1.53 )   $ 0.06  
  Loss  from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
     Net (loss) income
    (0.05 )     (0.03 )     (1.53 )     0.06  
Preferred stock cash dividends
    (0.00 )     (0.00 )     (0.01 )     (0.01 )
Net (loss) income attributable to common stockholders
  $ (0.05 )   $ (0.03 )   $ (1.54 )   $ 0.05  
                                 
Diluted net (loss) income per share
                               
  (Loss) income from continuing operations
  $ (0.05 )   $ (0.03 )   $ (1.53 )   $ 0.05  
  Loss  from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
     Net (loss) income
    (0.05 )     (0.03 )     (1.53 )     0.05  
Preferred stock cash dividends
    (0.00 )     (0.00 )     (0.01 )     -  
Net (loss) income attributable to common stockholders
  $ (0.05 )   $ (0.03 )   $ (1.54 )   $ 0.05  
                                 
Weighted average basic shares outstanding
    30,606,216       30,482,949       30,574,361       30,442,955  
Weighted average diluted shares outstanding
    30,606,216       30,482,949       30,574,361       34,713,061  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements

 
2

 
 
THESTREET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
For the Nine Months Ended September 30,
 
   
2009
   
2008
 
         
(As Restated - Note 1)
 
   
(unaudited)
 
Cash Flows from Operating Activities:
           
Net (loss) income
  $ (46,655,228 )   $ 1,901,123  
Loss from discontinued operations
    10,453       7,895  
(Loss) income from continuing operations
    (46,644,775 )     1,909,018  
Adjustments to reconcile income from continuing operations
               
   to net cash provided by operating activities:
               
Stock-based compensation expense
    2,158,815       2,639,208  
Provision for doubtful accounts
    183,049       410,000  
Depreciation and amortization
    3,885,363       4,330,054  
Valuation allowance on deferred taxes
    16,116,790       -  
Impairment charges
    24,137,069       -  
Restructuring and other charges
    428,868       -  
Deferred rent
    941,954       146,470  
Changes in operating assets and liabilities:
               
    Accounts receivable
    2,697,628       (1,174,755 )
    Other receivables
    41,966       134,556  
    Prepaid expenses and other current assets
    (240,864 )     (157,942 )
    Other assets
    8,009       63,883  
    Accounts payable
    1,857,748       807,600  
    Accrued expenses
    2,809,201       (1,859,338 )
    Deferred revenue
    2,074,634       1,039,292  
    Other current liabilities
    183,477       161,770  
    Other liabilities
    (31,596 )     (50,681 )
          Net cash provided by continuing operations
    10,607,336       8,399,135  
          Net cash used in discontinued operations
    (13,174 )     (13,134 )
          Net cash provided by operating activities
    10,594,162       8,386,001  
                 
Cash Flows from Investing Activities:
               
Purchase of marketable securities
    (29,204,799 )     (26,589,234 )
Sale of marketable securities
    11,265,338          
Business combinations, net of cash received
    -       (106,252 )
Long term investment
    -       (1,392,976 )
Capital expenditures
    (1,697,251 )     (4,001,552 )
Proceeds from the sale of fixed assets
    -       28,153  
          Net cash used in investing activities
    (19,636,712 )     (32,061,861 )
                 
Cash Flows from Financing Activities:
               
Proceeds from the exercise of stock options
    -       588,874  
Costs associated with the sale of preferred stock
    -       (125,000 )
Cash dividends paid on common stock
    (2,392,651 )     (2,318,640 )
Cash dividends paid on preferred stock
    (289,272 )     (385,696 )
Restricted cash
    -       (41,709 )
Purchase of treasury stock
    (230,287 )     (325,729 )
          Net cash used in financing activities
    (2,912,210 )     (2,607,900 )
Net decrease increase in cash and cash equivalents
    (11,954,760 )     (26,283,760 )
Cash and cash equivalents, beginning of period
    72,441,294       79,170,754  
Cash and cash equivalents, end of period
  $ 60,486,534     $ 52,886,994  
Supplemental disclosures of cash flow information:
               
Cash payments made for interest
  $ 7,880     $ 31,399  
Cash payments made for income taxes
  $ 322,395     $ 544,241  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements

 
3

 

TheStreet.com, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)

1.             DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Business

TheStreet.com, Inc. together with its wholly owned subsidiaries, (“we”, “us” or the “Company”), is a leading digital financial media company.  Our goal is to be the primary independent online-only source of reliable and actionable investing ideas, news and analysis, markets and rate data and analytical tools for a growing audience of self-directed investors and the institutions that serve them.  We distribute our fee-based premium content and advertising-supported content through a network of proprietary electronic services including: Web sites, blogs, widgets, email services, mobile devices, podcasts and online video channels.  We also syndicate our content for distribution by financial institutions and other media organizations.

Basis of Presentation and Restatement of September 30, 2008 Interim Condensed Consolidated Financial Statements
 
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and for quarterly reports on Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The financial statements require the use of management estimates and include the accounts of the Company as required by GAAP.   Operating results for the three and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, as restated (see below), but does not include all of the information and notes required by GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2008, filed with the Securities and Exchange Commission (“SEC”) on February 8, 2010 (“2008 Form 10-K/A”).  The 2008 period results described in our condensed consolidated financial statements reflect the results reported in our 2008 Form 10-K/A.

The Company is restating its previously filed September 30, 2008 interim condensed consolidated financial statements (“2008 Financial Information”) to correct inaccuracies related to the timing of recognition of revenue within the Company’s former Promotions.com subsidiary which the Company sold in December 2009.  The restatement of the 2008 Financial Information as well as the restatement of the December 31, 2008 consolidated financial statements and the interim consolidated financial statements for the quarters ended March 31, 2008, June 30, 2008 and December 31, 2008, result in reduced revenue in certain quarters, and increased revenue in other quarters, as compared to results previously reported; reduced expense in certain quarters, as compared to results previously reported; and reduced net income (or increased net loss) in certain quarters, and reduced net loss in other quarters, as compared to results previously reported.  The restatement does not affect the Company’s previously reported cash, cash equivalents, restricted cash and marketable securities.

 
4

 

Restated balances for items of the 2008 Financial Information have been identified with the notation “As Restated” where appropriate.  Throughout the interim condensed consolidated financial statements, the term “as previously reported” will be used to refer to balances from the September 2008 interim condensed consolidated financial statements as reported prior to this restatement.

The impact of the restatement on the Company’s Consolidated Statements of Operations for the three and nine month periods ended September 30, 2008 is as follows:

   
Unaudited
 
   
For the Three Months Ended September 30, 2008
 
   
As Filed
   
Adjustment
   
As Restated
 
Net revenue:
                 
Paid services
  $ 10,244,212     $ -     $ 10,244,212  
Marketing services
    6,478,367       326,058       6,804,425  
     Total net revenue
    16,722,579       326,058       17,048,637  
                         
Operating expense:
                       
Cost of services
    8,405,002       (45,439 )     8,359,563  
Sales and marketing
    3,550,363       -       3,550,363  
General and administrative
    4,589,851       -       4,589,851  
Depreciation and amortization
    1,481,670       -       1,481,670  
     Total operating expense
    18,026,886       (45,439 )     17,981,447  
     Operating loss
    (1,304,307 )     371,497       (932,810 )
Net interest income
    345,675       -       345,675  
 Loss from continuing operations before income taxes
    (958,632 )     371,497       (587,135 )
Provision for income taxes
    106,364       -       106,364  
  Loss from continuing operations
    (1,064,996 )     371,497       (693,499 )
Discontinued operations:
                       
   Loss from discontinued operations
    3,079       -       3,079  
Net loss
    (1,068,075 )     371,497       (696,578 )
Preferred stock cash dividends
    96,424       -       96,424  
Net loss attributable to common stockholders
  $ (1,164,499 )   $ 371,497     $ (793,002 )
                         
Basic net loss per share:
                       
  Loss from continuing operations
  $ (0.04 )           $ (0.03 )
  Loss from discontinued operations
    (0.00 )             (0.00 )
  Net loss
    (0.04 )             (0.03 )
  Preferred stock dividends
    (0.00 )             (0.00 )
     Net loss attributable to common stockholders
  $ (0.04 )           $ (0.03 )
                         
Diluted net loss per share:
                       
  Loss from continuing operations
  $ (0.04 )           $ (0.03 )
  Loss from discontinued operations
    (0.00 )             (0.00 )
  Net loss
    (0.04 )             (0.03 )
  Preferred stock dividends
    (0.00 )             (0.00 )
     Net loss attributable to common stockholders
  $ (0.04 )           $ (0.03 )
                         
Weighted average basic shares outstanding
    30,482,949               30,482,949  
Weighted average diluted shares outstanding
    30,482,949               30,482,949  
 
5

 
   
Unaudited
 
   
For the Nine Months Ended September 30, 2008
 
   
As Filed
   
Adjustment
   
As Restated
 
Net revenue:
                 
Paid services
  $ 31,293,620     $ -     $ 31,293,620  
Marketing services
    24,065,875       (1,915,011 )     22,150,864  
     Total net revenue
    55,359,495       (1,915,011 )     53,444,484  
                         
Operating expense:
                       
Cost of services
    24,427,285       (136,316 )     24,290,969  
Sales and marketing
    10,944,352       -       10,944,352  
General and administrative
    13,024,218       -       13,024,218  
Depreciation and amortization
    4,330,054       -       4,330,054  
     Total operating expense
    52,725,909       (136,316 )     52,589,593  
     Operating income
    2,633,586       (1,778,695 )     854,891  
Net interest income
    1,432,112       -       1,432,112  
 Income from continuing operations before income taxes
    4,065,698       (1,778,695 )     2,287,003  
Provision for income taxes
    377,985       -       377,985  
  Income from continuing operations
    3,687,713       1,778,695       1,909,018  
Discontinued operations:
                       
    Loss from discontinued operations
    7,895       -       7,895  
Net income
    3,679,818       (1,778,695 )     1,901,123  
Preferred stock cash dividends
    289,272       -       289,272  
Net income attributable to common stockholders
  $ 3,390,546     $ (1,778,695 )   $ 1,611,851  
                         
Basic net loss per share:
                       
  Loss from continuing operations
  $ 0.12             $ 0.06  
  Loss from discontinued operations
    (0.00 )             (0.00 )
  Net loss
    0.12               0.06  
  Preferred stock dividends
    (0.01 )             (0.01 )
     Net loss attributable to common stockholders
  $ 0.11             $ 0.05  
                         
Diluted net loss per share:
                       
  Loss from continuing operations
  $ 0.11             $ 0.05  
  Loss from discontinued operations
    (0.00 )             (0.00 )
  Net loss
    0.11               0.05  
  Preferred stock dividends
    -               -  
     Net loss attributable to common stockholders
  $ 0.11             $ 0.05  
                         
Weighted average basic shares outstanding
    30,442,955               30,442,955  
Weighted average diluted shares outstanding
    34,713,061               34,713,061  

The restatement did not have a material impact on the Company’s interim consolidated balance sheet as of September 30, 2008 or its cash flows from operating, investing and financing activities for the nine months ended September 30, 2008.

A summary of the Company's critical accounting policies and estimates can be found in our 2008 Form 10-K/A, as filed with the SEC on February 8, 2010 (the “2008 Form 10-K/A”).  During the nine months ended September 30, 2009, we changed a critical accounting policy related to our Promotions.com business:  whereas in prior periods, we accounted for revenue for Promotions.com primarily on a percentage of completion basis, we have determined that we did not have in place adequate systems to identify and document the occurrence of milestones.  Promotions.com generates revenues from website design, promotion management and hosting services.  The Company typically enters into arrangements on a fixed fee basis.  Revenue generated from website design services are recognized upon acceptance from the customer or on a straight-line basis over the hosting period if the Company performs website design services and hosts the software.  Revenues from promotions management services are recognized straight-line over the promotion period as the promotion is designed to only operate on Promotions.com proprietary platform.  Hosting services are recognized straight-line over the hosting period.

Effective July 1, 2007, the Company’s revenue streams were classified into two components, “paid services” and “marketing services”.  Effective April 1, 2009, the “paid services” component has been renamed “premium services” to better reflect the character of this revenue and as such, this line item has been changed for all periods presented.

The Company has evaluated subsequent events for recognition or disclosure through February 8, 2010, which was the date we filed this Form 10-Q with the SEC.

 
6

 

Recent Accounting Pronouncements

Effective January 1, 2009, the Company adopted Accounting Standards Codification (“ASC”) 805-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 141 (Revised 2007)), Business Combinations (“ASC 805-10”).  ASC 805-10 requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, requires expensing of most transaction costs, and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination.  The effect of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements reflected in this report.  However, the effect of this pronouncement may be material in the future dependent upon each specific acquisition that might occur in future periods.

Effective January 1, 2009, the Company adopted ASC 815-40 (formerly EITF 07-5), Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock, (“ASC 815-40”).  ASC 815-40 provides framework for determining whether an instrument is indexed to an entity’s own stock.  The adoption of ASC 815-40 did not have a material impact on the Company’s condensed consolidated financial statements reflected in this report.

Effective January 1, 2009 the Company adopted ASC 810-10 (formerly SFAS No. 160), Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“ASC 810-10”).  Upon adoption of ASC 810-10, the Company is required to report any noncontrolling interests as a separate component of stockholders’ equity. The Company is required to present any net income allocable to noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statement of operations. The effect of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements reflected in this report.  However, the effect of this pronouncement may be material in the future dependent upon each specific acquisition that might occur in future periods.

In April 2009, the Company adopted ASC 825-10 (formerly FSP 107-1), Interim Disclosure about Fair Value of Financial Instruments (“ASC 825-10”).  ASC 825-10 amends ASC 825-10 (formerly SFAS No. 107), Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements.  ASC 825-10 also amends ASC 270-10 (formerly APB Opinion No. 28), Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.  ASC 825-10 is effective for interim reporting periods after June 15, 2009.  The Company elected early adoption of ASC 825-10 for the quarter ended March 31, 2009.  The implementation of ASC 825-10 did not have a material effect on the Company’s condensed consolidated financial statements reflected in this report.

In April 2009, the Company adopted ASC 820-10 (formerly FSP No. 157-4), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“ASC 820-10”).  ASC 820-10 provides additional guidance for estimating fair value in accordance with ASC 820-10 (formerly SFAS No. 157), Fair Value Measurements when the volume and level of activity for the asset or liability have significantly decreased.  ASC 820-10 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  ASC 820-10 is effective for interim and annual reporting periods ending after June 15, 2009, applied prospectively. The Company elected early adoption of ASC 820-10 for the quarter ended March 31, 2009.  The implementation of ASC 820-10 did not have a material effect on the Company’s condensed consolidated financial statements reflected in this report.

In May 2009, the Company adopted ASC 855-10 (formerly SFAS No. 165), Subsequent Events .  This standard establishes the accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  The implementation of this standard did not have a material impact on the Company’s condensed consolidated financial statements reflected in this report.  See Note 1 – Basis of Presentation for this new disclosure.

 
7

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-16 (formerly SFAS No. 166, Accounting for Transfers of Financial Assets - An amendment of FASB Statement No. 140 ). ASU 2009-16 removes the concept of a qualifying special-purpose entity (QSPE) from ASC 860-10 (formerly SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities )   and removes the exception from applying ASC 810-10 (formerly FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ). This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This statement is effective for fiscal years beginning after November 15, 2009. Earlier application is prohibited.  ASU 2009-16 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASU 2009-17 (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46R ). ASU 2009-17 amends ASC 810-10 (formerly FIN 46R) to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This statement is effective for fiscal years beginning after November 15, 2009. Earlier application is prohibited.  ASU 2009-17 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009, the Company adopted ASC 105-10 (formerly SFAS No. 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“ASC 105-10”). The Codification will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of ASC 105-10, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative.  ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The implementation of ASC 105-10 did not have a material effect on the Company’s condensed consolidated financial statements reflected in this report.

In April 2009, the Company adopted ASC 320-10 (formerly FSP FAS 115-2 and ASC 958-320 (formerly FAS 124-2), “Recognition and Presentation of Other-Than-Temporary Impairments” (”ASC 320-10” and ”ASC 958-320”), which amends ASC 320-10 (formerly SFAS No. 115), “Accounting for Certain Investments in Debt and Equity Securities” and ASC 958-320 (formerly SFAS No. 124), “Accounting for Certain Investments Held by Not-for-Profit Organizations”. This standard establishes a different other-than-temporary impairment indicator for debt securities than previously prescribed. If it is more likely than not that an impaired security will be sold before the recovery of its cost basis, either due to the investor’s intent to sell or because it will be required to sell the security, the entire impairment is recognized in earnings. Otherwise, only the portion of the impaired debt security related to estimated credit losses is recognized in earnings, while the remainder of the impairment is recorded in other comprehensive income and recognized over the remaining life of the debt security. In addition, the standard expands the presentation and disclosure requirements for other-than-temporary-impairments for both debt and equity securities. ASC 320-10 and ASC 958-320 were adopted for the period ended June 30, 2009. ASC 320-10 and ASC 958-320 did not have a material impact on the Company’s condensed consolidated financial statements reflected in this report.  See Note 3 — Fair Value Measurements for further information.

In October 2009, the FASB issued ASU 2009-13 (an update to ASC 605-25), “Revenue Recognition: Multiple-Element Arrangements” (“ASU 2009-13”) which is effective for annual periods ending after June 15, 2010; however, early adoption is permitted. In arrangements with multiple deliverables, ASU 2009-13 permits entities to use management’s best estimate of selling price to value individual deliverables when those deliverables have never been sold separately or when third-party evidence is not available. In addition, any discounts provided in multiple element arrangements will be allocated on the basis of the relative selling price of each deliverable. The Company is currently evaluating the impact of adopting the provisions of ASU 2009-13.
 
 
8

 

Reclassifications

Certain prior period amounts have been reclassified to conform to current year presentation.

2.
MARKETABLE SECURITIES

The Company holds investments in corporate floating rate notes totaling approximately $18.3 million, which mature at various times within the next 35 months, and in two municipal auction rate securities (“ARS”) issued by the District of Columbia with a par value of $1.875 million.  The ARS pay interest in accordance with their terms at each respective auction date, typically every 35 days, and mature in the year 2038.  The Company accounts for its marketable securities in accordance with the provisions of ASC 320-10.  The Company classifies these securities as available for sale and are reported at fair value.  Unrealized gains and losses are recorded as a component of comprehensive income and excluded from net income. See Note 13 to Notes to Condensed Consolidated Financial Statements.

3.
FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted ASC 820-10, which refines the definition of fair value, provides a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date.  The statement establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

Level 1: Inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).

Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or vary substantially).

Level 3: Inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).
     
Financial assets and liabilities included in our financial statements and measured at fair value as of September 30, 2009 are classified based on the valuation technique level in the table below:

Description:
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Cash and cash equivalents (1)
  $ 60,486,534     $ 60,486,534     $     $  
Marketable securities (2)
    20,277,416       18,467,416             1,810,000  
Long term investment (3)
    555,000                   555,000  
Total at fair value
  $ 81,318,950     $ 78,953,950     $     $ 2,365,000  

 
(1)
Cash and cash equivalents, totaling $60,486,534, consists primarily of money market funds and checking accounts for which we determine fair value through quoted market prices.

 
(2)
Marketable securities consist of corporate floating rate notes for which we determine fair value through quoted market prices.  Marketable securities also consist of two municipal ARS issued by the District of Columbia. Historically, the fair value of ARS investments approximated par value due to the frequent resets through the auction process.  Due to recent events in credit markets, the auction events, which historically have provided liquidity for these securities, have been unsuccessful.  The result of a failed auction is that these ARS holdings will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for these ARS holdings develop.  For each of our ARS, we evaluate the risks related to the structure, collateral and liquidity of the investment, and forecast the probability of issuer default, auction failure and a successful auction at par, or a redemption at par, for each future auction period.  Temporary impairment charges are recorded in accumulated other comprehensive income, whereas other-than-temporary impairment charges are recorded in our statement of operations.  As of September 30, 2009, the Company determined there was a decline in the fair value of its ARS investments of $65,000, which was deemed temporary and was included within accumulated other comprehensive income.  The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS.  The assumptions used in preparing the discounted cash flow model include estimates for interest rate, timing and amount of cash flows and expected holding period of ARS.

 
9

 

 
(3)
Long term investment consists of an investment in Debtfolio, Inc., doing business as Geezeo, a Web-based personal finance site.  The investment totaled $1,850,000 for an 18.5% ownership stake.  Additionally, the Company incurred approximately $0.2 million of legal fees in connection with this investment. The Company retained the option to purchase the company based on an equity value of $12 million at any point prior to April 23, 2009, but did not exercise the option.  During the first quarter of 2009, the carrying value of the Company’s investment was written down to fair value based upon an estimate of the market value of the Company’s equity.  The impairment charge approximated $1.5 million.  There have been no additional events during the three months ended September 30, 2009 that would indicate any additional impairment.

The following table provides a reconciliation of the beginning and ending balance for the Company’s marketable securities measured at fair value using significant unobservable inputs (Level 3):
       
   
Marketable
Securities
 
Balance at January 1, 2009
  $ 1,658,178  
Transfers to Level 1
    (48,178 )
Increase in fair value of investment
    225,000  
Redemption of Auction Rate Security
    (25,000 )
Balance at September 30, 2009
  $ 1,810,000  
 
4.
STOCK-BASED COMPENSATION
 
For a detailed description of past equity-based compensation activity, please refer to the Company’s 2008 Form 10-K/A.  There have been no significant changes in the Company’s equity-based compensation accounting policies and assumptions from those that were disclosed in the 2008 Form 10-K/A.

The Company estimates the value of employee stock options on the date of grant using the Black-Scholes option-pricing model. This determination is affected by the Company’s stock price as well as assumptions regarding expected volatility, risk-free interest rate, and expected dividends. No employee stock options were granted during the nine months ended September 30, 2009.  The weighted-average fair value of employee stock options granted during the nine months ended September 30, 2008 was $3.56, using the Black-Scholes model with the weighted-average assumptions presented below.  Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options.

Expected option lives
 
3.5 years
Expected volatility
 
47.57%
Risk-free interest rate
 
2.37%
Expected dividend yield
 
0.83%
 
 
10

 

As of September 30, 2009, there remained 1,015,947 shares available for future awards under the Company’s 2007 Performance Incentive Plan (the “2007 Plan”).  In connection with awards under both the 2007 Plan and the Company’s 1998 Stock Incentive Plan (the “1998 Plan”), the Company recorded $573,221 and $2,158,815 of non-cash stock-based compensation for the three and nine month periods ended September 30, 2009, respectively, as compared to $986,076 and $2,639,208 for the three and nine month periods ended September 30, 2008, respectively.  As of September 30, 2009, there was approximately $5.6 million of unrecognized stock-based compensation expense remaining to be recognized over a weighted-average period of 3.32 years.

A summary of the activity of the 1998 Plan and 2007 Plan is as follows:

   
Shares
Underlying  
Awards
   
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
($000)
   
Weighted
Average
Remaining
Contractual
Life (In
Years)
 
Awards outstanding at December 31, 2008
    2,617,782     $ 6.37              
Restricted stock units granted
    735,021     $ 0.00              
Shares issued under restricted stock units
    (432,545 )   $ 0.00              
Options cancelled
    (525,540 )   $ 6.99              
Restricted stock units forfeited
    (87,857 )   $ 0.00              
Awards outstanding at March 31, 2009
    2,306,861     $ 5.64              
Restricted stock units granted
    650,000     $ 0.00              
Shares issued under restricted stock units
    (3,370 )   $ 0.00              
Options cancelled
    (570,717 )   $ 8.26              
Restricted stock units forfeited
    (116,729 )   $ 0.00              
Awards outstanding at June 30, 2009
    2,266,045     $ 3.66              
Restricted stock units granted
    492,088     $ 0.00              
Options cancelled
    (218,556 )   $ 10.52              
Restricted stock units forfeited
    (20,690 )   $ 0.00              
Awards outstanding at September 30, 2009
    2,518,887     $ 2.38     $ 5,215       3.18  
Awards vested and expected to vest at September 30, 2009
    2,254,488     $ 2.60     $ 4,490       3.23  
Options exercisable at September 30, 2009
    485,008     $ 8.04     $ 0       1.72  
Restricted stock eligible to be issued at September 30, 2009 pursuant to restricted stock units
    0     $ 0.00     $ 0       N/A  

A summary of the status of the Company’s unvested share-based payment awards as of September 30, 2009 and changes in the nine month period then ended, is as follows:
             
Unvested Awards
 
Number of
Shares
   
Weighted
Average Grant
Date Fair Value
 
Shares underlying awards unvested at December 31, 2008
    1,609,990     $ 5.70  
Shares underlying restricted stock units granted
    1,877,109     $ 2.52  
Shares underlying options vested
    (379,033 )   $ 3.59  
Shares underlying restricted stock units vested
    (435,915 )   $ 6.73  
Shares underlying options cancelled
    (412,996 )   $ 3.61  
Shares underlying restricted stock units forfeited
    (225,276 )   $ 4.78  
Shares underlying awards unvested at September 30, 2009
    2,033,879     $ 3.41  
 
 
11

 
 
For the nine months ended September 30, 2009 and 2008, the total fair value of share-based awards vested was $4,294,742 and $2,382,064, respectively.  For the nine months ended September 30, 2009 and 2008, the total intrinsic value of options exercised was $0 (no options were exercised) and $1,152,566, respectively.  For the nine months ended September 30, 2009 and 2008, zero and 572,106 stock options, respectively, and 1,877,109 and 458,371 restricted stock units, respectively, were granted to employees of the Company.  Additionally, for the nine months ended September 30, 2009 and 2008, zero and 138,368 stock options, respectively, were exercised, and 435,915 and 118,041 shares were issued under restricted stock unit grants, respectively, yielding approximately $0 and $0.4 million, respectively, to the Company.

5.
STOCKHOLDERS’ EQUITY

Preferred Stock

There have been no changes to the terms of the Company’s preferred stock from those that were described in the Company’s 2008 Form 10-K/A.

Treasury Stock

In December 2000, the Company’s Board of Directors authorized the repurchase of up to $10 million worth of the Company’s common stock, from time to time, in private purchases or in the open market.  In February 2004, the Company’s Board of Directors approved the resumption of the stock repurchase program under new price and volume parameters, leaving unchanged the maximum amount available for repurchase under the program.  However, the affirmative vote of the holders of a majority of the outstanding shares of Series B Preferred Stock, voting separately as a single class, is necessary for the Company to repurchase its stock.  During the nine-month periods ended September 30, 2009 and 2008, the Company did not purchase any shares of common stock under the program.  Since inception of the program, the Company has purchased a total of 5,453,416 shares of common stock at an aggregate cost of $7,321,122.  In addition, pursuant to the terms of the Company’s 1998 Plan and 2007 Plan,, and certain procedures adopted by the Compensation Committee of the Board of Directors, in connection with the exercise of stock options by certain of the Company’s executive officers, and the issuance of restricted stock units, the Company may withhold shares in lieu of payment of the exercise price and/or the minimum amount of applicable withholding taxes then due.  Through September 30, 2009, the Company had withheld an aggregate of 420,048 shares which have been recorded as treasury stock.  In addition, the Company received an aggregate of 208,270 shares as partial settlement of the working capital and debt adjustment from the acquisition of Corsis Technology Group II LLC, 104,055 of which were received in December 2008 and 104,215 of which were received in September 2009.  These shares have been recorded as treasury stock.

Dividends

On September 30, 2009, the Company paid its quarterly cash dividend of $0.025 per share on its common stock and its convertible preferred stock on a converted common share basis, to stockholders of record at the close of business on September 15, 2009.  These dividends totaled approximately $0.9 million.   Additionally, the Company’s Board of Directors declared a quarterly cash dividend in the amount of $0.025 per share of common stock during the fourth quarter of 2009, which resulted in additional cash expenditure of approximately $0.9 million.  The Company’s Board of Directors reviews the dividend payment each quarter and there can be no assurance that we will continue to pay this cash dividend in the future.

 
12

 
 
6.
LEGAL PROCEEDINGS
 
In December 2001, the Company was named as a defendant in a securities class action filed in the United States District Court for the Southern District of New York related to its initial public offering (“IPO”) in May 1999. The lawsuit also named as individual defendants certain of its former officers and directors, James J. Cramer, currently the Chairman of the Board of the Company, and certain of the underwriters of the IPO, including The Goldman Sachs Group, Inc., Hambrecht & Quist LLC (now part of JP Morgan Chase & Co.), Thomas Weisel Partners LLC, Robertson Stephens Inc. (an investment banking subsidiary of BankBoston Corp., later FleetBoston Corp., which ceased operations in 2002), and Merrill Lynch, Pierce, Fenner & Smith, Inc. (now part of Bank of America Corporation).  Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the district court (the “IPO Litigations”). The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Company’s stock. An amended complaint was filed April 19, 2002. The Company and the officers and directors were named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and other related provisions. The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.

On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving the Company. On July 15, 2002, the Company, along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. On February 19, 2003, the district court ruled on the motions. The district court granted the Company’s motion to dismiss the claims against it under Rule 10b-5, due to the insufficiency of the allegations against the Company. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including the Company. In addition, some of the individual defendants in the IPO Litigations, including Mr. Cramer, signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.

In June 2003, a proposed collective partial settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. On or about June 25, 2003, a committee of the Company’s Board of Directors conditionally approved the proposed settlement. In June 2004, an agreement of partial settlement was submitted to the court for preliminary approval. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.

While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. The Company’s case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing. In light of the Second Circuit opinion, counsel to the issuers informed the district court that the settlement with the plaintiffs could not be approved because the defined settlement class, like the litigation class, could not be certified. The settlement was terminated pursuant to a Stipulation and Order dated June 25, 2007.
 
 
13

 

On August 14, 2007, plaintiffs filed their second consolidated amended class action complaints against the focus cases and, on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss plaintiffs’ second amended consolidated class action complaints. On March 26, 2008, the district court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification motion was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.  On April 2, 2009, a stipulation and agreement of settlement among the plaintiffs, issuer defendants and underwriter defendants was submitted to the Court for preliminary approval.    The settlement was approved on October 5, 2009.  Under the settlement, the Company’s obligation of approximately $339,000 would be paid by the issuers’ insurance companies.  There can be no assurance that the approval of the settlement will not be reversed on appeal and that the settlement will be implemented in its current form, or at all.  Due to the inherent uncertainties of litigation, the ultimate outcome of the matter is uncertain.

In October 2009, the Company was named as one of several defendants in a lawsuit captioned Online News Link LLC v. Apple Inc. et al., Civ. No. 2:09-CV-0312-DF (U.S.D.C., E.D. Tex.).  The complaint alleges that defendants infringe U.S. Patent No. 7,508,789, putatively owned plaintiff, related to a certain method of displaying digital data via hyperlinks.  The Company has filed an answer denying liability on a variety of theories.  Due to the early stage of this matter and the inherent uncertainties of litigation, the ultimate outcome of this matter is uncertain.

The Company is party to other legal proceedings arising in the ordinary course of business or otherwise, none of which other proceedings is deemed material.
 
7.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.  Potential common shares consist of restricted stock units (using the treasury stock method), the incremental common shares issuable upon the exercise of stock options (using the treasury stock method), and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method).  For the three-month periods ended September 30, 2009 and 2008, approximately 3.9 million and 3.9 million options and warrants to purchase common stock, respectively, were excluded from the calculation, as their effect would be anti-dilutive because the exercise prices were greater than the average market price of the common stock during the respective periods and because the Company recorded a net loss.  For the nine-month periods ended September 30, 2009 and 2008, approximately 3.2 million and 2.4 million options and warrants to purchase common stock, respectively, were excluded from the calculation, as their effect would be anti-dilutive because the exercise prices were greater than the average market price of the common stock during the respective periods and, with respect to the nine months ended September 30, 2009, because the Company recorded a net loss.

The following table reconciles the numerator and denominator for the calculation.

   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2009
   
2008 (As restated)
   
2009
   
2008 (As restated)
 
Basic net (loss) income per share
                       
Numerator:
                       
   (Loss) income from continuing operations
  $ (1,294,898 )   $ (693,499 )   $ (46,644,775 )   $ 1,909,018  
   Loss from discontinued operations
    (1,846 )     (3,079 )     (10,453 )     (7,895 )
   Preferred stock cash dividends
    (96,424 )     (96,424 )     (289,272 )     (289,272 )
      Numerator for basic earnings per share -
                               
      Net (loss) income available to common stockholders
  $ (1,393,168 )   $ (793,002 )   $ (46,944,500 )   $ 1,611,851  
                                 
Denominator:
                               
   Weighted average basic shares outstanding
    30,606,216       30,482,949       30,574,361       30,442,955  
                                 
Basic net (loss) income per share:
                               
   (Loss) income from continuing operations
  $ (0.05 )   $ (0.03 )   $ (1.53 )   $ 0.06  
   Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
   Preferred stock cash dividends
    (0.00 )     (0.00 )     (0.01 )     (0.01 )
      Net (loss) income available to common stockholders
  $ (0.05 )   $ (0.03 )   $ (1.54 )   $ 0.05  
                                 
Diluted net (loss) income per share
                               
Numerator:
                               
   (Loss) income from continuing operations
  $ (1,294,898 )   $ (693,499 )   $ (46,644,775 )   $ 1,909,018  
   Loss from discontinued operations
    (1,846 )     (3,079 )     (10,453 )     (7,895 )
   Preferred stock cash dividends
    (96,424 )     (96,424 )     (289,272 )     -  
      Numerator for diluted earnings per share -
                               
      Net (loss) income available to common stockholders
  $ (1,393,168 )   $ (793,002 )   $ (46,944,500 )   $ 1,901,123  
                                 
Denominator:
                               
   Weighted average basic shares outstanding
    30,606,216       30,482,949       30,574,361       30,442,955  
Weighted average effect of dilutive securities:
                               
   Employee stock options and restricted stock units
    -       -       -       413,164  
   Convertible preferred stock
    -       -       -       3,856,942  
      Weighted average diluted shares outstanding
    30,606,216       34,482,949       30,574,361       34,713,061  
                                 
Diluted net (loss) income per share:
                               
   (Loss) income from continuing operations
  $ (0.05 )   $ (0.03 )   $ (1.53 )   $ 0.05  
   Loss from discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )
   Preferred stock cash dividends
    (0.00 )     (0.00 )     (0.01 )     -  
      Net (loss) income available to common stockholders
  $ (0.05 )   $ (0.03 )   $ (1.54 )   $ 0.05  
 
 
14

 
 
8.
INCOME TAXES
 
The Company accounts for its income taxes in accordance with ASC 740-10.  Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases.  ASC 740-10 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized based on all available positive and negative evidence.

As of September 30, 2009, the Company has approximately $128 million of net operating loss carryforwards (“NOLs”) and had recognized a deferred tax asset for a portion of such net operating losses in the amount of $16.1 million as of December 31, 2008.  During the three months ended March 31, 2009, the Company recorded a valuation allowance against these deferred tax assets as management concluded that it was more likely than not that the Company would not realize the benefit of this portion of its deferred tax assets through taxable income to be generated in future years. The decision to record this valuation allowance was based on a projected loss for the current year, the resulting expected cumulative pre-tax loss for the three years ended December 31, 2009, the inability to carryback the net operating losses, limited future reversals of existing temporary differences and the limited availability of tax planning strategies.

The Company expects to continue to provide a full valuation allowance until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize these assets.

In accordance with Section 382 of the Internal Revenue Code, the Company’s NOLs may be limited in the event of a change in ownership.  The ultimate realization of NOLs is dependent upon the generation of future taxable income during the periods following an ownership change.  As such, a portion of the existing NOLs may be subject to limitation.
 
9.
BUSINESS CONCENTRATIONS AND CREDIT RISK
 
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and restricted cash. The Company maintains all of its cash, cash equivalents, marketable securities and restricted cash in six domestic financial institutions, although substantially all of the balance is within one institution.  The Company performs periodic evaluations of the relative credit standing of the six institutions.  As of September 30, 2009, the Company’s cash and cash equivalents primarily consisted of money market funds, checking accounts and short-term certificates of deposit. The Company’s marketable securities consisted of approximately $18.3 million of corporate floating rate notes, which mature at various times within the next 35 months, and two auction rate securities issued by the District of Columbia with a par value of $1.875 million.
 
 
15

 

For the three and nine month periods ending September 30, 2009, no individual client accounted for 10% or more of consolidated revenue.

The Company’s customers are primarily concentrated in the United States.  The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information.  To date, actual losses have been within management’s expectations.

10.
LONG TERM INVESTMENT

During 2008, the Company made an investment in Debtfolio, Inc., doing business as Geezeo, a Web-based personal finance site.  The investment totaled $1,850,000 for an 18.5% ownership stake.  Additionally, the Company incurred approximately $0.2 million of legal fees in connection with this investment. The Company retained the option to purchase the company based on an equity value of $12 million at any point prior to April 23, 2009, but did not exercise the option.  During the first quarter of 2009, the carrying value of the Company’s investment was written down to fair value based upon an estimate of the market value of the Company’s equity.  The impairment charge approximated $1.5 million.  There have been no additional events during the three months ended September 30, 2009 that would indicate any additional impairment.

11.
IMPAIRMENT CHARGES

In the first quarter of 2009, the Company performed an interim impairment test of its goodwill, intangible assets and a long-term investment due to certain impairment indicators, including a continued decline in both advertising and subscription revenue resulting from the challenging economic environment and a reduction in the Company’s enterprise value.  As a result of this test, the Company recorded an impairment charge of $24.1 million, as follows:

 
·
The total Company fair value was estimated using a combination of a discounted cash flow model (present value of future cash flows) and the Company’s business enterprise value based upon the fair value of its outstanding common and preferred shares.  The fair value of the Company’s goodwill is the residual fair value after allocating the Company’s total fair value to its other assets, net of liabilities.  This analysis resulted in an impairment of the Company’s goodwill approximating $19.8 million.  The review also revealed an additional impairment to the Company’s intangible assets related to certain customer relationships and noncompete agreements approximating $2.8 million.

 
·
The carrying value of the Company’s long-term investment was written down to fair value based upon the most current estimate of the market value of the Company’s equity stake in Debtfolio, Inc.  The impairment approximated $1.5 million. (See Note 10 – Long Term Investment)

12.
RESTRUCTURING AND OTHER CHARGES

In March 2009, the Company announced and implemented a reorganization plan, including an approximate 8% reduction in the Company’s workforce, to align the Company’s resources with its strategic business objectives.  Additionally, effective March 21, 2009, the Company’s then Chief Executive Officer tendered his resignation, and effective May 8, 2009, the Company’s then Chief Financial Officer tendered his resignation.  As a result of these activities, the Company incurred restructuring and other charges from continuing operations approximating $2.7 million during the nine months ended September 30, 2009.  Included in this charge were severance and other payroll related expenses, totaling approximately $1.8 million, $0.2 million related to the accelerated vesting of certain restricted stock units, $0.3 million related to the write-off of certain assets, $0.2 million of recruiting fees, and legal fees approximating $0.2 million.

 
16

 

Total cash outlay for the restructuring and other charge will approximate $2.3 million, of which approximately $0.8 million is included in accrued expenses on the Company’s consolidated balance sheet as of September 30, 2009.

  The following table displays the activity of the restructuring and other charge reserve account from the initial charges during the first quarter 2009 through September 30, 2009:
 
   
Intial  Charge
   
Q1
Payments
   
Q1 2009 Other
Deductions
   
Balance 
March 31, 2009
   
Q2
Additions
   
Q2 Payments
   
Balance 
June 30,
2009
   
Q3
Additions
   
Q3 Payment
   
Balance 
September
30, 2009
 
Workforce reduction
  $ 1,741,752     $ (243,598 )   $ (186,091 )   $ 1,312,063     $ 574,281     $ (643,503 )   $ 1,242,841     $ 169,692     $ (582,613 )   $ 829,920  
Asset write-off
    242,777       -       (242,777 )     -       -       -       -       -       -       -  
    $ 1,984,529     $ (243,598 )   $ (428,868 )   $ 1,312,063     $ 574,281     $ (643,503 )   $ 1,242,841     $ 169,692     $ (582,613 )   $ 829,920  
 
13.
COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income consists of the following:

   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2009
   
2008 (As
restated)
   
2009
   
2008 (As
restated)
 
Net (loss) income
  $ (1,296,744 )     (696,578 )   $ (46,655,228 )   $ 1,901,123  
Recovery of temporary impairment of ARS
    225,000       -       225,000       -  
Unrealized gain on marketable securities
    489,461       -       838,103       -  
Reclass from AOCI to earnings due to sale
    (34,684 )     -       (295,430 )     -  
Comprehensive (loss) income
  $ (616,967 )   $ (696,578 )   $ (45,887,555 )   $ 1,901,123  

14.
DISCONTINUED OPERATIONS

In June 2005, the Company committed to a plan to discontinue the operations of its wholly owned subsidiary, Independent Research Group LLC, which operated the Company’s securities research and brokerage segment.  Accordingly, the remaining operating results relating to this segment, which are limited to certain professional fees, have been segregated from continuing operations and reported as a separate line item on the condensed consolidated statements of operations and cash flows. There were no cash flows from discontinued operations from investing or financing activities for all periods presented.

15.
ASSETS HELD FOR SALE

During the second quarter of 2009, the Company began seeking a buyer for its Promotions.com subsidiary (“Promotions.com”).  As a result, the assets and liabilities that can be specifically related to the Promotions.com operations have been classified in the condensed consolidated balance sheet as of September 30, 2009 as assets and liabilities held for sale. The Company has ceased depreciation and amortization on these assets and all amounts have been recorded at their estimated fair values, less selling costs, and consist of the following at September 30, 2009:

 
17

 

ASSETS
     
Cash and cash equivalents
  $ 40,052  
Restricted cash
    16,951  
Accounts receivable
    2,778,445  
Other receivables
    55,408  
Prepaid expenses and other current assets
    198,997  
Property and equipment
    636,522  
Other assets
    24,778  
Other intangibles, net
    1,355,633  
Restricted cash
    101,708  
      Total assets held for sale
  $ 5,208,494  
         
LIABILITIES
       
Accounts payable
  $ 59,403  
Accrued expenses
    135,741  
Deferred revenue
    1,652,159  
Other current liabilities
    135,752  
Other liabilities
    14,521  
      Total liabilities held for sale
  $ 1,997,576  

16.
SUBSEQUENT EVENTS

On December 18, 2009, the Company sold all of its membership interest in its Promotions.com subsidiary for an aggregate price of approximately $3.1 million (the “Sale Price”).  The purchaser (the “Purchaser”) is a company owned by the managers of the Promotions.com subsidiary, who prior to the closing were employees of the Company.  In connection with the sale, the Company received a payment of $1.0 million in cash and notes in an aggregate principal amount of approximately $2.1 million.  The notes are payable in six equal monthly installments commencing April 1, 2010.  The Company was granted a security interest in the securities and assets of Promotions.com until the notes are fully paid, and one of the notes (with a principal amount of $0.3 million) is guaranteed by the principals of the Purchaser.  In the event that, prior to December 18, 2011, there is a change in control of the Purchaser or all or substantially all of the assets of Promotions.com are sold, among other events, for consideration (as defined therein) in excess of the Sale Price, the Company will be entitled to receive an additional payment from the Purchaser, equal to 50% of such excess if the event occurs on or before December 18, 2010 and 25% of such excess if the event occurs after December 18, 2010 and prior to December 18, 2011.

On December 16, 2009 (the “Closing Date”), the Company, through a wholly-owned acquisition subsidiary, acquired all of the outstanding securities of Kikucall, Inc., a subscription marketing services company (the “Acquisition”), for an aggregate purchase price of approximately $5.2 million, subject to adjustment as provided therein.  In connection with the Acquisition, the Company paid approximately $3.8 million in cash and issued to the target company’s stockholders 647,901 shares of the Company’s common stock (the “Stock”), valued at approximately $1.4 million, a portion of which was placed in escrow pursuant to the terms of an escrow agreement entered into in connection with the Acquisition. The Stock issued in connection with the Acquisition was unregistered and exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder, based upon representations that the Company has obtained from each target company stockholder receiving Stock in the Acquisition that such stockholder is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D.  The Company has not granted the recipients any registration rights with respect to the Stock.  Additionally, the Company has assumed net liabilities approximating $0.1 million.  Two of the Company’s directors, Daryl Otte (who is also our Chief Executive Officer) and Martin Peretz, were directors of the acquired company, and, both directly and indirectly through investment vehicles, were stockholders and creditors of the acquired company.  As a result of the Acquisition, the following amounts were received, respectively, on the Closing Date by (i) Mr. Otte, (ii) Dr. Peretz, (iii) investment vehicles in which Mr. Otte and Dr. Peretz had a direct or indirect interest and (iv) other investment vehicles in which Dr. Peretz had a direct or indirect interest, or by Dr. Peretz’s children:  (i) approximately $190,000 cash and 34,524 shares of Stock, having an aggregate value of approximately $265,000 on the Closing Date; (ii) approximately $155,000 cash and 20,023 shares of Stock, having an aggregate value of approximately $200,000 on the Closing Date; (iii) approximately $520,000 cash and 120,127 shares of Stock, having an aggregate value of approximately $785,000 on the Closing Date; and (iv) approximately $680,000 cash and 68,526 shares of Stock, having an aggregate value of approximately $830,000 on the Closing Date.  In connection with the Acquisition, Mr. Otte and Dr. Peretz each executed a letter agreeing to donate to charity an amount that approximated the respective gain such donor recognized as a result of the Acquisition related to his shareholdings in the acquired company. The negotiation of the Acquisition was overseen by the Company’s Audit Committee, comprised solely of independent directors, on behalf of the Company and the Acquisition was unanimously approved by the Audit Committee and the Company’s board of directors.

 
18

 

The acquisition provides the Company with the expertise and software programs to expand its subscription marketing efforts to increase its subscription revenue.

Assets acquired:
     
Accounts receivable
  $ 18,539  
Other current assets
    66,670  
Other assets
    27,000  
Excess purchase price over net assets acquired
    5,383,617  
Total assets acquired
    5,495,826  
         
Liabilities assumed:
       
Accounts payable and accrued expenses
    253,923  
         
Total consideration
  $ 5,241,903  

The initial accounting for the acquisition is not complete as an independent appraisal to identify and quantify potential intangible assets and their estimated useful lives has not yet been concluded.

The following unaudited pro forma financial information for the nine months ended September 30, 2009 and 2008, gives effect to the acquisition by the Company of Kikucall as if the acquisition had occurred on January 1, 2008:

   
2009
   
2008
 
Total revenue
  $ 44,680,616     $ 54,385,148  
Net income
  $ (46,879,218 )   $ 921,694  

The pro forma financial information above is not necessarily indicative of what the Company’s consolidated results of operations actually would have been if the Kikucall acquisition had been completed at the beginning of the period. In addition, the pro forma financial information above does not attempt to project the Company’s future results of operations.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All statements contained in this quarterly report on Form 10-Q that are not descriptions of historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those reflected in the forward-looking statements due to a number of factors, which include, but are not limited to, the factors set forth under the heading “Risk Factors” and elsewhere in this quarterly report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s annual report on Form 10-K/A for the year ended December 31, 2008.  Certain forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential”, or “continue” or similar terms or the negative of these terms. All statements relating to the Company’s plans, strategies and objective are deemed forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements.  The forward-looking statements contained in this quarterly report speak only as of the date of the filing hereof; the Company has no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise.
 
 
19

 

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto.

Overview

TheStreet.com, Inc., together with its wholly owned subsidiaries (“we”, “us” or the “Company”), is a leading digital financial media company.  Our goal is to be the primary independent online-only source of reliable and actionable investing ideas, news and analysis, markets and rate data and analytical tools for a growing audience of self-directed investors and the institutions that serve them.  We distribute our fee-based premium content and advertising-supported content through a network of proprietary electronic services including: Web sites, blogs, widgets, email services, mobile devices, podcasts and online video channels.  We also syndicate our content for distribution by financial institutions and other media organizations.

Effective July 1, 2007, the Company’s revenue streams were classified into two components, “paid services” and “marketing services”.  Effective April 1, 2009, the “paid services” component has been renamed “premium services” to better reflect the character of this revenue and as such this line item has been changed for all periods presented.

The Company reports revenue in two categories: premium services and marketing services.  Premium service revenue is comprised of subscriptions, licenses and fees for access to its investment information and rate services.  Marketing services revenue is comprised of fees charged for the placement of advertising and sponsorships within the Company’s services and for interactive marketing work performed by the Company’s Promotions.com business.

Critical Accounting Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are deemed to be necessary.  Significant estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, the following:

 
·
incentive compensation,
 
·
useful lives of intangible assets,
 
·
useful lives of fixed assets,

 
20

 

 
·
the carrying value of goodwill, intangible assets, marketable securities and the Company’s long term investment,
 
·
allowances for doubtful accounts,
 
·
accrued expense estimates,
 
·
reserves for estimated tax liabilities,
 
·
certain estimates and assumptions used in the calculation of the fair value of equity compensation issued to employees, and
 
·
revenue estimates based upon a completed contract basis related to the Company’s Promotions.com business.

A summary of the Company's critical accounting policies and estimates can be found in our 2008 Form 10-K/A, as filed with the SEC on February 8, 2010 (the “2008 Form 10-K/A”).  During the nine months ended September 30, 2009, we changed a critical accounting policy related to our Promotions.com business:  whereas in prior periods, we accounted for revenue for Promotions.com primarily on a percentage of completion basis, we have determined that we did not have in place adequate systems to identify and document the occurrence of milestones.  Promotions.com generates revenues from website design, promotion management and hosting services.  The Company typically enters into arrangements on a fixed fee basis.  Revenue generated from website design services are recognized upon acceptance from the customer or on a straight-line basis over the hosting period if the Company performs website design services and hosts the software.  Revenues from promotions management services are recognized straight-line over the promotion period as the promotion is designed to only operate on Promotions.com proprietary platform.  Hosting services are recognized straight-line over the hosting period.

Restatement of 2008 Period Results

As previously discussed in this Form 10-Q, the Company has restated its previously issued interim condensed consolidated financial statements for the period ended September 30, 2008 and as its December 31, 2008 consolidated financial statements and the interim consolidated financial statements for the quarters ended March 31, 2008, June 30, 2008 and December 31, 2008. Restated amounts have been identified with the wording “as restated”. The 2008 period results discussed below reflect the results reported in our 2008 Form 10-K/A.

Results of Operations

Comparison of Three Months Ended September 30, 2009 and September 30, 2008 (as restated)

Revenue

   
For the Three Months Ended September 30,
       
Revenue:
 
2009
   
Percent
of Total
 Revenue
   
2008 (As
restated)
   
Percent
of Total
Revenue
   
Percent
Change
 
Premium services
  $ 9,373,672       62 %   $ 10,244,212       60 %     -8 %
Marketing services
    5,861,932       38 %     6,804,425       40 %     -14 %
Total revenue
  $ 15,235,604       100 %   $ 17,048,637       100 %     -11 %

Premium services .   Premium service revenue is comprised of subscriptions, licenses and fees for access to its investment information and rate services. Revenue is recognized ratably over the contract period.

Premium services revenue for the three months ended September 30, 2009 decreased by 8% when compared to the three months ended September 30, 2008.  The decrease is primarily attributable to a 9% decrease in revenue from the Company’s equity investment information services and a 37% decrease in revenue from its equity ratings services, related to the end of the global research settlement arranged by former New York State Attorney General Eliot Spitzer with several major Wall Street brokerage firms.  The settlement period ended in July 2009 and thus contributed only one month of revenue during the three months ended September 30, 2009.  Settlement revenue for the seven months ended July 31, 2009 approximated $1.2 million.  These decreases were partially offset by a 9% increase in revenue from the Company’s bank rate information services.

 
21

 

  The revenue decline in the equity investment information services is a result of a decline in the number of subscribers and the value of booked subscription contracts in the three months ended September 30, 2009 as compared to the prior year period.  During the three months ended September 30, 2009, the Company launched new marketing initiatives resulting in bookings, a measure of the dollar value of the subscription-based services contracted during the period net of cancellations and refunds, to increase by 11% when compared to the three months ended September 30, 2008.

Marketing services .   Marketing services revenue is comprised of fees charged for the placement of advertising and sponsorships within the Company’s services and for interactive marketing work performed by the Company’s Promotions.com business.

   
For the Three Months Ended
September 30,
       
   
2009
   
2008 (as
restated)
   
Percent
Change
 
Marketing services:
                 
Advertising and sponsorships
  $ 4,303,958     $ 5,436,633       -21 %
Interactive marketing services (Promotions.com)
    1,557,974       1,367,792       14 %
Total
  $ 5,861,932     $ 6,804,425       -14 %

Marketing services revenue for the three months ended September 30, 2009, decreased by 14% when compared to the three months ended September 30, 2008.  We believe that our marketing services businesses were impacted by a poor macro-economic environment, which caused our clients to reduce their overall marketing spending.

Operating Expense
   
For the Three Months Ended September 30,
       
Operating expense:
 
2009
   
Percent
of Total
Revenue
   
2008 (As
restated)
   
Percent
of Total
Revenue
   
Percent
Change
 
Cost of services
  $ 7,156,120       47.0 %   $ 8,359,563       49.1 %     -14 %
Sales and marketing
    3,005,218       19.7 %     3,550,363       20.8 %     -15 %
General and administrative
    5,213,582       34.2 %     4,589,851       26.9 %     14 %
Depreciation and amortization
    1,206,916       7.9 %     1,481,670       8.7 %     -19 %
Restructuring and other charges
    169,692       1.1 %     -       N/A       N/A  
     Total operating expense
  $ 16,751,528             $ 17,981,447               -7 %

Cost of services.   Cost of services expense includes compensation, benefits and outside contributor costs related to the creation of our content, licensed data and the technology required to publish our content.

Cost of services expense decreased by approximately $1.2 million over the periods.  The decrease was largely the result of lower compensation and related costs totaling approximately $0.8 million resulting from a reduction of approximately 17% in the average headcount in this expense category. Additionally, the Company achieved savings related to hosting and internet costs combined with reduced fees paid to nonemployees, the sum of which totaled approximately $0.4 million, partially offset by increased consulting fees totaling approximately $0.1 million.

 
22

 

Sales and marketing.   Sales and marketing expense consists primarily of advertising and promotion, promotional materials, credit card processing fees, and compensation expense for the direct sales force, marketing services, and customer service departments.

Sales and marketing expense decreased by approximately $0.5 million over the periods.  The decrease was largely the result of reduced advertising and promotion expenditures approximating $0.6 million, together with lower compensation and related costs totaling approximately $0.1 million resulting from a reduction of approximately 8% in the average headcount in this expense category.  These savings were partially offset by increased consulting fees approximating $0.1 million.

General and administrative .  General and administrative expense consists primarily of compensation for general management, finance and administrative personnel, occupancy costs, professional fees, insurance, and other office expenses.

General and administrative expense increased by approximately $0.6 million over the periods. The increase was primarily the result of onetime costs related to a review of the recording of certain revenue in a non-core business, Promotions.com, totaling approximately $1.3 million, partially offset by (1) lower compensation and related costs totaling approximately $0.2 million, primarily related to a reduction of approximately 9% in the average headcount within this expense category, and (2) reduced costs related to occupancy and bad debt expense, the sum of which totaled approximately $0.3 million.

Depreciation and amortization.   Depreciation and amortization expense decreased by approximately $0.3 million over the periods.  The decrease is largely attributable to reduced amortization expense resulting from the impairment charges recorded during the three months ended March 31, 2009, partially offset by increased amortization of Web site and software development costs.

Restructuring and other charges .  In March 2009, the Company announced and implemented a reorganization plan to align the Company’s resources with its strategic business objectives.  As a result of these activities, the Company has incurred a restructuring and other charge from continuing operations approximating $0.2 million during the three months ended September 30, 2009.

Net Interest Income

   
For the Three Months Ended
September 30,
     
   
2009
   
2008 (As
restated)
   
Percent
Change
 
Net interest income
  $ 186,342     $ 345,675       -46 %

The decrease in net interest income is primarily the result of reduced interest rates.

Provision for Income Taxes

   
For the Three Months Ended
September 30,
       
   
2009
   
2008 (As
restated)
   
Change
 
Benefit (provision) for income taxes
  $ -     $ (106,364 )     N/A  
 
 
23

 

The Company accounts for its income taxes in accordance with ASC 740-10 (formerly SFAS No. 109), Accounting for Income Taxes (“ASC 740-10”).  Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases.  ASC 740-10 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized based on all available positive and negative evidence.

As of September 30, 2009, the Company has approximately $128 million of net operating loss carryforwards (“NOLs”) and had recorded a full valuation allowance against these deferred tax assets as management concluded that it was more likely than not that the Company would not realize the benefit of this portion of its deferred tax assets through taxable income to be generated in future years. The decision to record this valuation allowance was based on a projected loss for the current year, the resulting expected cumulative pre-tax loss for the three years ended December 31, 2009, the inability to carryback the net operating losses, limited future reversals of existing temporary differences and the limited availability of tax planning strategies.

The Company expects to continue to provide a full valuation allowance until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize these assets.

In accordance with Section 382 of the Internal Revenue Code, the Company’s NOLs may be limited in the event of a change in ownership.  The ultimate realization of NOLs is dependent upon the generation of future taxable income during the periods following an ownership change.  As such, a portion of the existing NOLs may be subject to limitation.

Net Loss

Net loss for the three months ended September 30, 2009 totaled $1,296,744, or $0.05 per basic and diluted share, compared to net loss totaling $696,578, or $0.03 per basic and diluted share, for the three months ended September 30, 2008.

Comparison of Nine Months Ended September 30, 2009 and September 30, 2008 (as restated)

Revenue

   
For the Nine Months Ended September 30,
       
Revenue:
 
2009
   
Percent
of  Total
Revenue
   
2008 (As
restated)
   
Percent
of Total
Revenue
   
Percent
Change
 
Premium services
  $ 28,310,049       65 %   $ 31,293,620       59 %     -10 %
Marketing services
    15,418,258       35 %     22,150,864       41 %     -30 %
Total revenue
  $ 43,728,307       100 %   $ 53,444,484       100 %     -18 %

Premium services revenue for the nine months ended September 30, 2009 decreased by 10% when compared to the nine months ended September 30, 2008.  The decrease is primarily attributable to a 12% decrease in revenue from the Company’s equity investment information services and a 16% decrease in revenue from its equity ratings services, primarily related to the end of the global research settlement arranged by former New York State Attorney General Eliot Spitzer with several major Wall Street brokerage firms.  The settlement period ended in July 2009 and thus contributed only seven months of revenue during the nine months ended September 30, 2009.  Settlement revenue for the seven months ended July 31, 2009 approximated $1.2 million.  These decreases were partially offset by a 7% increase in revenue from the Company’s bank rate information services.

 
24

 

  The revenue decline in the equity investment information services is a result of a decline in the number of subscribers and the value of booked subscription contracts in the nine months ended September 30, 2009 as compared to the prior year period.  For the nine months ended September 30, 2009, bookings, a measure of the dollar value of the subscription-based services contracted during the period net of cancellations and refunds, declined by 6% when compared to the nine months ended September 30, 2008.  However, during the three months ended September 30, 2009, the Company launched new marketing initiatives resulting in bookings to increase by 11% when compared to the three months ended September 30, 2008.

   
For the Nine Months Ended
S eptember 30,