Page
Part I	FINANCIAL INFORMATION			1
Item 1.	Financial Statements			1
	Condensed Consolidated Balance Sheets - September 30, 2008 (unaudited) and December 31, 2007			1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)			2
	Condensed Consolidated Statement of Changes in Stockholder's Equity for the nine months ended September 30, 2008 (unaudited)			3
	Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)			4
	Notes to the Unaudited Condensed Consolidated Financial Statements			6
Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operation			22
Item 4T.	Controls and Procedures			29
Part II	OTHER INFORMATION			30
Item 1.	Legal Proceedings			30

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.)

Item 6.	Exhibits			30

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Forward-Looking Statements

 

 

This quarterly report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results, ability to raise additional capital and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward looking statement can be guaranteed and actual future results may vary materially. 

 

 

Information regarding market and industry statistics contained in this quarterly report on Form 10-Q is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this quarterly report of Form 10-Q. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements.

 

 

The forward-looking statements included in this quarterly report on Form 10-Q are made only as of the date of this quarterly report on Form 10-Q. We do not intend, and do not assume any obligations, to update these forward looking statements, except as required by law.

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PART I.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements 

		September 30, 2008			December 31, 2007
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	611,189		$	3,675,483
Accounts receivable, net of allowance of $345,208 and $150,000			4,703,829			3,390,302
Prepaid expenses and other current assets			205,796			55,750
Total current assets			5,520,814			7,121,535
Property and equipment, net			633,523			512,031
Intangible assets, net			714,683			1,028,621
Goodwill			7,909,571			7,909,571
Investment in Options Media Group Holdings, Inc.			1,694,000			-
Deferred debt issue costs, net of accumulated amortization of
$0 and $13,932, respectively			-			77,505
Deferred acquisition costs			-			129,333
Other assets			211,943			66,937
Total assets		$	16,684,534		$	16,845,533
Liabilities and Stockholders’ Equity
Current liabilities:
Senior secured notes payable - related party, net of debt
discount of $0 and $1,127,084, respectively		$	1,300,000		$	3,872,916
Capital lease obligations, current portion			10,319			9,290
Accounts payable			3,937,095			2,499,604
Accrued expenses			610,390			1,046,719
Accrued interest			1,068			36,173
Deferred revenue			100,935			-
Payable and promissory note settlement liability			1,090,230			-
Total current liabilities			7,050,037			7,464,702
Capital lease obligations, net of current portion			10,286			19,317
Total liabilities			7,060,323			7,484,019
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized,
zero shares issued and outstanding			-			-
Common stock, $0.001 par value; 140,000,000 shares authorized,
37,845,167 and 34,979,667 issued and outstanding, respectively			37,846			34,980
Additional paid-in capital			24,390,346			12,737,982
Deferred equity-based expense			-			(178,481	)
Accumulated other comprehensive loss			(197,704	)		-
Accumulated deficit			(14,606,277	)		(3,232,967	)
Total stockholders’ equity			9,624,211			9,361,514
Total liabilities and stockholders’ equity		$	16,684,534		$	16,845,533

 

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

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the Three			For the Three			For the Nine			From June 14, 2007
		Months Ended			Months Ended			Months Ended			(Inception) to
		September 30, 2008			September 30, 2007			September 30, 2008			September 30, 2007
Revenues		$	5,756,707		$	1,169,991		$	13,992,303		$	1,169,991
Cost of revenue			3,964,388			1,083,613			10,084,467			1,083,613
Gross profit			1,792,319			86,378			3,907,836			86,378
Operating expenses:
General and administrative (includes stock-based expense
of $439,768, $43,311, $1,417,031 and $43,311, respectively)			1,513,224			939,848			4,755,165			939,848
Sales and marketing			1,282,205			109,884			3,552,847			109,884
Technology support			256,370			-			764,779			-
Merger, acquisition, and divestiture costs			57,415			187,353			569,477			187,353
Amortization of intangible assets			104,571			91,094			313,938			91,094
Total operating expenses			3,213,785			1,328,179			9,956,206			1,328,179
Operating loss from continuing operations			(1,421,466	)		(1,241,801	)		(6,048,370	)		(1,241,801	)
Other income (expense):
Interest income			8,140			23,995			14,903			23,995
Loss on settlement of debt			-			-			(20,121	)		-
Loss on sale of available-for-sale securities			(116,454	)		-			(116,454	)		-
Loss on disposal of fixed assets			(15,385	)		-			(15,385	)		-
Interest expense			(189,382	)		-			(1,422,885	)		-
Total other income (expense)			(313,081	)		23,995			(1,559,942	)		23,995
Loss from continuing operations before income tax benefit			(1,734,547	)		(1,217,806	)		(7,608,312	)		(1,217,806	)
Income tax benefit			-			280,019			-			280,019
Loss from continuing operations before equity investment			(1,734,547	)		(937,787	)		(7,608,312	)		(937,787	)
Equity in investee's loss, net of income taxes			(404,103	)		-			(653,231	)		-
Loss from continuing operations			(2,138,650	)		(937,787	)		(8,261,543	)		(937,787	)
Discontinued operations:
Loss from discontinued operations, net of income taxes			(1,053,059	)		-			(1,988,232	)		-
Loss on sale of discontinued operations, net of income taxes			(498,554	)		-			(1,123,535	)		-
Net loss from discontinued operations			(1,551,613	)		-			(3,111,767	)		-
Net loss			(3,690,263	)		(937,787	)		(11,373,310	)		(937,787	)
Other comprehensive loss:
Unrealized loss on available-for-sale securities			(197,704	)		-			(197,704	)		-
Total other comprehensive loss			(197,704	)		-			(197,704	)		-
Comprehensive loss		$	(3,887,967	)	$	(937,787	)	$	(11,571,014	)	$	(937,787	)
Loss per share from continuing operations - basic and diluted		$	(0.06	)	$	(0.04	)	$	(0.22	)	$	(0.04	)
Loss per share from discontinued operations - basic and diluted		$	(0.04	)	$	-		$	(0.09	)	$	-
Net loss per share - basic and diluted		$	(0.10	)	$	(0.04	)	$	(0.31	)	$	(0.04	)
Weighted average shares outstanding - basic and diluted			37,808,210			23,756,165			36,900,393			22,292,694

 

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

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2008

(Unaudited)

 

											Deferred			Accumulated
								Additional			Equity-			Other						Total
		Common Stock						Paid-In			Based			Comprehensive			Accumulated			Stockholders'
		Stock			Amount			Capital			Expense			Loss			Deficit			Equity
Balance, December 31, 2007			34,979,667		$	34,980		$	12,737,982		$	(178,481	)	$	-		$	(3,232,967	)	$	9,361,514
Issuance of Common Stock in connection with Options Media Group merger			1,000,000			1,000			5,716,273			-			-			-			5,717,273
Issuance of Warrant in connection with Options Media Group merger			-			-			29,169			-			-			-			29,169
Common stock and warrants issued for cash			1,425,000			1,425			2,911,075			-			-			-			2,912,500
Common stock and warrants issued per price protection clause			75,000			75			(75	)		-			-			-			-
Common stock and warrants issued to settle debt			305,500			306			610,694			-			-			-			611,000
Amortization of deferred consulting - warrants			-			-			-			178,481			-			-			178,481
Common stock issued for services			60,000			60			188,940			-			-			-			189,000
Stock options expense			-			-			2,196,288			-			-			-			2,196,288
Unrealized loss on marketable securities			-			-			-			-			(197,704	)		-			(197,704	)
Net loss, nine months ended September 30, 2008			-			-			-			-			-			(11,373,310	)		(11,373,310	)
Balance, September 30, 2008			37,845,167		$	37,846		$	24,390,346		$	-		$	(197,704	)	$	(14,606,277	)	$	9,624,211

 

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

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

		For the Nine			From June 14, 2007
		Months Ended			(Inception) to
		September 30, 2008			September 30, 2007
Cash flows from operating activities:
Net loss		$	(11,373,310	)	$	(937,787	)
Add back loss from discontinued operations			3,111,767			-
Loss from continuing operations			(8,261,543	)		(937,787	)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities, net:			4,782,113			42,245
Net cash used in operating activities			(3,479,430	)		(895,542	)
Cash flows from investing activities:
Purchases of property & equipment			(322,548	)		(60,847	)
Acquisition of business, net of cash acquired			-			(4,279,534	)
Proceeds from sales of property & equipment			13,000			-
Proceeds from sales of available-for-sale securities			1,034,000			-
Deferred acquisition costs			(10,619	)		-
Net cash provided by (used in) investing activities			713,833			(4,340,381	)
Cash flows from financing activities:
Principal payments on notes payable			(4,523,573	)		-
Proceeds from issuance of notes payable - related party			1,300,000			250,000
Principal payments on capital leases			(8,002	)		-
Proceeds from common stock and warrants issued for cash			2,912,500			7,015,016
Net cash (used in) provided by financing activities			(319,075	)		7,265,016
Cash flows from discontinued operations:
Cash flows from operating activities			(2,685,674	)		-
Cash flows from investing activities-acquisition			(1,885,624	)		-
Cash flows from investing activities-divestiture			4,591,676			-
Net cash provided by discontinued operations			20,378			-
Net (decrease) increase in cash and cash equivalents			(3,064,294	)		2,029,093
Cash and cash equivalents at beginning of period			3,675,483			-
Cash and cash equivalents at end of period		$	611,189		$	2,029,093

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

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

		For the Nine			From June 14, 2007
		Months Ended			(Inception) to
		September 30, 2008			September 30, 2007
Supplemental disclosure of cash flow information:
Interest paid		$	261,796		$	-
Income taxes paid		$	-		$	-
Non-cash investing and financing activities:
Issuance of common stock and warrants in business combination		$	5,746,442		$	3,500,000
Conversion of convertible notes		$	-		$	250,000
Issuance of common stock and warrants in debt settlement		$	611,000		$	-
Issuance of common stock for deferred services rendered		$	189,000		$	-
Issuance of shares in Options Media Group Holdings, Inc. to
settle accounts payable		$	54,611		$	-
Unrealized loss on available-for-sale securities		$	197,704		$	-

 

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

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Note 1. Nature of Operations, Going Concern and Basis of Presentation 

Overview 

 

Customer Acquisition Network, Inc. was formed in Delaware on June 14, 2007.

 

Outsiders Entertainment, Inc. was incorporated on March 4, 2002, under the laws of the State of Delaware. On August 28, 2007, the name was changed to Customer Acquisition Network Holdings, Inc. On June 25, 2008, the name was changed to interCLICK, Inc.

 

On August 28, 2007, Customer Acquisition Network Holdings, Inc. ("Holdings") entered into an Agreement and Plan of Merger and Reorganization (the “CAN Merger Agreement”) by and among Holdings, Customer Acquisition Network, Inc. ("CAN"), and CAN Acquisition Sub Inc., a newly formed, wholly-owned Delaware subsidiary of Holdings (“CAN Acquisition Sub”). The merger transaction contemplated under the CAN Merger Agreement (the “CAN Merger”) was consummated on August 28, 2007, at which time CAN Acquisition Sub was merged with and into CAN, and CAN, as the surviving corporation, became a wholly-owned subsidiary of Holdings.

Merger with Desktop Interactive, Inc.

 

On August 31, 2007, Holdings entered into an Agreement and Plan of Merger (the “Desktop Merger Agreement”) by and among Holdings, Desktop Interactive, Inc., a privately held Delaware corporation (“Desktop”), CAN and Desktop Acquisition Sub, Inc., a newly formed, wholly-owned Delaware subsidiary of Holdings (“Desktop Acquisition Sub”). The merger transaction contemplated under the Desktop Merger Agreement (the “Desktop Merger"), was consummated on August 31, 2007, at which time, Desktop Acquisition Sub was merged into Desktop, and Desktop, as the surviving corporation, became a wholly-owned subsidiary of Holdings.

 

After the CAN Merger, Holdings succeeded to the business of CAN as its sole line of business. Desktop owned and operated an Internet advertising network serving Internet advertising to website publishers including proprietary ad serving technology operated under the name “Interclick.” After the Desktop Merger, we also continued to operate the Desktop business.

Unless the context requires otherwise, references to the "Company," "CAN," "we," "our" and "us" for periods prior to the closing of our reverse merger on August 28, 2007, refer to Customer Acquisition Network, Inc., a private Delaware corporation that is now our wholly-owned subsidiary, and references to the "Company," “Holdings”, “interCLICK”, "we," "our" and "us" for periods subsequent to the closing of the reverse merger on August 28, 2007, refer to interCLICK, Inc. (formerly Customer Acquisition Network Holdings, Inc.), a publicly traded company, and its subsidiaries, Customer Acquisition Network, Inc., Desktop Interactive, Inc. and Options Acquisition Sub, Inc. (which ceased being a consolidated subsidiary on June 23, 2008 and was treated as discontinued operations thereafter).

 

The Company was previously presented as a development stage company. Upon its acquisition of Desktop on August 31, 2007, the Company exited the development stage.

 

Merger with Customer Acquisition Network Holdings, Inc.

 

On August 28, 2007, Holdings entered into the CAN Merger Agreement by and among Holdings, CAN and CAN Acquisition Sub. Upon closing of the CAN Merger, CAN Acquisition Sub merged with and into CAN, and CAN, as the surviving corporation, became a wholly-owned subsidiary of Holdings. Prior to the CAN Merger, Holdings’ name was changed to Customer Acquisition Network Holdings, Inc. and Holdings effected a 10.9583333333 -for-1 forward stock split of its common stock (the “Stock Split”). All share and per share data in the accompanying financial statements have been adjusted retroactively for the effect of the recapitalization and subsequent stock split.

 

At the closing of the CAN Merger, each share of CAN's common stock issued and outstanding, 24,238,000 immediately prior to the closing of the CAN Merger, was converted into the right to receive one share of Holdings’ common stock. In addition, pursuant to the CAN Merger Agreement and under the terms of an attendant Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, Holdings transferred all of its pre- CAN Merger assets and liabilities to its newly formed wholly owned subsidiary, Outsiders Entertainment Holdings, Inc. (“Splitco”). Subsequently, Holdings transferred all of its outstanding capital stock of Splitco to a major stockholder of Holdings in exchange for cancellation of all shares of Holdings’ common stock held by such shareholder (the “Split off”). The remaining shares outstanding (6,575,000, excluding the Holdings shares issued to CAN’s shareholders as a result of the CAN Merger), represent the surviving “Public Float” shares, of which 2.6 million shares are restricted.

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Recapitalization 

 

Prior to the closing of the CAN Merger, Holdings had limited operations and net assets. At the same time, CAN had significantly more capital than Holdings and had commenced certain publishing/advertising operations. In addition, as discussed in “Merger with Desktop,” above, after the closing of the CAN Merger, Holdings consummated the Desktop Merger and effected the Split off. As a result of these facts and the former shareholders of CAN obtaining voting and management control of the combined entity, the CAN Merger is considered and accounted for as a recapitalization of CAN, with CAN being considered as the acquirer and Holdings the acquiree for accounting purposes. Accordingly, the Company’s financial statements for periods prior to the CAN Merger become those of the accounting acquirer, retroactively restated for the equivalent number of shares received in the CAN Merger. Operations prior to the CAN Merger are those of CAN and earnings per share for the period prior to the CAN Merger are restated to reflect the equivalent number of shares outstanding.

 

Merger with Options Media

On January 4, 2008, Holdings consummated an Agreement and Plan of Merger (the “Options Merger”), wherein Holdings formed Options Acquisition Sub, Inc. (“Options Acquisition”), and Options Newsletter, Inc. (“Options Newsletter” or "Options") was merged into Options Acquisition, which was the surviving corporation and a wholly-owned subsidiary of Holdings. On June 23, 2008, Holdings consummated an Agreement of Merger and Plan or Reorganization wherein Options Acquisition was sold to Options Media Group Holdings, Inc.

 

Options Newsletter, a privately held Delaware corporation, now known as Options Media, began selling advertising space within free electronic newsletters that Options Newsletter published and emailed to subscribers. Options Newsletter also generated leads for customers by emailing its customers’ advertisements to various email addresses from within the Options Newsletter database. Options Newsletter was also an email service provider (“ESP”) and offered customers an email delivery platform to create, send and track email campaigns. During the period from January 4, 2008 to June 23, 2008 (date of disposition), the majority of Options Newsletter’s revenue was derived from being an ESP, but Options Newsletter continued to publish newsletters as well as email customer advertisements on a cost per lead generated basis.

 

The initial merger consideration with respect to the Options Merger (the “Options Merger Consideration”) included $1.5 million in cash of which $150,000 was held in escrow pending passage of deferred representation and warranty time period and 1.0 million shares of Holdings’ stock valued at $5.72 per share (applying EITF 99-12 “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”). The total initial purchase price was $7,395,362 and included cash of $1,500,000, common stock valued at $5,717,273, legal fees of $73,920, valuation service fees of $25,000, brokers fees of $50,000 and 10,000 warrants valued at $29,169 with an exercise price of $5.57 per share.

The shares of Holdings’ stock issued in conjunction with the Options Merger are subject to a 12-month lockup.

 

In addition to the initial merger consideration, Holdings was obligated to pay an additional $1 million (the “Earn Out”) if certain gross revenues are achieved for the one year period subsequent to the Options Merger payable 60 days after the end of each of the quarters starting with March 31, 2008. For the quarters ended March 31, 2008 and June 30, 2008, the Company incurred $279,703 and $221,743, respectively, in Earn Out. On September 30, 2008, the Company entered into a settlement agreement with the seller whereby the Company agreed to pay the remaining $498,554 of Earn Out. The $1,000,000 Earn Out has increased the purchase price and been included as an adjustment to goodwill in the purchase price allocation below. The total Earn Out due of $1,000,000 has been included in payable and promissory note settlement liability on the accompanying balance sheet as of September 30, 2008 (See Divestiture of Options Media below).

 

Holdings has accounted for the acquisition utilizing the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”. The results of operations of Options Acquisition were included in the consolidated results of operations of the Company beginning on January 1, 2008. The operations from January 1, 2008 to January 4, 2008 were not material. The net purchase price, including acquisition costs paid, and adjusted for the total Earn Out to be paid as part of the September 30, 2008 settlement with the seller, was allocated to assets acquired and liabilities assumed as follows:

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Current assets (including cash of $41,424)		$	58,153
Property and equipment			112,289
Other assets (Software)			67,220
Goodwill (adjusted for Earn Out)			8,020,450
Other Intangibles			660,000
Liabilities assumed			(258,750	)
Deferred tax liability			(264,000	)
Net purchase price		$	8,395,362

Intangible assets acquired include customer relationships valued at $610,000 and $50,000 for a covenant not to compete.

  

Goodwill is expected not to be deductible for income tax purposes.

In connection with the purchase of Options, the Company executed a three-year employment agreement with the former owner of Options to pay him $250,000 per year plus 300,000 options which cliff vest 1/3 at the end of each of three years and are exercisable at $1.00 per share. On September 30, 2008, the Company entered into a settlement agreement with the seller whereby all 300,000 stock options became fully vested immediately and exercisable as follows: 100,000 stock options shall be exercisable as of January 15, 2009 and 200,000 stock options shall be exercisable as of September 30, 2009. Accordingly, the remaining unrecognized portion of the fair value of the stock options of $962,829 was recognized and included in loss from discontinued operations as of September 30, 2008.

 

Divestiture of Options Media

On June 23, 2008, Holdings, as the sole stockholder of Options Acquisition entered into an Agreement of Merger and Plan of Reorganization (the “Options Divestiture”) by and among, Options Media Group Holdings, Inc. (“OPMG”), Options Acquisition and Options Acquisition Corp., a newly formed, wholly owned Delaware subsidiary of OPMG.

The Company does not believe that the adoption of any recently issued standards will have a material effect on the Company’s financial position or results of operations and cash flows.

 

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Note 3. Intangible Assets

 

Intangible assets, which were all acquired from the Desktop business combination, consisted of the following:

		September 30,			December 31,
		2008			2007
Customer relationships		$	540,000		$	540,000
Developed technology			790,000			790,000
Domain name			683			683
			1,330,683			1,330,683
Accumulated amortization			(616,000	)		(302,062	)
Intangible assets, net		$	714,683		$	1,028,621

Customer relationships are amortized based upon the estimated percentage of annual or period projected cash flows generated by such relationships, to the total cash flows generated over the estimated three year life of the customer relationships. Accordingly, this results in an accelerated amortization in which the majority of costs is amortized during the two-year period following the acquisition date of the intangible.

Developed technology is being amortized on a straight-line basis over five years.

The domain name is being amortized over its remaining life at acquisition date of six months.

Amortization expense for the three and nine months ended September 30, 2008 was $104,571 and $313,938, respectively.

Note 4. Investments

The following represents information about available-for sales securities held as of September 30, 2008:

Securities in loss positions					Aggregate			Aggregate
less than 12 months		Cost			Unrealized losses			Fair Value
Options Media Group Holdings, Inc.		$	1,891,704		$	197,704		$	1,694,000

At the closing of the Options Divestiture on June 23, 2008, the Company, as Options Acquisition’s sole stockholder, received as part of the divestiture 12,500,000 shares of OPMG’s common stock (the “OPMG Stock”). The OPMG Stock was valued at $3,750,000 using a price of $0.30 per share, which was based on a private placement for OPMG shares that was occurring at the same time of the Options Divestiture. From June 23, 2008 forward, the Company accounted for the investment in OPMG under the equity method until September 18, 2008, at which time the Company’s ownership percentage fell to below 20% and the Company lost significant influence and control over the investee. From June 23, 2008 through September 18, 2008, the Company recognized an aggregate of $653,231 of its proportionate share of the investee losses. During that same period, the Company sold an aggregate of 4.7 million OPMG shares having a basis of $1,180,496 for proceeds of $1,034,000, resulting in a loss of $146,496. On September 30, 2008, the Company gave 100,000 OPMG shares having a basis of $24,568 in order to settle $54,611 of accounts payable, resulting in a gain of $30,042. The OPMG closing stock price on September 30, 2008 was $1.80 per share, however, due to the thinly traded nature of such shares coupled with the fact that the Company owns restricted shares, the Company has used its most recent cash sales price of OPMG stock of $0.22 per share to value its remaining 7.7 million OPMG shares. This resulted in a basis of $1,694,000 as of September 30, 2008. This investment is classified as available-for-sale equity securities in the accompanying unaudited consolidated financial statements at September 30, 2008.  As a result of the valuation, during the three and nine months ended September 30, 2008, the Company recorded a $197,704 unrealized loss on available-for-sale equity securities in the stockholders’ section of the unaudited consolidated financial statements. The OPMG Stock has been pledged as security for the GRQ Notes (See Note 5).

 

15

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Note 5. Notes Payable and other obligations

		September 30,
		2008
6% Senior secured promissory notes
payable (due December 31, 2008)		$	1,300,000
Equipment - Capital lease obligation			20,605
Total notes payable, long-term debt
and other obligations			1,320,605
Less: Current maturities			(1,310,319	)
Amount due after one year		$	10,286

 

		December 31, 2007
					Debt Discount
					Original									Accumulated			Notes Payable
					Issue			Lender			Common			Amortization of			net of
		Principal			Discount			Fee			Stock			Debt Discount			Debt Discount
8% Senior secured promissory notes
payable (due May 30, 2008)		$	5,000,000		$	(500,000	)	$	(50,000	)	$	(802,500	)	$	225,416		$	3,872,916
Equipment - Capital lease obligation			28,607			-			-			-			-			28,607
Total notes payable, long-term debt
and other obligations			5,028,607			(500,000	)		(50,000	)		(802,500	)		225,416			3,901,523
Less: Current maturities			(5,009,290	)		500,000			50,000			802,500			(225,416	)		(3,882,206	)
Amount due after one year		$	19,317		$	-		$	-		$	-		$	-		$	19,317

Senior Secured Promissory Notes

On November 30, 2007, pursuant to a purchase agreement we sold senior secured promissory notes (the “Longview Notes”) in the original aggregate principal amount of $5,000,000. We received net proceeds in the amount of $4,500,000 net of $500,000 of an Original Issue Discount upon sale of the Longview Notes.

The Longview Notes were to mature on May 30, 2008 and bore interest at the rate of 8% per annum, payable quarterly in cash. We used the net proceeds from the sale of the Longview Notes first, to pay expenses and commissions related to the sale of the Longview Notes and second, for the general working capital needs and acquisitions of companies or businesses reasonably related to Internet marketing and advertising.

In addition, the Purchase Agreement contains certain customary negative covenants, including, without limitation, certain restrictions (subject to limited exceptions) on (i) the issuance of variable priced securities, (ii) purchases and payments, (iii) limitations on prepayments, (iv) incurrence of indebtedness, (v) sale of collateral, (vi) affiliate transactions and (vii) the ability to make loans and investments.

In consideration of the execution and delivery by the buyers of the Agreement, by and among the Company and the buyers, the buyers purchased 150,000 common shares at a negotiated purchase price of $0.01 per share from a third party stockholder of the Company. On such date, the closing trading price of the Company's common stock on the Over The Counter Bulletin Board was $5.35. The purchase of the common shares at a favorable price from such third party stockholder was a material inducement to the buyers entering into the transactions. Accordingly, under U.S. GAAP, of the $4.5 million received by the Company in connection with the sale of the senior notes to the buyers, $802,500 has been allocated to the value of the common shares sold to the buyers as if such common shares were contributed to the Company by the third party and then reissued by the Company in connection with the transactions.

The resulting aggregate debt discount of $1,352,500 (consisting of the original issue discount of $500,000, lender fees of $50,000 and the 150,000 common shares valued at $802,500) was being amortized to interest expense over the original term of the debt through May 30, 2008.

 

16

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

On May 5, 2008, $611,111 of the original $5,000,000 face value of debt was settled by the issuance of 305,500 common shares and 152,750 five-year warrants exercisable at $2.50 per share having an aggregate value of $611,000, which was based on a private placement of similar securities of the Company occurring at the time of settlement. The net book value of the debt at the date of settlement was $588,404, resulting in a loss on settlement of $22,707, of which $20,121 was included in other income (expense) and $2,586 was included in loss from discontinued operations.

Amortization of the debt discount for the three and nine months ended September 30, 2008 totaled $120,819 and $1,239,061, of which $120,819 and $1,075,140 is included in interest expense and $0 and $163,921 is included in discontinued operations, respectively.

In addition, the Company incurred legal and other fees associated with the issuance of the Longview Notes. Such fees of $91,437 are included in deferred debt issue costs and were amortized to interest expense over the term of the debt. Amortization of the deferred costs for the three and nine months ended September 30, 2008 totaled $0 and $77,505, of which $0 and $66,134 is included in interest expense and $0 and $11,371 is included in discontinued operations, respectively.

On May 30, 2008, the Company paid a one-time cash fee in the amount of $50,000 to extend the maturity date on the senior secured promissory note from May 30, 2008 to June 13, 2008. Accordingly, $0 and $44,524 is included in interest expense and $0 and $5,476 is included in discontinued operations for the three and nine months ended September 30, 2008, respectively.

On June 17, 2008, the Company paid a one-time cash fee in the amount of $50,000 (the “Extension Amount”) to extend the maturity date on the senior secured promissory note from June 13, 2008 until June 20, 2008. The Extension Amount may be credited against the outstanding principal balance in certain circumstances as described in the Amendment Agreement, which, in fact, occurred as a result of the Options Divestiture.

On June 23, 2008, the Company utilized proceeds from the Options Divestiture in order to enter into an “Amendment Agreement” whereby the Company paid down $2,750,000 of the balance on the senior secured promissory note. The remaining balance of the Longview Notes as of June 23, 2008 (giving effect to the increase in principal per the Amendment Agreement of $134,684) was $1,773,573. Also per the Amendment Agreement, the maturity date of the Longview Notes was extended to August 30, 2008 and the interest rate was increased from 8% to 12%. The Company also pledged the OPMG stock to Longview, in order to secure the remaining balance of the Longview Notes. The resulting debt discount of $134,684 was amortized to interest expense over the term of the note. Amortization of the new debt discount for the three and nine months ended September 30, 2008 was $120,819 and $134,684, respectively, all of which is included in interest expense.

As of September 30, 2008, all principal and accrued interest on the Longview Notes had been repaid.

On September 26, 2008, we sold senior secured promissory notes (the “GRQ Notes”) in the original aggregate principal amount of $1,300,000 to a related party. The GRQ Notes bear interest at the rate of 6% per annum and mature December 31, 2008. We used the net proceeds from the sale of the GRQ Notes to repay the Longview Notes. The Company also pledged the OPMG Stock as collateral on the GRQ Notes.

Accrued interest related to above notes at September 30, 2008 and at December 31, 2007, was $1,068 and $33,333, respectively.

 

Note 6. Net Loss per Share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon exercise of stock options and warrants and conversion of convertible debt (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. The treasury stock effect of options, warrants and conversion of convertible debt to shares of common stock outstanding at September 30, 2008 have not been included in the calculation of the net loss per share as such effect would have been anti-dilutive. As a result, the basic and diluted loss per share for all periods presented are identical.

At September 30, 2008, there were common stock options for 5,136,954 shares, which if exercised, may dilute future earnings per share.

At September 30, 2008, there were common stock warrants for 1,402,050 shares, which if exercised, may dilute future earnings per share.

 

17

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Note 7. Income Taxes

 

As part of the allocation of the purchase price associated with the Options Merger (see Note 1), a deferred tax liability of $264,000 was established as a result of differences between the book and tax basis of acquired intangible assets. Upon completion of the Options Divestiture, the entire deferred tax liability was recognized as a deferred tax benefit in operations, which ultimately increased the loss on sale from discontinued operations and decreased the loss from discontinued operations.

 

In addition, the Company has not recognized a tax benefit for the three and nine months ended September 30, 2008, due to the Company's continuing losses.

 

Note 8. Stockholders’ Equity

 

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock of which none is issued and outstanding at September 30, 2008.

 

Common Stock

The Company is authorized to issue up to 140,000,000 shares of $0.001 par value common stock of which 37,845,167 shares were issued and outstanding at September 30, 2008.

 

On January 4, 2008, the Company issued 1,000,000 shares of its common stock valued at $5,717,273, and 10,000 five-year warrants valued at $29,169 with an exercise price of $5.57 per share as part of the consideration to purchase Options Acquisition. On June 23, 2008, Options Acquisition was sold and all related activity has been reclassified to discontinued operations accordingly.

During the period from March 28, 2008 through April 1, 2008, the Company entered into subscription agreements pursuant to which the Company sold to various investors (i) 300,000 shares of its common stock and (ii) five-year warrants to purchase 150,000 shares of its common stock at an exercise price of $2.75 per share for gross proceeds of $750,000 ($2.50 per unit), of which $25,000 was paid in finder’s fees. Until the earlier of 24 months from the closing date or such date there is an effective registration statement on file with the SEC covering the resale of all of the shares and warrants, the shares and warrants are price protected and the Company is obligated to issue additional shares and/or warrants in the event the Company issues common stock at a price less than $2.50 per share.

During the period from April 30, 2008 through July 17, 2008, the Company entered into subscription agreements pursuant to which the Company sold to various investors (i) 1,125,000 shares of its common stock and (ii) five-year warrants to purchase 562,500 shares of its common stock at an exercise price of $2.50 per share for gross proceeds of $2,250,000 ($2.00 per unit), of which $62,500 and five-year warrants to purchase 11,800 shares of its common stock at an exercise price of $2.50 per share was paid in finder’s fees. Until the earlier of 24 months from the closing date or such date there is an effective registration statement on file with the SEC covering the resale of all of the shares and warrants, the shares and warrants are price protected and the Company is obligated to issue additional shares and/or warrants in the event the Company issues common stock at a price less than $2.00 per share.

On April 30, 2008, as a result of the issuance by the Company of common stock at a price below $2.50 per share and warrants at an exercise price below $2.75 per share, the Company issued an additional 75,000 shares of its common stock and five-year warrants to purchase 15,000 shares of its common stock at an exercise price of $2.50 per share, pursuant to price protection clauses contained within the subscription agreements. In addition, the five-year warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $2.75 per share were also repriced to $2.50 per share. As the additional issuances of equity instruments stemmed from a capital transaction, there is no effect on the accompanying statement of operations. Accordingly, the activity was recorded by an increase in common stock of $75 with a corresponding decrease in additional paid-in capital.

On May 5, 2008, the Company settled $611,111 of the original $5,000,000 face value of the senior secured notes payable by issuance of 305,500 of its common shares and five-year warrants to purchase 152,750 of its common shares at an exercise price of $2.50 per share having an aggregate value of $611,000, which was based on a private placement price of $2.00 per unit for similar securities occurring at the time of settlement. The net book value of the debt at the date of settlement was $588,404, resulting in a loss on settlement of $22,707, of which $20,121 was included in other income (expense) and $2,586 was included in loss from discontinued operations.

 

18

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

During the three and nine months ended September 30, 2008, the Company amortized $24,919 and $178,481, respectively, of deferred equity-based expense related to warrants.

On May 28, 2008, the Company issued 60,000 common shares having a fair value of $189,000 (based on a quoted trading price of $3.15 per share) to an investor relations firm in exchange for services to be rendered over a three-month period. Accordingly, $126,000 and $189,000 has been expensed during the three and nine months ended September 30, 2008, respectively.

Stock Incentive Plan and Option Grants

 

During the three and nine months ended September 30, 2008, the Company recognized stock-based compensation of $1,276,597 and $2,196,288, respectively, in connection with the Company’s stock option plan.

During the nine months ended September 30, 2008, the Company granted 1,970,000 stock options, each exercisable at the fair value of the common stock on the respective grant dates ranging from $1.31 to $6.16 pursuant to employment contracts. The options vest pro rata over 2 to 4 years and expire 5 years from the grant date. The total value of the options of $3,721,182 was computed using a Black-Scholes option pricing method with volatilities ranging from 71% to 127% (based earlier on comparable companies and later on historical volatility), an expected term of 5 years (based on contracted term since we have no history and using the SAB 107 simplified method does not produce a material difference), dividends of 0% and interest rates ranging from 2.66% to 3.79%. The expense will be recognized pro rata over the respective 2-year to 4-year requisite service periods. On September 23, 2008, an aggregate of 1,462,500 of the stock options issued during 2008 were repriced resulting in an additional fair value of $380,250, which is being recognized over the remaining vesting periods.

Note 9. Commitments and Contingencies

Leases

As of September 30, 2008 the minimum future lease payments for the New York and Florida leases, both of which have noncancelable terms in excess of one year, are as follows:

Year ending December 31,
2008		$	76,539
2009			447,458
2010			456,208
2011			465,183
2012			421,588
2013			378,252
Later years			341,824
		$	2,587,052

 

Rent expense for the three and nine months ended September 30, 2008 was $58,570 and $110,539, respectively.

The Company leased office space for its Fort Lauderdale, Florida location under a yearly renewable lease agreement bearing monthly rent of $11,300. In July 2008, this office was relocated to Boca Raton, Florida, where the Company entered into a five-year lease agreement bearing monthly rent of $3,313 with an annual 3.0% escalation. The Company leased office space for its New York, NY location, under a five-year lease agreement bearing monthly rent of $8,798. In September 2008, the Company relocated this office to a larger space in New York, where the Company entered into a six-year lease agreement bearing monthly rent of $25,073 with an annual 2.5% escalation. As the Company is still obligated under the original New York lease, the Company is attempting to sublease this office space.

Severance Package

On April 25, 2008, Bruce Kreindel, the Company’s former Chief Financial Officer (the “CFO”), Treasurer, and formerly a member of the board of directors of the Company, executed a separation and release agreement (the “Separation Agreement”) in which he resigned as CFO, Treasurer and as a member of the board of directors of the Company. Mr. Kreindel remained in the position of interim CFO until the appointment of David Garrity as the Company’s new CFO on June 30, 2008. Pursuant to the terms of the Separation Agreement, Mr. Kreindel received, as severance (i) $50,000 (paid May 6, 2008), and (ii) $125,000 (of which $104,167 has been paid and $20,833 is included in accrued expenses as of September 30, 2008) to be paid in accordance with the Company’s regular payroll practices. Pursuant to the terms of the employment agreement dated June 28, 2007 between Mr. Kreindel and the Company, Mr. Kreindel received equity in the Company known as “Founder’s Stock.” Pursuant to the terms of the Separation Agreement, Mr. Kreindel will retain his Founder’s Stock. Mr. Kreindel has agreed that, at any time prior to December 27, 2008, he will, as may be required by the Company, enter into a lock-up agreement on the same terms and conditions as all other members of the Company’s board of directors, with respect to the Founder’s Stock. Prior to entering into the Separation Agreement, 115,954 options had vested as of the date of the Separation Agreement. Pursuant to the Separation Agreement, Mr. Kreindel will not be entitled to any other options. Mr. Kreindel will have the unqualified right to exercise any of the vested options for a period of 12 months after the separation date.

 

19

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Guaranteed Bonus

 

On December 2007, the Company entered into an employment agreement whereby the Company is obligated to pay a guaranteed bonus of $500,000 during the first year of the employment agreement. As of September 30, 2008, the Company has paid $250,000 of the guaranteed bonus and the remaining $250,000 of the guaranteed bonus is included in accrued expenses.

Earn Out for Options Acquisition

As part of the Options Merger, the Company became obligated to pay up to an additional $1 million (the “Earn Out”) if certain gross revenues are achieved for the one year period subsequent to the Options Merger payable 60 days after the end of each of the quarters starting with March 31, 2008. On September 30, 2008, the Company entered into a settlement agreement with the former owner of Options Media to settle all amounts due under the $1 million Earn Out and the January 4, 2008 employment agreement whereby the Company agreed to pay $600,000 upon execution of the settlement agreement and $500,000, payable in two equal installments on October 30, 2008 and January 15, 2009. The $1,100,000 in payments has been discounted to a net present value of $1,090,230 using a discount rate of 12%. In addition, all stock options previously granted to the former owner of Options Media became fully vested immediately. As a result of the settlement, the additional loss from discontinued operations was $1,053,059 and the additional loss on sale of discontinued operations was $498,554 for the three months ended September 30, 2008.

Agreement with Falcon

On May 28, 2008, the Company entered into a six-month Consulting Services Agreement (the “Agreement”) whereby the Company is to receive investor and marketing relations in exchange for: (i) issuing 60,000 of its common shares within ten days of the Agreement having a fair value of $189,000, (ii) issuing 60,000 of its common shares at August 28, 2008 having a fair value of $189,000, (iii) an initial cash fee of $30,000, and (iv) a monthly cash fee of $25,000. On August 12, 2008, the consultant was terminated. Accordingly, the 60,000 common shares due to the consultant on August 28, 2008 were not issued. No further consideration is due under the Agreement as of September 30, 2008.

 

Legal Matters

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, 2008, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

On May 16, 2008, Devon Cohen, our former Chief Operating Officer, commenced an employment arbitration action against us before the American Arbitration Association, claiming that he was terminated by us without cause that he is therefore owed $600,000 as severance compensation. On September 24, 2008, the litigation between the Company and Mr. Cohen was settled with no obligation for either party to the suit except to pay their own legal fees.

There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

Note 10. Concentrations

 

Concentration of Credit Risk

 

20

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INTERCLICK, INC. (FORMERLY CUSTOMER ACQUISITION NETWORK HOLDINGS, INC.) AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited in the local currency in two financial institutions in the United States. The balance, at any given time, may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of September 30, 2008, there was $1,102,554 in excess of insurable limits. Subsequent to September 30, 2008, the FDIC insurance limits were temporarily increased to $250,000 per institution thereby, further reducing the Company’s risk.

 

Concentration of Revenues and Accounts Receivable

For the three and nine months ended September 30, 2008, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

		For the Three			For the Nine
		Months Ended			Months Ended
		September 30, 2008			September 30, 2008
Customer 1			9.1	%		12.9	%
Customer 2			7.5	%		10.1	%
			16.6	%		23.0	%

 

Note 11. Related Party Transactions

On September 26, 2008, we sold senior secured promissory notes (the “GRQ Notes”) in the original aggregate principal amount of $1,300,000 to a related party (See Note 5).

Note 12. Subsequent Events

In October 2008, the Company entered into a revolving credit facility with Silicon Valley Bank to finance 80% of its accounts receivable up to a maximum credit line of $3 million. The credit line has an interest rate equal to Prime plus 2.0% and is secured by all of the Company’s assets except property and equipment financed elsewhere and the Company’s 7.7  million OPMG share investment which has been pledged to secure the GRQ Notes (see Note 5).

 

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

 

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under "Risk Factors" in our annual report on Form 10-KSB filed on April 15, 2008.

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts, income taxes, goodwill and other intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

 

Company Overview

 

We operate the interCLICK Network, an online ad network that combines advanced behavioral targeting with site by site reporting, allowing advertisers to identify and track their desired audience on an unprecedented level. interCLICK offers advanced proprietary demographic, behavioral, contextual, geographic and retargeting technologies across a network of name brand publishers to ensure the right message is delivered to a precise audience in a brand friendly environment.

 

By combining site by site transparency and advanced behavioral targeting, interCLICK is taking the inefficiencies out of the buyer/seller dynamic by allowing advertisers to achieve a direct response metric, whether it’s a click, lead or a sale. We believe that this fundamental difference allows online marketers to achieve a better return on investment while still being able to target the premium websites.

 

Corporate History

 

Prior to August 28, 2007, we were a public company, without material assets or activities. On August 28, 2007, we completed a reverse merger, pursuant to which a wholly-owned subsidiary of ours merged with and into a private company, Customer Acquisition Network, Inc., with such private company being the surviving company. In connection with this reverse merger, we discontinued our former business and succeeded to the business of Customer Acquisition Network, Inc. as our sole line of business. For financial reporting purposes, Customer Acquisition Network, Inc., and not us, is considered the accounting acquirer. Accordingly, the historical financial statements presented and the discussion of financial condition and results of operations herein are those of Customer Acquisition Network, Inc. and do not include our historical financial results.

On August 31, 2007, we consummated the acquisition of Desktop Interactive, Inc., (“Desktop”) known in the industry as InterCLICK, one of the nation’s leading Internet advertising networks.  ComScore, the industry standard utilized to measure an ad network’s capability to reach unique online visitors, recently ranked interCLICK as the eleventh largest ad network in the United States as of September 30, 2008. InterCLICK reaches 122 million unique U.S. visitors per month, or 64% of the U.S. online population, with total pages viewed per month totaling almost 5.9 billion. interCLICK’s rapidly expanding customer base includes some of the world’s largest Internet publishers and advertisers.

On January 4, 2008, we consummated the acquisition of Options Newsletter, Inc., known in the industry as Options Media (“Options”), a leading provider of email delivery services.

On June 23, 2008, we consummated the divestiture of Options to Options Media Group Holdings, Inc.

On June 25, 2008, Customer Acquisition Network Holdings, Inc. changed its name to interCLICK, Inc. (“interCLICK”).

 

Results of Operations

The following table presents our results of operations for the three and nine months ended September 30, 2008. It should be noted that our results of operations and our liquidity and capital resources discussions focus primarily on the operations of interCLICK while referring to Options as a discontinued operation for the three and nine months ended September 30, 2008 (otherwise referred to as the “Period”).

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		For the Three			For the Three			For the Nine			From June 14, 2007
		Months Ended			Months Ended			Months Ended			(Inception) to
		September 30, 2008			September 30, 2007			September 30, 2008			September 30, 2007
Revenues		$	5,756,707		$	1,169,991		$	13,992,303		$	1,169,991
Cost of revenue			3,964,388			1,083,613			10,084,467			1,083,613
Gross profit			1,792,319			86,378			3,907,836			86,378
Operating expenses:
General and administrative (includes stock-based expense
of $439,768, $43,311, $1,417,031 and $43,311, respectively)			1,513,224			939,848			4,755,165			939,848
Sales and marketing			1,282,205			109,884			3,552,847			109,884
Technology support			256,370			-			764,779			-
Merger, acquisition, and divestiture costs			57,415			187,353			569,477			187,353
Amortization of intangible assets			104,571			91,094			313,938			91,094
Total operating expenses			3,213,785			1,328,179			9,956,206			1,328,179
Operating loss from continuing operations			(1,421,466	)		(1,241,801	)		(6,048,370	)		(1,241,801	)
Other income (expense):
Interest income			8,140			23,995			14,903			23,995
Loss on settlement of debt			-			-			(20,121	)		-
Loss on sale of available-for-sale securities			(116,454	)		-			(116,454	)		-
Loss on disposal of fixed assets			(15,385	)		-			(15,385	)		-
Interest expense			(189,382	)		-			(1,422,885	)		-
Total other income (expense)			(313,081	)		23,995			(1,559,942	)		23,995
Loss from continuing operations before income tax benefit			(1,734,547	)		(1,217,806	)		(7,608,312	)		(1,217,806	)
Income tax benefit			-			280,019			-			280,019
Loss from continuing operations before equity investment			(1,734,547	)		(937,787	)		(7,608,312	)		(937,787	)
Equity in investee's loss, net of income taxes			(404,103	)		-			(653,231	)		-
Loss from continuing operations			(2,138,650	)		(937,787	)		(8,261,543	)		(937,787	)
Discontinued operations:
Loss from discontinued operations, net of income taxes			(1,053,059	)		-			(1,988,232	)		-
Loss on sale of discontinued operations, net of income taxes			(498,554	)		-			(1,123,535	)		-
Net loss from discontinued operations			(1,551,613	)		-			(3,111,767	)		-
Net loss			(3,690,263	)		(937,787	)		(11,373,310	)		(937,787	)
Other comprehensive loss:
Unrealized loss on available-for-sale securities			(197,704	)		-			(197,704	)		-
Total other comprehensive loss			(197,704	)		-			(197,704	)		-
Comprehensive loss		$	(3,887,967	)	$	(937,787	)	$	(11,571,014	)	$	(937,787	)
Loss per share from continuing operations - basic and diluted		$	(0.06	)	$	(0.04	)	$	(0.22	)	$	(0.04	)
Loss per share from discontinued operations - basic and diluted		$	(0.04	)	$	-		$	(0.09	)	$	-
Net loss per share - basic and diluted		$	(0.10	)	$	(0.04	)	$	(0.31	)	$	(0.04	)
Weighted average shares outstanding - basic and diluted			37,808,210			23,756,165			36,900,393			22,292,694

 

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Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007

Revenues

 

Revenues from continuing operations for the three months ended September 30, 2008 increased to $5,756,707 from $1,169,991 in the 2007 period, an increase of 392%. The increase is primarily attributable to the Company's national sales force expansion and the continued shift towards higher-priced cost per click (CPC) and cost per thousand (CPM) advertising campaigns.

Seasonally, the third quarter marks the start of the stronger half of the year in terms of demand for CPM advertising campaigns. interCLICK is particularly sensitive to this seasonality effect given that the majority of its revenues are tied to CPM campaigns. However, in response to well-known unfavorable macro-economic developments, the overall U.S. Internet audience based on ComScore data contracted to 189.2mm average viewers in the third quarter of 2008, a decline of 0.7%, as compared to the second quarter of 2008, while still showing an increase of 4.5%, as compared to the second quarter of 2007. For the same periods indicated, we experienced growth of 7.5% and 52.0%, respectively, as our audience reach expanded rapidly based on signing more publishers and gaining access to more inventory.

 

During the three months ended September 30, 2008, revenues from large branded advertisers accounted for more than 85% of overall revenues as compared to less than 75% for the 2007 period.

 

Cost of Revenue and Gross Profit

 

Cost of revenue for the three months ended September 30, 2008 increased to $3,964,388 from $1,083,613 in the 2007 period, an increase of 266%. The increase is primarily attributable to the growth in advertising campaigns requiring the purchase of appropriate levels of inventory from publishers. Cost of revenue is comprised of the amounts we paid to website publishers on interCLICK’s online advertising network. Cost of revenue represented 68.9% of revenue for the three months ended September 30, 2008 compared to 92.6 % of revenue for the 2007 period. The decrease is primarily attributable to improvements in our technology platform resulting in a better match between acquired publisher inventory and advertising campaigns.

Gross profit for the three months ended September 30, 2008 increased to $1,792,319 from $86,378 in the 2007 period, an increase of 1,975%. The increase is primarily attributable to the higher level of revenues combined with the positive revenue mix shift towards higher margin CPM advertising campaigns. Gross profit represented 31.1% of revenue for the three months ended September 30, 2008 compared to 7.4% of revenue for the 2007 period.

We pay interCLICK’s website publishers on a CPM or a revenue share basis. The amount of display advertisements we deliver (e.g. impressions) reflects the level of publishing media we can acquire. Based on our ComScore rating as of September 30, 2008, we reach 64% of the domestic online population and are ranked as the eleventh largest ad network in the domestic online marketplace. We endeavor both to expand our publisher base and to increase the levels of acquired publishing media, particularly with tier one publishers.

Operating Expenses:

General and Administrative 

General and administrative expenses consist primarily of executive and administrative compensation, facilities costs, insurance, depreciation, professional fees and investor relations services fees. General and administrative expenses for the three months ended September 30, 2008 increased to $1,513,224 from $939,848 in the 2007 period, an increase of 61.0%. The increase is primarily attributable to headcount expansion over the period. General and administrative expenses represented 26.3% of revenue for the three months ended September 30, 2008 compared to 80.3% of revenue for the 2007 period.

Included in general and administrative expenses are non-cash stock based compensation, which is comprised of expense from our stock option plans and amortization of warrants issued for consulting services. Non-cash stock based compensation for the three months ended September 30, 2008 increased to $439,768 from $43,311 in the same period in 2007, an increase of 915%. The increase is primarily attributable to the award of incentive stock option grants to current as well as new employees. Non-cash stock based compensation represented 7.6% of revenue for the three months ended September 30, 2008 compared to 3.7% of revenue for the 2007 period.

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for sales and marketing and related support resources, sales commissions and trade shows. Sales and marketing expenses for the three months ended September 30, 2008 increased to $1,282,205 from $109,884 in the 2007 period, an increase of 1,067%. The increase is primarily attributable to our national sales-force expansion. Sales and marketing expenses represented 22.3% of revenue for the three months ended September 30, 2008 compared to 9.4% of revenue for the 2007 period.

 

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We expect sales and marketing costs to increase as a result of our continued expansion of sales and marketing resources and the expected overall growth in our business.

Technology Support

Technology Support consists primarily of compensation of technology support and related consulting resources and third party ad server costs for interCLICK. Technology support and related consulting support resources have been directed primarily towards continued enhancement of our consumer behavioral-targeting and predictive scoring capabilities, integration and optimization of captured and acquired consumer data, and ongoing maintenance and improvement of our ad server optimization technology platform.  Technology support expenses for the three months ended September 30, 2008 increased to $256,370 from $0 in the 2007 period. The increase is primarily attributable to expenditures necessary to support our increased operating scale. Technology support expenses represented 4.5% of revenue for the three months ended September 30, 2008 compared to 0.0% of revenue for the 2007 period.

Amortization of Intangible Assets

Amortization of intangible assets includes amortization of customer relationships, developed technology and a domain name acquired through the Desktop acquisition. Amortization of intangible assets for the three months ended September 30, 2008 increased to $104,571 from $91,094 in the 2007 period, an increase of 14.8%. The increase is primarily attributable to three full months of amortization in the 2008 period versus one month of amortization in the 2007 period. Amortization of intangible assets represented 1.8% of revenue for the three months ended September 30, 2008 compared to 7.8% of revenue for the 2007 period.

Merger, Acquisition and Divestiture Costs

Merger, acquisition and divestiture costs consist primarily of audit and accounting services related to the acquisition and subsequent divestiture of Options Acquisition Sub, Inc. Merger, acquisition and divestiture costs for the three months ended September 30, 2008 decreased to $57,415 from $187,353 in the 2007 period, a decrease of 69.4%. The decrease is primarily attributable to management's decision to focus on the organic growth of its internet ad network operations. Merger, acquisition and divestiture costs represented 1.0% of revenue for the three months ended September 30, 2008 compared to 16.0% of revenue for the 2007 period.

Income taxes

 

As part of the allocation of the purchase price associated with the Options Merger, (see Note 1 of the consolidated financial statements) a deferred tax liability of $264,000 was established as a result of differences between the book and tax basis of acquired intangible assets. With our divesture of the business of Options Acquisition Sub, Inc. in June 2008, the deferred tax liability has been eliminated.

We have not recognized a tax benefit for the three months ended September 30, 2008 due to our continued losses. For the three months ended September 30, 2007, we had recognized a tax benefit of $280,019.

 

Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007

Revenues

 

Revenues from continuing operationsfor the nine months ended September 30, 2008 increased to $13,992,303 from $1,169,991 in the 2007 period, an increase of 1,096%. The increase is primarily attributable to our national sales force expansion and the continued shift towards higher-priced cost per click (CPC) and cost per thousand (CPM) advertising campaigns.

 

 

During the nine months ended September 30, 2008, CPM revenues accounted for over 84% of interCLICK’s overall revenues as compared to less than 75% for the 2007 period.

Cost of Revenue and Gross Profit

 

Cost of revenue for the nine months ended September 30, 2008 increased to $10,084,467 from $1,083,613 in the 2007 period, an increase of 831%. The increase is primarily attributable to the growth in advertising campaigns requiring the purchase of appropriate levels of inventory from publishers. Cost of revenue is comprised of the amounts we paid to website publishers on interCLICK’s online advertising network. Cost of revenue represented 72.1% of revenue for the nine months ended September 30, 2008 compared to 92.6 % of revenue for the 2007 period. The decrease is primarily attributable to improvements in our technology platform resulting in a better match between acquired publisher inventory and advertising campaigns.

 

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Gross profit for the nine months ended September 30, 2008 increased to $3,907,836 from $86,378 in the 2007 period, an increase of 4,424%. The increase is primarily attributable to the higher level of revenues combined with the positive revenue mix shift towards higher margin CPM advertising campaigns. Gross profit represented 27.9% of revenue for the nine months ended September 30, 2008 compared to 7.4% of revenue for the 2007 period.

We pay interCLICK’s website publishers on a CPM or a revenue share basis. The amount of display advertisements we deliver (e.g. impressions) reflects the level of publishing media we can acquire. Based on ComScore data as of September 30, 2008, we reach 64% of the domestic online population and are ranked as the eleventh largest ad network in the domestic online marketplace. We endeavor both to expand our publisher base and to increase the levels of acquired publishing media, particularly with tier one publishers.

Operating Expenses:

General and Administrative 

General and administrative expenses for the nine months ended September 30, 2008 increased to $4,755,165 from $939,848 in the 2007 period, an increase of 406%. The increase is primarily attributable to headcount expansion over the period. General and administrative expenses represented 34.0% of revenue for the nine months ended September 30, 2008 compared to 80.3% of revenue for the 2007 period.

Included in general and administrative expenses are non-cash stock based compensation, which is comprised of expense from our stock option plans and amortization of warrants issued for consulting services. Non-cash stock based compensation for the nine months ended September 30, 2008 increased to $1,417,031 from $43,311 in the 2007 period, an increase of 3,172%. The increase is primarily attributable to the award of incentive stock option grants to current as well as new employees. Non-cash stock based compensation represented 24.6% of revenue for the nine months ended September 30, 2008 compared to 3.7% of revenue for the 2007 period.

Sales and Marketing

Sales and marketing expenses for the nine months ended September 30, 2008 increased to $3,552,847 from $109,884 in the 2007 period, an increase of 3,133%. The increase is primarily attributable to our national sales-force expansion. Sales and marketing expenses represented 25.4% of revenue for the nine months ended September 30, 2008 compared to 9.4% of revenue for the 2007 period.

We expect sales and marketing costs to increase as a result of our continued expansion of sales and marketing resources and the expected overall growth in our business.

Technology Support

Technology support expenses for the nine months ended September 30, 2008 increased to $764,779 from $0 in the 2007 period. The increase is primarily attributable to expenditures necessary to support our increased operating scale. Technology support expenses represented 5.5% of revenue for the nine months ended September 30, 2008 compared to 0.0% of revenue for the 2007 period.

Amortization of Intangible Assets

Amortization of intangible assets for the nine months ended September 30, 2008 increased to $313,938 from $91,094 in the 2007 period, an increase of 245%. The increase is primarily attributable to nine full months of amortization in the 2008 period versus one month of amortization in the 2007 period. Amortization of intangible assets represented 2.2% of revenue for the nine months ended September 30, 2008 compared to 7.8% of revenue for the 2007 period.

Merger, Acquisition and Divestiture Costs

Merger, acquisition and divestiture costs for the nine months ended September 30, 2008 increased to $569,477 from $187,353 in the 2007 period, an increase of 204%. The decrease is primarily attributable to management's decision to focus on the organic growth of its internet ad network operations. Merger, acquisition and divestiture costs represented 4.1% of revenue for the nine months ended September 30, 2008 compared to 16.0% of revenue for the 2007 period.

 

Income taxes

 

As part of the allocation of the purchase price associated with the Options Merger, (see Note 1 of the consolidated financial statements) a deferred tax liability of $264,000 was established as a result of differences between the book and tax basis of acquired intangible assets. With our divesture of the business of Options Acquisition Sub, Inc. in June 2008, the deferred tax liability has been eliminated.

 

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We have not recognized a tax benefit for the nine months ended September 30, 2008 due to our continued losses. For the nine months ended September 30, 2007, we had recognized a tax benefit of $280,019.

Liquidity and Capital Resources

At September 30, 2008, we had a cash and cash equivalent balance of approximately $0.6 million and a working capital deficit of approximately $1.5 million. Net cash used in operating activities during the nine months ended September 30, 2008 totaled approximately $3.5 million. This resulted primarily from a loss from operations of approximately $8.3 million and a $0.7 million outflow of cash from changes in operating assets and liabilities offset by $5.5 million in non-cash charges.

Net cash provided by investing activities for the nine months ended September 30, 2008 totaled approximately $0.7 million. This resulted primarily from proceeds from the sale of available-for-sale securities of approximately $1.0 million offset by purchases of property and equipment of approximately $0.3 million.

Net cash used in financing activities for the nine months ended September 30, 2008 was approximately $0.3 million. This resulted primarily from approximately $4.5 million in note payable principal payments offset by approximately $2.9 million in cash received from stock subscriptions and $1.3 million received from the issuance of notes payable.

On November 30, 2007, pursuant to a purchase agreement we sold senior secured promissory notes (the “Senior Notes”) in the original aggregate principal amount of $5,000,000. We received net proceeds in the amount of $4,500,000 net of $500,000 of an Original Issue Discount upon sale of the Senior Notes.

The Senior Notes were to mature on May 30, 2008 and bore interest at the rate of 8% per annum, payable quarterly in cash. We used the net proceeds from the sale of the Senior Notes first, to pay expenses and commissions related to the sale of the Senior Notes and second, for the general working capital needs and acquisitions of companies or businesses reasonably related to Internet marketing and advertising.

On May 5, 2008, $611,111 of the original $5,000,000 face value of the Senior Notes was settled by the issuance of 305,500 common shares and 152,750 five-year warrants exercisable at $2.50 per share having an aggregate value of $611,000, which was based on a private placement of similar securities occurring at the time of settlement. The net book value of the debt at the date of settlement was $588,404, resulting in a loss on settlement of $22,707, of which $20,121 was included in other income (expense) and $2,586 was included in loss from discontinued operations.

Amortization of the debt discount for the three and nine months ended September 30, 2008 totaled $120,819 and $1,239,061, of which $120,819 and $1,075,140 is included in interest expense and $0 and $163,921 is included in discontinued operations, respectively.

In addition, we incurred legal and other fees associated with the issuance of the Senior Notes. Such fees of $91,437 are included in deferred debt issue costs and were amortized to interest expense over the term of the debt. Amortization of the deferred costs for the three and nine months ended September 30, 2008 totaled $0 and $77,505, of which $0 and $66,134 is included in interest expense and $0 and $11,371 is included in discontinued operations, respectively.

On May 30, 2008, we paid a one-time cash fee in the amount of $50,000 to extend the maturity date on the Senior Notes from May 30, 2008 to June 13, 2008. Accordingly, $0 and $44,524 is included in interest expense and $0 and $5,476 is included in discontinued operations for the three and nine months ended September 30, 2008, respectively.

On June 17, 2008, we paid a one-time cash fee in the amount of $50,000 (the “Extension Amount”) to extend the maturity date on the Senior Notes from June 13, 2008 until June 20, 2008. The Extension Amount was credited against the outstanding principal balance (see Note 1 of the consolidated financial statements).

On June 23, 2008, we utilized proceeds from the Options Divestiture (see Note 1 of the consolidated financial statements) to pay down $2,750,000 of the balance on the Senior Notes, while at the same time we agreed to increase the principal thereunder by $134,684, leaving a balance of $1,773,573 owed under the Senior Notes. In connection with this pay down, the maturity date of the Senior Notes was extended to August 30, 2008 and the interest rate was increased from 8% to 12%. We also pledged our holdings in Options Media Group Holdings, Inc. (the “OPMG Stock”), in order to secure the remaining balance of the Senior Notes. The resulting debt discount of $134,684 was amortized to interest expense over the term of the Senior Notes. Amortization of the new debt discount for the three and nine months ended September 30, 2008 was $120,819 and $134,684, respectively, all of which is included in interest expense.

 

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As of September 30, 2008, all principal and accrued interest on the Senior Notes had been repaid.

On September 26, 2008, we sold senior secured promissory notes (the “GRQ Notes”) in the original aggregate principal amount of $1,300,000 to a related party. The GRQ Notes bear interest at the rate of 6% per annum and mature December 31, 2008. We used the net proceeds from the sale of the GRQ Notes to repay the Senior Notes. We also pledged the OPMG Stock as collateral on the GRQ Notes.

Accrued interest related to the above described notes at September 30, 2008 and at December 31, 2007, was $1,068 and $33,333, respectively.

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Item 4T. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this Report (September 30, 2008), in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

 

From time to time we may be involved in claims arising in the ordinary course of business. To our knowledge there are no pending or threatened legal proceedings, government actions, administrative actions, investigations or claims against us, except as described below.

On May 16, 2008, Devon Cohen, our former Chief Operating Officer, commenced an employment arbitration action against us before the American Arbitration Association, claiming that he was terminated by us without cause that he is therefore owed $600,000 as severance compensation. On September 24, 2008, the litigation between us and Mr. Cohen was settled with no obligation for either party to the suit except to pay their own legal fees.

 

Item 6. Exhibits

 

Exhibit No.	Description
31.1*	Section 302 Certification by the Principal Executive Officer
31.2*	Section 302 Certification by the Principal Financial Officer
32.1*	Section 906 Certification by the Principal Executive Officer
32.2*	Section 906 Certification by the Principal Financial Officer

________________________

* Filed herewith

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SIGNATURES

 

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

 

	INTERCLICK, INC.
Date: November 6, 2008	By:	/s/ Michael Mathews
		Michael Mathews
		Chief Executive Officer (Principal Executive Officer)

Date: November 6, 2008	By:	/s/ David Garrity
		David Garrity
		Chief Financial Officer
		(Principal Financial Officer)

 

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EXHIBIT INDEX

 

 

Exhibit No.	Description
31.1*	Section 302 Certification by the Principal Executive Officer
31.2*	Section 302 Certification by the Principal Financial Officer
32.1*	Section 906 Certification by the Principal Executive Officer
32.2*	Section 906 Certification by the Principal Financial Officer

________________________

* Filed herewith

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