UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended September 30, 2009
 
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the Transition Period From ___________   to 
_____________
 
 Commission
File Number: 000-53733
 
 ADEX
MEDIA, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              
              20-8755674(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S
      Employer Identification No.)883
      N. Shoreline Blvd. Suite A-200, Mountain View, CA 94043(Address
      of principal executive offices)
 
 (650) 967-3040
 (Registrant’s
telephone number, including area code)
 
 
 Indicate
by 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   ̈
 
 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 was required to submit and post such files).
 Yes    ̈     No   ̈
 
 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
              
               ̈
              
              Accelerated filer
              
               ̈Non-accelerated
      filer
              
               ̈  (Do
      not check if a smaller reporting company)
              
              Smaller reporting company
              
              x
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  
 ̈      No  x
 
 At
November 10, 2009, 32,055,248 shares of Common Stock, par value $0.0001, of the
registrant were outstanding.
 
 
 Table of Contents
 
 
 
 ADEX
MEDIA, INC.
 
 QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 
 TABLE OF CONTENTS
 
 
 
 PagePart
      I.     Financial InformationItem
      1.
              Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September
      30, 2009 and December 31, 2008
              3Condensed Consolidated Statements of Operations
      for the Three and Nine Months Ended September 30, 2009 and
      2008
              4Condensed Consolidated Statements of Cash Flows for the
      Nine Months Ended September 30, 2009
    and  2008
              5Notes to Condensed Consolidated Financial
      Statements
              6Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              23Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              34Item
      4T.
              Controls and Procedures
              34Part
      II.     Other InformationItem
      1.
              Legal Proceedings
              35Item 1A.
              Risk Factors
              35Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              50Item
      3.
              Defaults Upon Senior Securities
              50Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              50Item
      5.
              Other Information
              50Item
      6.
              Exhibits
              51Signatures
              52
  
 2
 Table of Contents
 
 PART
    I.
              FINANCIAL
      INFORMATIONITEM 1.
              FINANCIAL
      STATEMENTS
   ADEX
      MEDIA, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE
SHEETS(Unaudited)September
      30,
                
                
                December
      31,2009
                
                
                2008
      (a)ASSETSCurrent
      assets:Cash and cash
      equivalents
                
                $
                1,879,547
                
                
                $
                683,576Restricted
      cash
                
                
                100,000
                
                
                
                -Short-term
      investments
                
                
                570,960
                
                
                
                2,502,670Accounts
      receivable, net of allowance for doubtful accounts of
    $10,960and $19,737,
      respectively
                
                
                317,202
                
                
                
                521,004Credit card
      processor holdbacks, net of reserves of $477,706 and
    $167,363,accrued credit
      card chargeback fees of $120,213 and $57,280, andaccrued credit
      card fees of $134,143 and zero, respectively
                
                
                574,164
                
                
                
                243,213Inventory,
      net
                
                
                417,123
                
                
                
                57,087Prepaid
      expenses and other current assets
                
                
                152,986
                
                
                
                97,878Total
      current assets
                
                
                4,011,982
                
                
                
                4,105,428Property and
      equipment, net
                
                
                136,465
                
                
                
                43,606Intangible
      assets, net
                
                
                206,638
                
                
                
                1,367,330Goodwill
                
                
                8,448,789
                
                
                
                8,448,789Total
      assets
                
                $
                12,803,874
                
                
                $
                13,965,153LIABILITITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                1,291,311
                
                
                $
                929,807Accrued
      liabilities
                
                
                1,030,273
                
                
                
                536,627Warrant  liability
                
                
                111,067
                
                
                
                -Deferred
      revenue
                
                
                29,774
                
                
                
                25,709Promissory
      notes
                
                
                142,976
                
                
                
                401,806Total
      current liabilities
                
                
                2,605,401
                
                
                
                1,893,949Promissory
      notes
                
                
                -
                
                
                
                150,000Deferred tax
      liability
                
                
                3,653
                
                
                
                404,817Total
      liabilities
                
                
                2,609,054
                
                
                
                2,448,766Commitments
      and Contingencies (Note 14)Stockholders'
      Equity:Preferred
      stock; $0.0001 par value; 10,000,000 shares authorized;2,221,337
      shares issued and outstanding at September 30, 2009 forseries A
      preferred stock and zero at December 31, 2008
                
                $
                222
                
                
                $
                -Common
      stock, $0.0001 par value; 150,000,000 shares authorized,
      32,055,248and 31,202,347
      shares issued and outstanding at September 30, 2009 andDecember 31,
      2008, respectively
                
                
                3,206
                
                
                
                3,120Additional
      paid-in capital
                
                
                18,098,650
                
                
                
                13,808,966Accumulated
      deficit
                
                
                (7,907,258
                )
                
                
                (2,295,699
                )Total
      stockholders' equity
                
                
                10,194,820
                
                
                
                11,516,387Total liabilities and stockholders' equity
                
                $
                12,803,874
                
                
                $
                13,965,153The
      accompanying notes are integral part of these condensed consolidated
      financial statements.(a)
      Derived from audited consolidated financial statements.
  3
 Table of Contents
  ADEX MEDIA, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF
      OPERATIONS(Unaudited)For
      The Three Months Ended
                
                
                For
      The Nine Months EndedSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues:Marketing
      platform services - external offers
                
                $
                3,078,563
                
                
                $
                1,340,935
                
                
                $
                8,416,063
                
                
                $
                2,750,264Marketing
      platform services - internal offers
                
                
                3,429,139
                
                
                
                476,228
                
                
                
                9,744,824
                
                
                
                476,228Total
      revenues
                
                
                6,507,702
                
                
                
                1,817,163
                
                
                
                18,160,887
                
                
                
                3,226,492Cost
      of revenues:Marketing
      platform services - external offers
                
                
                2,511,901
                
                
                
                1,219,213
                
                
                
                6,832,201
                
                
                
                2,299,117Marketing
      platform services - internal offers
                
                
                1,388,945
                
                
                
                127,526
                
                
                
                3,296,270
                
                
                
                127,526Amortization
      of acquired product licenses
                
                
                -
                
                
                
                18,795
                
                
                
                58,333
                
                
                
                18,795Total
      cost of revenues
                
                
                3,900,846
                
                
                
                1,365,534
                
                
                
                10,186,804
                
                
                
                2,445,438Gross
      profit
                
                
                2,606,856
                
                
                
                451,629
                
                
                
                7,974,083
                
                
                
                781,054Operating
      expenses:Product
      development
                
                
                -
                
                
                
                17,300
                
                
                
                -
                
                
                
                52,550Sales
      and marketing
                
                
                2,716,664
                
                
                
                1,021,662
                
                
                
                9,428,746
                
                
                
                1,350,135General
      and administrative
                
                
                1,071,825
                
                
                
                404,521
                
                
                
                2,448,362
                
                
                
                955,729Amortization
      of intangible assets
                
                
                25,584
                
                
                
                22,224
                
                
                
                112,525
                
                
                
                22,224Impairment
      charges on intangible assets
                
                
                -
                
                
                
                310,000
                
                
                
                989,834
                
                
                
                310,000Total
      operating expenses
                
                
                3,814,073
                
                
                
                1,775,707
                
                
                
                12,979,467
                
                
                
                2,690,638Operating
      loss
                
                
                (1,207,217
                )
                
                
                (1,324,078
                )
                
                
                (5,005,384
                )
                
                
                (1,909,584
                )Other
      income and expense:Interest
      and other (expense) income, net
                
                
                (8,170
                )
                
                
                13,489
                
                
                
                (7,738
                )
                
                
                45,582Mark-to-market
      gain on warrant liability
                
                
                88,786
                
                
                
                -
                
                
                
                70,248
                
                
                
                -Loss
      before income taxes benefit
                
                
                (1,126,601
                )
                
                
                (1,310,589
                )
                
                
                (4,942,874
                )
                
                
                (1,864,002
                )Income
      tax benefit
                
                
                (1,400
                )
                
                
                (12,923
                )
                
                
                (401,164
                )
                
                
                (12,123
                )Net
      loss
                
                $
                (1,125,201
                )
                
                $
                (1,297,666
                )
                
                $
                (4,541,710
                )
                
                $
                (1,851,879
                )Deemed
      dividend to series A preferred stockholders
                
                
                (121,500
                )
                
                
                -
                
                
                
                (1,069,850
                )
                
                
                -Net
      loss attributable to common stockholders
                
                $
                (1,246,701
                )
                
                $
                (1,297,666
                )
                
                $
                (5,611,560
                )
                
                $
                (1,851,879
                )Loss
      per common share, basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.04
                )
                
                $
                (0.18
                )
                
                $
                (0.12
                )Weighted
      average common shares used in computingbasic
      and diluted loss per common share
                
                
                31,871,506
                
                
                
                30,388,079
                
                
                
                31,648,221
                
                
                
                15,443,218
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 4
 Table of Contents
 
 ADEX
      MEDIA, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)For
      The Nine Months EndedSeptember
      30,
                
                
                September
      30,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (4,541,710
                )
                
                $
                (1,851,879
                )Reconciliation
      of net loss to net cash used in operating activities:Depreciation
                
                
                35,713
                
                
                
                9,872Amortization
      of intangibles
                
                
                170,858
                
                
                
                41,019Share-based
      compensation
                
                
                905,354
                
                
                
                323,926Loss
      on disposal of assets
                
                
                7,717
                
                
                
                -Mark-to-market
      gain on warrant  liability
                
                
                (70,248
                )
                
                
                -Impairment
      charges on intangible assets
                
                
                989,834
                
                
                
                310,000Interest
      from accretion of promissory notes
                
                
                1,170
                
                
                
                3,696Deferred
      income tax adjustment
                
                
                (401,164
                )
                
                
                (12,923
                )Inventory
      provision for obsolescence
                
                
                157,788
                
                
                
                -Bad
      debt expense
                
                
                122,909
                
                
                
                -Changes
      in current assets and liabilities:Accounts
      receivable
                
                
                80,893
                
                
                
                (255,833
                )Credit
      card processor holdbacks
                
                
                (330,951
                )
                
                
                (24,163
                )Other
      receivables
                
                
                -
                
                
                
                (43,783
                )Inventory
                
                
                (517,824
                )
                
                
                4,735Prepaid
      expenses and other current assets
                
                
                (55,108
                )
                
                
                (58,140
                )Accounts
      payable
                
                
                361,504
                
                
                
                483,374Accrued
      liabilities
                
                
                493,646
                
                
                
                412,124Deferred
      revenue
                
                
                4,065
                
                
                
                13,412Net
      cash used in operating activities
                
                
                (2,585,554
                )
                
                
                (644,563
                )Cash
      flows from investing activities:Purchase
      of short-term investments
                
                
                (518,320
                )
                
                
                (4,137,205
                )Proceeds
      from sale of short-term investments
                
                
                2,450,030
                
                
                
                1,576,698Change
      in restricted cash
                
                
                (100,000
                )
                
                
                -Cash
      acquired in connection with acquisition of membership
      interestsin
      Digital Instructor, LLC
                
                
                -
                
                
                
                56,431Acquisition
      of membership interests in Digital Instructor, LLC
                
                
                -
                
                
                
                (1,000,000
                )Acquisition
      of assets of Vibrantads, LLC
                
                
                -
                
                
                
                (70,000
                )Acquisition
      of assets of Bay Harbor Marketing, LLC
                
                
                -
                
                
                
                (50,000
                )Acquisition
      costs and finders' fees paid
                
                
                -
                
                
                
                (203,445
                )Purchase
      of intangible assets
                
                
                -
                
                
                
                (10,000
                )Purchase
      of property, plant and equipment
                
                
                (136,289
                )
                
                
                (34,993
                )Net
      cash provided by (used in) investing activities
                
                
                1,695,421
                
                
                
                (3,872,514
                )Cash
      flows from financing activities:Gross
      proceeds from private placement of common stock
                
                
                -
                
                
                
                5,758,148Costs
      of private placement of common stock
                
                
                -
                
                
                
                (104,920
                )Gross
      proceeds from private placement of series A preferred
stock
                
                
                2,665,604
                
                
                
                -Costs
      of private placement of Series A preferred stock
                
                
                (169,500
                )
                
                
                -Cash
      dividend paid
                
                
                -
                
                
                
                (491,431
                )Repayment
      of promissory notes
                
                
                (410,000
                )
                
                
                -Net
      cash provided by financing activities
                
                
                2,086,104
                
                
                
                5,161,797Net
      increase in cash and cash equivalents
                
                
                1,195,971
                
                
                
                644,720Cash
      and cash equivalents at beginning of period
                
                
                683,576
                
                
                
                5,379Cash
      and cash equivalents at end of period
                
                $
                1,879,547
                
                
                $
                650,099Non-cash
      financing transactions:Deemed
      dividend to series A preferred stockholders
                
                $
                1,069,850
                
                
                $
                -Fair
      value allocated to warrants issued with series A preferred
      stock
                
                $
                181,315
                
                
                $
                -Promissory
      notes issued in connection with acquisitions
                
                $
                -
                
                
                $
                560,000Value
      of common shares issued in connection with acquisition ofmembership
      interests in Digital Instructors, LLC
                
                $
                -
                
                
                $
                5,616,000Value
      of common shares issued in connection with acquisition ofassets
      of Vibrantads, LLC
                
                $
                -
                
                
                $
                531,563Value
      of common shares issued in connection with acquisition ofassets
      of Bay Harbor Marketing, LLC
                
                $
                -
                
                
                $
                1,676,187Discount
      on promissory notes issued
                
                $
                -
                
                
                $
                21,784
 The accompanying notes are an
integral part of these condensed consolidated financial
statements.
 
 5
 Table of Contents
 
 ADEX
MEDIA, INC
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
1.        ORGANIZATION AND BASIS OF
PRESENTATION
 
 Description
of Business
 
 Adex
Media, Inc. (“we”, “us”, “our”, the “Company” or “Adex”) is the parent company
of Abundantad, Inc. (“Abundantad”).  Adex was incorporated under the
laws of Delaware in April 2008.  It was formed as a subsidiary of
SupportSpan, Inc., a public reporting Nevada corporation (“SupportSpan”). On
April 25, 2008, SupportSpan was consolidated into Adex for the purposes of
changing its name to Adex and its place of incorporation to Delaware (the
“Merger”).
 
 Abundantad
was formed on February 4, 2008 for the purpose of creating, operating and/or
acquiring publishers of internet content whose properties are deemed desirable
to generate paid-for dissemination of internal or third-party direct advertising
and revenues derived from agency and advertising network-directed advertising on
the internet. Abundantad creates, acquires, owns and operates content websites
which may include promotions, sweepstakes, mobile offers, and other internet
websites in furtherance of its purposes. On May 14, 2008, Abundantad
acquired substantially all the assets and liabilities of Kim and Lim, LLC, d/b/a
Pieces Media (“Pieces”). Also on May 14, 2008, Abundantad, via a reverse merger,
became a wholly-owned subsidiary of Adex.
 
 Adex is
an early-stage integrated internet marketing publisher with a focus on
offering third party advertising customers and promoting its own offers through
a multi-channel internet advertising platform. Adex’s marketing platform
provides a range of services including (i) search and contextual based
marketing; (ii) display marketing; (iii) lead generation; and (iv) affiliate
marketing.
 
 Basis
of Presentation and Use of Management Estimates
 
 As stated
above, Adex acquired Abundantad and Abundantad simultaneously purchased the
assets and liabilities of Pieces, Pieces was deemed the acquirer for accounting
purposes and Adex is deemed the acquired company.  Accordingly,
Pieces’ historical financial statements for periods prior to the acquisition
become those of Adex retroactively restated for, and giving effect to, the
number of shares received in the merger with Abundantad.  The
historical retained earnings of Pieces are carried forward after the
acquisition.
 
 The
December 31, 2008 condensed consolidated balance sheet was derived from the
audited financial statements at that date, but does not include all disclosures
required by GAAP. Earnings per share prior to the merger with Abundantad are
restated to reflect the equivalent number of shares received by Pieces. The
results of operations presented for the period ended September 30, 2008 included
three and nine month results of operations for Pieces, Abundantad, Adex and
results from Digital Instructors, LLC (“Digital Instructor”) from August 13 to
September 30, 2008. The results of operations presented for the period ended
September 30, 2009 included the three and nine month results of Pieces,
Abundantad, Adex and Digital Instructor. The condensed consolidated financial
statements include the accounts as described above as well as the
Company’s additional subsidiaries, all of which are wholly owned. All
significant inter-company balances and transactions have been eliminated in
consolidation.
 
 The
financial statements include management’s estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the financial
statements and the reported amounts of sales and expenses during the reporting
periods. Actual results could differ from those estimates, and material effects
on operating results and financial position may result. These condensed
consolidated financial statements should be read in conjunction with our audited
consolidated financial statements for the fiscal year ended December 31, 2008
included in our Annual Report on Form 10-K, as amended by Amendment
No. 1 on Form 10-K/A, Amendment No. 2 on Form 10-K/A, our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009, and Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009, each as filed with the
Securities and Exchange Commission (“SEC”). The results of operations for
the three and nine months ended September 30, 2009 are not necessarily
indicative of the results to be expected for any future period.
 
 To
conform to current period presentation, we have reclassified the accrual of
credit card chargeback fees and credit card fees from “Accrued liabilities” to
“Credit card processor holdbacks, net of reserves, accrued credit card
chargeback fees and accrued credit card fees” line item on our condensed
consolidated balance sheet.
 
 6
 Table of Contents
 
 NOTE
2.        SIGNIFICANT ACCOUNTING
POLICIES
 
 Revenue
Recognition
 
 The
Company’s revenues consist of marketing services to promote both third party
offers as well as its own internal offers. The Company evaluates revenue
recognition using the following basic criteria and recognizes revenue when all
four criteria are met:
 
 (i)
              Evidence
      of an arrangement: Evidence of an arrangement with the customer that
      reflects the terms and conditions for delivery of services must be present
      in order to recognize revenue;(ii)
              Delivery:
      Delivery is considered to occur when the service is performed and the risk
      of loss and reward have been transferred to the
  customer;(iii)
              Fixed
      or determinable fee: If a portion of the arrangement fee is not fixed or
      determinable, we recognize that amount as revenue when the amount becomes
      fixed or determinable; and(iv)
              Collection
      is deemed probable: We conduct a credit review of each customer involved
      in a significant transaction to determine the creditworthiness of the
      customer. Collection is deemed probable if we expect the customer to be
      able to pay amounts under the arrangement as those amounts become due. If
      we determine that collection is not probable, we recognize revenue when
      collection becomes probable (generally upon cash
    collection).
 
 The
Company’s marketing platform service revenue – external offers to
third parties consists mostly of revenue derived from direct advertisers,
affiliate networks, ad networks, and list managers. The Company’s marketing
platform service – internal offers consists mostly of revenue derived
from on-line consumers.
 
 The
Company’s marketing platform service revenue to third-parties is mostly derived
on a cost-per-action (“CPA”) basis, also known as pay-per-action (“PPA”) basis.
Under this pricing model, advertisers, affiliate networks, ad networks, and list
managers pay the Company when a specified action (a purchase, a form submission,
or other action linked to the advertisement) has been completed.
 
 The
Company markets its internal offers on a free trial subscription basis. Title to
all internal offers shipped pass to the consumer upon receipt by the consumer
and the expiration of the free trial period. Upon receipt by the consumer, the
Company records non-refundable shipping and handling revenue. The consumer has
between 7 to 11 days from when the internal offer was ordered during which
they can notify the Company of their intent to cancel and return the product
shipped in which case the consumer’s credit card will not be billed for the
product sales price. If the customer chooses to keep the product beyond the free
trial period, the customer’s credit card will be billed and the customer’s
subscription will begin automatically once the free trial period has expired.
Accordingly, the Company does not record revenue until acceptance occurs which
is deemed to be after the free trial period has expired without notification of
rejection of the product. Every month thereafter, the consumer will be shipped
additional items under the offer and billed accordingly until the consumer
cancels the subscription.
  Classification
of Direct Media Costs and Payments Made to Affiliates
 
 Payments
made or accrued for our sales and marketing affiliates or payments made for
direct media buys that relate to promoting our internal offers are recorded as
sales and marketing expenses. Payments made or accrued for our sales and
marketing affiliates or direct media buys for external offers are recorded as
cost of revenues.
  NOTE
3.        RESTRICTED CASH
 
 During
the second quarter of 2009, we classified $100,000 of cash as restricted cash.
This cash is collateralized as part of securing commercial card accounts with
one major credit card company. The collateral is held in a ninety-day
certificate of deposit (“CD”) at which time it matures. The CD will
automatically renew for subsequent ninety-day terms unless terminated. The
credit card company has a security interest in the CD and the Company is
prohibited from pledging or assigning the CD.
  NOTE
4.        FAIR VALUE
MEASUREMENT
 
 The
fair-value hierarchy established by Financial Accounting Standards Board
(“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and
Disclosures, prioritizes the inputs used in valuation techniques into
three levels as follows:
 
 7
 Table of Contents
  Level-1
              Observable
      inputs – quoted prices in active markets for identical assets and
      liabilities;Level-2
              Observable
      inputs other than the quoted prices in active markets for identical assets
      and liabilities – such as quoted prices for similar instruments, quoted
      prices for identical or similar instruments in inactive markets, or other
      inputs that are observable or can be corroborated by observable market
      data;Level-3
              Unobservable
      inputs – includes amounts derived from valuation models where one or more
      significant inputs are unobservable and require us to develop relevant
      assumptions.
 
 The
Company used Level 1 inputs in measuring the fair value of its short-term
investments at September 30, 2009. The Company’s Level 3 liability consists
of the convertible preferred stock warrants held by the preferred
shareholders.  The fair value of the warrant liability was
estimated using the Black-Scholes option pricing model with internal observable
and unobservable market input assumptions (see Note 16). The following
table summarizes the assets and the liabilities that are measured at the fair
value on September 30, 2009.
 
 Quoted Pricesin
      Active
                
                
                SignificantMarkets
      for
                
                Other
                
                
                SignificantIdentical
                
                
                Observable
                
                
                UnobservableInstruments
                
                Inputs
                
                
                InputsLevel
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalAssetsShort-term
      investments
                
                $
                570,960
                
                
                $
                -
                
                
                $
                -
                
                
                $
                570,960LiabilitiesWarrant
      liability
                
                $
                -
                
                
                $
                -
                
                
                $
                111,067
                
                
                $
                111,067
 The
reconciliation of beginning and ending balances for warrant liability measured
at fair value using significant unobservable inputs (Level 3) are as
follows:
 
 Warrant
      LiabilityFair
      value at issuance date on June 12, 2009
                
                $
                167,815Fair
      value at issuance date on July 27, 2009
                
                
                13,500Mark-to-market
      gain at September 30, 2009
                
                
                (70,248
                )Warrant
      liability at fair value on September 30, 2009
                
                $
                111,067
  The fair
value of cash and cash equivalents, accounts receivable and accounts payable for
all periods presented approximates their respective carrying amounts because of
the short maturity of these financial instruments.
  NOTE
5.        CREDIT CARD PROCESSOR
HOLDBACKS
 
 Credit
card processor holdbacks are reserves maintained by the credit card processors
or independent sales organizations that we contract through for any potential
charge-backs or fines levied by the card associations related to the Company’s
on-line sales of its internal offers or fees charged by the
processors.  The Company maintains a separate accrual for credit card
processor charge-backs, customer return refunds, credit card chargeback fees and
credit card processing fees. As of September 30, 2009 and December 31, 2008, the
balance of credit card processor holdbacks, net of aforementioned accruals, was
$574,164 and $243,213, respectively.  The balance of the allowance of
credit card processors charge-backs and customer return refunds at September 30,
2009 and December 31, 2008 was $454,383 and $144,040, respectively. The balance
of the accrual for credit card processors fees and credit card fees at September
30, 2009 and December 31, 2008 was $254,356 and $57,280, respectively. The
Company also maintains an allowance for uncollectible credit card processor
holdbacks.  The balance for this accrual at both September 30,
2009 and December 31, 2008 was $23,323.
 
 8
 Table of Contents
 
 NOTE
6.        INVENTORY
 
 Inventories
consist of finished goods or finished goods components purchased from third
parties and freight-in. Inventories are stated at the lower of cost or
market, using the first-in, first-out method.  The Company performs
periodic assessments to determine the existence of obsolete, slow moving and
non-saleable inventories, and records necessary provisions to reduce such
inventories to net realizable value.  At September 30, 2009 and
December 31, 2008, the balance in the provision for obsolete slow moving and
non-saleable inventory was $185,863 and $24,354, respectively. All inventories
are produced by third-party manufacturers, and substantially all inventories are
located at a third-party fulfillment facility in Wood Dale,
Illinois.
 
 NOTE
7.        PREPAID EXPENSES AND OTHER
CURRENT ASSETS
 
 Prepaid
expenses and other current assets consist primarily of prepaid insurance
premiums, prepaid media buys and leads, and prepaid deposits on the Company’s
inventory and operating leases. At September 30, 2009 and December 31, 2008, the
balance was $152,986 and $97,878, respectively.
 
 NOTE
8.        PROPERTY AND EQUIPMENT,
NET
 
 Property
and equipment as of September 30, 2009 and December 31, 2008 are comprised of
the following:
  September
      30,
                
                
                December
      31,2009
                
                
                2008Computers
      and other office equipment
                
                $
                114,947
                
                
                $
                75,721Office
      furniture
                
                
                53,587
                
                
                
                44,544Software
      licenses and internal developed software
                
                
                82,832
                
                
                
                2,530Total
      property and equipment, net
                
                
                251,366
                
                
                
                122,795Accumulated
      depreciation
                
                
                (114,901
                )
                
                
                (79,189
                )Property
      and equipment, net
                
                $
                136,465
                
                
                $
                43,606
 The
Company depreciates its property and equipment using the straight line method
over useful lives ranging from two to five years. For software developed
for internal use, we follow ASC 350-40, Internal Use
Software.  During the nine months ended September 30, 2009, we
capitalized $80,302 of such costs.
 
 For the
three months and nine months ended September 30, 2009, we recorded $12,639 and
$35,713, respectively, in depreciation expense, and recorded $7,009 and $9,872,
respectively, in depreciation expense for the three and nine months ended
September 30, 2008.
  NOTE
9.      GOODWILL AND INTANGIBLE
ASSETS
 
 Goodwill
 
 Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business combination.
We follow ASC 350-20, Goodwill, under which we
evaluate goodwill for impairment on an annual basis or whenever events and
changes in circumstances suggest that the carrying amount may not be
recoverable. We conduct our annual impairment analysis in the fourth quarter of
each fiscal year. Impairment of goodwill is tested at the reporting unit level
by comparing the reporting unit’s carrying amount, including goodwill, to the
fair value of the reporting unit. The fair values of the reporting units are
estimated using a combination of the income approach that uses discounted cash
flows and the market approach that utilizes comparable companies’ data. If the
carrying amount of the reporting unit exceeds its fair value, goodwill is
considered impaired and a second step is performed to measure the amount of
impairment loss. Because we have two reporting units under ASC 280,Segments Reporting, the
impairment test is performed at the reporting unit.
  9
 Table of Contents
  In
connection with the impairment test of our intangible assets during the second
quarter of 2009, we performed an interim impairment test on our goodwill
balances. The test performed compared the implied fair value of goodwill to the
carrying amount of goodwill on our balance sheet. Our estimate of the implied
fair value of the goodwill was based on the quoted market price of our common
stock and shares outstanding on June 1, 2009. Accordingly, each reporting unit
was assigned an implied fair value by using an income based approach. Our
goodwill impairment test indicated that no goodwill impairment was required
reflecting the implied fair value of each of our reporting units exceeded the
carrying amount. A second step to measure the amount of impairment loss was
accordingly not required.
 
 As of
September 30, 2009, the balance in goodwill was $8,448,789, of which $1,945,366
is attributable to the marketing platform services – external offering segment
and $6,503,423 is attributable to the marketing platform services – internal
offering segment.
  Intangible
Assets
 
 Our
purchased intangible assets as of September 30, 2009 and December 31, 2008 are
summarized as follows:
  September
      30, 2009
                
                
                December
      31, 2008Beginning
                
                
                
                
                
                
                
                
                Net
                
                
                Gross
                
                
                
                
                
                
                
                
                NetCarrying
                
                
                Accumulated
                
                
                Impairment
                
                
                Carrying
                
                
                Carrying
                
                
                Accumulated
                
                
                Impairment
                
                
                CarryingAmount
      *
                
                
                Amortization
                
                
                Charges
                
                
                Amount
                
                
                Amount
                
                
                Amortization
                
                
                Charges
                
                
                AmountDomain
      Names
                
                $
                10,000
                
                
                $
                (4,722
                )
                
                $
                -
                
                
                $
                5,278
                
                
                $
                10,000
                
                
                $
                (2,222
                )
                
                $
                -
                
                
                $
                7,778Product
      License Agreements
                
                
                700,000
                
                
                
                (112,032
                )
                
                
                (587,968
                )
                
                
                -
                
                
                
                700,000
                
                
                
                (53,699
                )
                
                
                -
                
                
                
                646,301Product
      Trade Names
                
                
                300,000
                
                
                
                (48,014
                )
                
                
                (251,986
                )
                
                
                -
                
                
                
                300,000
                
                
                
                (23,014
                )
                
                
                -
                
                
                
                276,986Customer
      Database
                
                
                130,000
                
                
                
                (48,514
                )
                
                
                (58,661
                )
                
                
                22,825
                
                
                
                280,000
                
                
                
                (18,652
                )
                
                
                (150,000
                )
                
                
                111,348Internal
      Use Software
                
                
                200,000
                
                
                
                (44,131
                )
                
                
                -
                
                
                
                155,869
                
                
                
                200,000
                
                
                
                (14,131
                )
                
                
                -
                
                
                
                185,869Company
      Trade Name
                
                
                100,000
                
                
                
                (16,694
                )
                
                
                (80,640
                )
                
                
                2,666
                
                
                
                200,000
                
                
                
                (6,740
                )
                
                
                (100,000
                )
                
                
                93,260Marketing
      Collateral
                
                
                50,000
                
                
                
                (19,421
                )
                
                
                (10,579
                )
                
                
                20,000
                
                
                
                50,000
                
                
                
                (4,212
                )
                
                
                -
                
                
                
                45,788Affiliate  and
      Incentive Platform
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                60,000
                
                
                
                -
                
                
                
                (60,000
                )
                
                
                -Total
                
                $
                1,490,000
                
                
                $
                (293,528
                )
                
                $
                (989,834
                )
                
                $
                206,638
                
                
                $
                1,800,000
                
                
                $
                (122,670
                )
                
                $
                (310,000
                )
                
                $
                1,367,330*
      The beginning carrying amount reflects intangible asset impairment charges
      of $310,000 taken in 2008.
 
 Our
long-lived assets include equipment, furniture and fixtures and intangible
assets. Long-lived assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We evaluate the recoverability of our long-lived assets in
accordance with ASC 360, Property, Plant, and
Equipment. We compare the carrying value of long-lived assets to our
projection of future undiscounted cash flows attributable to such assets and, in
the event that the carrying value exceeds the future undiscounted cash flows, we
record an impairment charge against income equal to the excess of the carrying
value over the asset’s fair value.
 
 During
the second quarter of 2009, the Company made certain changes to its acquired Bay
Harbor Marketing, LLC (“Bay Harbor”) business unit model whereby the company
discontinued its lead generation services for financial advisors and redeployed
the underlying acquired technology engine for marketing its internal offers to
consumers.
 
 Also
during the second quarter of 2009, the Company shifted its marketing resources
away from the three educational offers that were acquired and being marketed
through Digital Instructor in place of new health and beauty based internal
offers. The Company believes that certain health and beauty based internal
offers will provide the Company with a longer lifetime value per consumer and
higher profit margins but plans to continue to seek opportunistic educational
offers that have high lifetime values per consumer.
 
 Given the
impairment indicators of the acquired intangible assets discussed above, we
performed a test of purchased intangible assets for recoverability. The
assessment of recoverability is based upon the assumptions and future usefulness
of the assets.
 
 The
analysis determined that the carrying amounts of the intangible assets exceeded
the implied fair values under the test for impairment per ASC 360 and the
difference was allocated to the intangible assets of the impacted asset group on
a pro-rata basis using the relative carrying amounts of the assets. We recorded
an impairment charge of approximately $1.0 million, of which $587,968 related to
product licensing agreements (acquired from Digital Instructor), $251,986 to
product trade names (acquired from Digital Instructor), $58,661 to customer
database (acquired from Digital Instructor), $80,640 to company trade name
(acquired from Bay Harbor) and $10,579 to marketing collateral (acquired from
Bay Harbor). In addition, the remaining lives of the marketing collateral and
company trade names were shortened from 38 months to 12 months and from 48
months to 12 months, respectively.
 
 10
 Table of Contents
  If our
assumptions regarding projected revenues or gross margin rates are not achieved,
we may be required to record additional intangible asset impairment charges in
future periods, if any such change or other factors constitute a triggering
event. It is not possible at this time to determine if any such future
impairment charge would result or, if it does, whether such charge would be
material.
 
 The
aggregate amortization expenses for our purchased intangible assets are
summarized for the periods presented below:
 
 Weighted
                
                
                Three
      Months Ended
                
                
                Nine
      Months EndedAverage
      Lives
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,in
      Months
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Domain
      Names
                
                
                36
                
                
                $
                834
                
                
                $
                1,389
                
                
                $
                2,500
                
                
                $
                1,389Product
      License Agreements
                
                
                10
                
                
                
                -
                
                
                
                18,794
                
                
                
                58,333
                
                
                
                18,794Product
      Trade Names
                
                
                10
                
                
                
                -
                
                
                
                8,055
                
                
                
                25,000
                
                
                
                8,055Customer
      Database
                
                
                10
                
                
                
                6,250
                
                
                
                5,772
                
                
                
                29,862
                
                
                
                5,772Internal
      Use Software
                
                
                60
                
                
                
                10,000
                
                
                
                4,159
                
                
                
                30,000
                
                
                
                4,159Company
      Trade Name
                
                
                21
                
                
                
                1,000
                
                
                
                1,753
                
                
                
                9,954
                
                
                
                1,753Marketing
      Collateral
                
                
                21
                
                
                
                7,500
                
                
                
                1,097
                
                
                
                15,209
                
                
                
                1,097Total
                
                
                
                
                
                $
                25,584
                
                
                $
                41,019
                
                
                $
                170,858
                
                
                $
                41,019Note:
      The weighted average lives were adjusted to reflect the impairment taken
      during the second quarter of 2009.
  The
estimated future amortization expenses for our purchased intangible assets are
summarized below:
 
 Amortization
      Expense(by
      fiscal year)Remainder
      of 2009
                
                $
                25,5842010
                
                
                74,0752011
                
                
                41,1112012
                
                
                40,0002013
                
                
                25,868Total
                
                $
                206,638
  NOTE
10.      ACCRUED LIABILITIES
 
 Accrued
liabilities as of September 30, 2009 and December 31, 2008 are comprised of as
follows:
 
 September
      30,
                
                
                December
      31,2009
                
                
                2008Accrued
      payroll and payroll  related expenses
                
                $
                303,761
                
                
                $
                259,358Accrued
      professional fees
                
                
                109,372
                
                
                
                130,001Accrued
      dividends to Pieces Media 1
                
                
                -
                
                
                
                100,000Other
                
                
                
                617,140
                
                
                
                47,268Total
                
                $
                1,030,273
                
                
                $
                536,627(1)
      Payments due to former members of Pieces Media.
  11
 Table of Contents
 
 NOTE
11.    PROMISSORY NOTES
 
 Our
promissory notes as of September 30, 2009 and December 31, 2008 are comprised of
the following:
 
 September
      30,
                
                
                December
      31,2009
                
                
                
                20081$60,000
      promissory note; non-interest bearing, due
                  July
      21, 2009; shown net of imputed interest of
                  $0
      and $2,388, respectively 2
                
                $
                -
                
                
                $
                57,612$255,000
      promissory note; non-interest bearing,
                  $52,500
      due May 12, 2009; $52,500 due August 12, 2009;
                  $150,000
      due February 12, 2010; shown net of imputed
                  interest
      of $7,024 and $5,806, respectively 3
                
                
                142,976
                
                
                
                494,194Total
      promissory notes
                
                $
                142,976
                
                
                $
                551,806(1)
      At December 31, 2008, $401,806 was classified as short-term liabilities
      and $150,000 was classifiedas
      long-term liabilities.(2)
      The principal amount of $60,000 was fully paid on July 21,
      2009;(3)
      Of the total promissory note, $52,500 was paid on May 12, 2009 and August
      12, 2009, respectively; Theremaining
      principal amount of $150,000 was paid on October 16, 2009;
 
 In
connection with the Company’s acquisition of the assets of Vibrantads, LLC, on
July 21, 2008, the Company entered into a promissory note with the sole selling
member of Vibrantads in the principal amount of $60,000. The principal amount of
the promissory note bears no interest and it contains customary events of
default that entitle the holder to accelerate the due date of the unpaid
principal amount of the promissory note. The present value of the promissory
note at December 31, 2008 was $57,612. The promissory note was accreted to the
value of its principal amount over a period of twelve months. The promissory
note was paid in full on July 21, 2009.
 
 In
connection with the Company’s acquisition of the membership interests of Digital
Instructor, LLC, on August 12, 2008, the Company issued a senior secured
promissory note in the principal amount of $500,000, which was payable on
February 12, 2009 (subsequently amended as set forth below). The note was issued
to Digital Equity Partners, LLC, a Colorado limited liability company and
wholly-owned by the selling members of Digital Instructor, which was formed for
the purpose of holding the promissory note. The principal amount of the
promissory note bears no interest and contains customary events of default that
entitle the holder thereof to accelerate the maturity date of the unpaid
principal amount. As part of the transaction, the Company entered into a
security agreement with Digital Equity Partners, LLC for purposes of
collateralizing the note. Under the security agreement, Digital Equity Partners,
LLC was given a first priority security interest in the membership interests
purchased by the Company.
 
 On March
6, 2009, the Company, Digital Equity Partners, and the selling members entered
into an Agreement (the “Agreement”) pursuant to which:
 
 (i)
              Digital
      Equity Partners surrendered the $500,000 note and the Company issued to
      Digital Equity Partners in exchange for such note (a) a new note payable
      to Digital Equity Partners in the principal amount of $255,000 (the “New
      Note”) and (b) a cash payment of $245,000 on the Effective of the
      Agreement; and(ii)
              the
      Security Agreement under the $500,000 note was amended to reflect Digital
      Equity Partners’ amended security interest in the principal amount of
      $255,000 under the New Note.
 
 Pursuant
to the New Note, the Company agreed to pay Digital Equity Partners the following
amounts on the following dates:
 
 12
 Table of Contents
 
 (i)
              $52,500
      on the earlier of (i) ninety days from February 12, 2009 and (ii) when
      such amount is declared due and payable by the holder upon or after the
      occurrence of an Acceleration Event (as defined in the New
      Note);(ii)
              $52,500
      on the earlier of (i) one hundred eighty days from February 12, 2009 and
      (ii) when such amount is declared due and payable by the holder upon or
      after the occurrence of an Acceleration Event (as defined in the New
      Note); and(iii)
              $150,000
      on the earlier of (i) February 12, 2010, (ii) when such amount is declared
      due and payable by the holder upon or after the occurrence of an
      Acceleration Event and (iii) when such amount is declared due and payable
      by holder upon or after the occurrence of the Company’s termination of the
      managing member of Digital Instructor’s employment other than for Cause
      (as defined in the Agreement) prior to February 12,
  2010.
 
 During
the second and third quarters of 2009, the Company made $52,500 principal
payment to the note holder, respectively. The present value of the promissory
note at September 30, 2009 and December 31, 2008 was $142,976 and $494,194,
respectively. The promissory note is being accreted to the value of its
principal amount over a period of three to twelve months. The remaining
principal amount of $150,000 was subsequently paid on October 16, 2009 (see
Note 21).
 
 During
the three months ended September 30 2009, we recorded $1,699 in interest expense
related the accretion of the promissory notes. During the nine months ended
September 30, 2009, we recorded a net of $1,170 interest expense which includes
a recovery of $4,813 of imputed interest expense due to the amendment on the
payment term of the promissory note. We incurred $3,696 in such interest expense
for both the three and nine months ended September 30, 2008.
  NOTE
12.       LOSS PER SHARE
 
 Basic
earnings (loss) per share excludes dilution and is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the periods in accordance with ASC 260,Earnings Per Share. Diluted
earnings per share (“EPS”) reflects the potential dilution that would occur if
outstanding stock options or warrants to issue common stock, or preferred stock,
were exercised or converted for common stock, and the common stock underlying
restricted stock were issued by using the treasury stock method. Potentially
dilutive securities are excluded from the computation if their effect is
anti-dilutive.
 
 The
following table summarizes the weighted average shares outstanding and earnings
(loss) per common share for the three and nine months ended September 30, 2009
and 2008:
 
 Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      loss
                
                $
                (1,125,201
                )
                
                $
                (1,297,666
                )
                
                $
                (4,541,710
                )
                
                $
                (1,851,879
                )Deemed
      dividend to series A preferred stockholders
                
                
                (121,500
                )
                
                
                -
                
                
                
                (1,069,850
                )
                
                
                -Net
      loss attributable to common stockholders
                
                $
                (1,246,701
                )
                
                $
                (1,297,666
                )
                
                $
                (5,611,560
                )
                
                $
                (1,851,879
                )Shares
      used in computation:Weighted
      average shares of common stock outstanding used in computation of basis
      loss per share
                
                
                31,871,506
                
                
                
                30,388,079
                
                
                
                31,648,221
                
                
                
                15,443,218Dilutive
      effect of stock options and restricted stocks
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Shares
      used in computation of diluted loss per common share
                
                
                31,871,506
                
                
                
                30,388,079
                
                
                
                31,648,221
                
                
                
                15,443,218Loss
      per common share, basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.04
                )
                
                $
                (0.18
                )
                
                $
                (0.12
                )
  During
the three and nine months ended September 30, 2009, as the Company incurred a
net loss, the weighted average number of common shares outstanding equaled the
weighted average number of common shares and share equivalent assuming dilution.
During the three and nine months ended September 30, 2008, the basic and diluted
weighted average shares were the same as we incurred losses for both
periods.
 
 At
September 30, 2009, options to purchase 6,333,437 shares of common stock at
exercise prices ranging from $0.75 to $5.55, were outstanding but were not
included in the computation of diluted loss per share because they were
anti-dilutive under the treasury stock method. Warrants to purchase
approximately 75,000 shares of common stock with an exercise price of $2.00 to
$3.00 were also excluded from the computation of diluted loss per share because
they were anti-dilutive under the treasury stock method. Unvested restricted
stock corresponding to approximately 46,854 shares of our common stock with a
grant date fair value from $1.50 to $5.80 were outstanding at September 30,
2009 and were not included in the computation of diluted net loss per share
because they were anti-dilutive under the treasury stock method. The convertible
series A preferred stock of 2,221,337 and 1,110,668 warrants to purchase common
stock issued in the second and third quarters of 2009 were also excluded from
the computation of diluted net loss per share because they were anti-dilutive
under the treasury stock method.
 
 13
 Table of Contents
  During
the second and third quarters of 2009, we issued 1,951,337 and 270,000 shares of
series A convertible preferred stock, respectively, and 975,668 and 135,000
warrants to purchase common stock, respectively, at an exercise price of $1.56
per share. Accordingly, the Company recorded $948,350 and $121,500 in deemed
dividends, respectively, during the second and third quarters of 2009 to the
preferred stockholders at the issuance date (see Note 16). The deemed
dividends were included in the calculation of loss per common
share.
 
 In
connection with the Company’s acquisitions of the assets of Pieces and
Vibrantads, and the membership interests of Digital Instructor, under share
reset provisions in each of the respective acquisition agreements, a potential
maximum number of shares issuable to each of the above are 250,000, 262,500, and
1,400,000, respectively. On July 21, 2009 and August 12, 2009, the Company
issued 63,298 and 306,543 shares of common stock, respectively, to Vibrantads
and Digital Instructor, as a result of the reset provisions. (See Part II, Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds). Under the reset
provision, no shares were issued to Pieces.
 
 In
connection with the Company’s acquisition of the assets of Bay Harbor, 150,000
shares were held in escrow and were subject to release based upon Bay Harbor’s
achieving of certain revenue and profit milestones during the earn-out period
from August 30, 2008 to August 29, 2009. No such shares were issued to Bay
Harbor under this provision.
 
 NOTE
13.      COMPREHENSIVE (LOSS) INCOME
 
 We report
comprehensive loss in accordance with ASC 220, Comprehensive Income, which
established the standard for reporting and displaying other comprehensive
(loss) income and its components within financial statements.
For the three and nine months ended September 30, 2009 and 2008, the Company’s
comprehensive loss was the same as net loss.
 
 NOTE
14.      COMMITMENT AND CONTINGENCIES
 
 Lease
Commitments
 
 The
Company leases 2,825 square feet for its corporate office headquarters in
Mountain View, California under an 18-month lease agreement. The lease carries a
monthly base rental of $6,780 per month through April 2009 and then increases to
$7,119 until the end of the lease term. The lease expired on October 31,
2009 and we are currently on a month-to-month lease term.
 
 In
connection with the acquisition of Digital Instructor in August, 2008, the
Company assumed an additional two leases representing an aggregate of 7,746
square feet expiring on June 30, 2012 in Boulder, Colorado. Monthly aggregate
base rentals of these two leases are $6,397 to June 2009, increasing to $6,623
to June 2010, increasing to $6,855 to June 2011, and increasing to $7,101 to
June 2012.
 
 During
the second quarter of 2009, we entered into a six-month lease for a small office
in New Jersey. The monthly lease payment is $1,250 and the lease ends on
December 31, 2009.
 
 Total
rent expense for the three and nine months ended September 30, 2009 was $43,343
and $124,367, respectively; and was $38,050 and $60,650 for both the three and
nine months ended September 30, 2008.
 
 We
believe that if we lost any of the foregoing leases, we could promptly relocate
within ten miles of each location on similar terms.
 
 The
approximate future minimum lease payments under non-cancelable office lease
agreements are as follows:
 
 14
 Table of Contents
  Years
                
                AmountRemainder
      of 2009
                
                $
                30,3212010
                
                
                80,9672011
                
                
                83,8382012
                
                
                42,603Total
                
                $
                237,729
  Contingencies
 
 In August
2009, Dr. Mehmet Oz, Zo Co 1, LLC, OW Licensing Company, LLC and Harpo, Inc.
(collectively, the “Plaintiffs”) filed a complaint in the United States District
Court Southern District of New York against approximately fifty named defendants
and up to 500 additional “Doe” defendants (the “Complaint”).  The
Complaint includes allegations against the defendants relating to their
marketing and advertisement activities in connection with certain products,
including certain products marketed and sold by the Company.  The
Plaintiffs seek monetary and injunctive relief for alleged claims that the
defendants’ products, advertisements and/or promotions violate their rights of
privacy and publicity, resulting in trademark and copyright infringement, false
endorsement and sponsorship, unfair competition, false advertising, deceptive
acts and practices, and cyber squatting.
  The
Company is exploring an early resolution and settlement of any potential
liability with Plaintiffs’ counsel; however, the Company intends and is prepared
to defend itself against the claims by responding to the Complaint and asserting
affirmative defenses.  Although the Company believes it may have
meritorious defenses to the Plaintiffs’ allegations, due to the inherent
uncertainties of the judicial system and the multi-party nature of this
Complaint, the Company is currently unable to predict the outcome of this
matter.  The Company is currently unable to determine whether an
unfavorable outcome will have a material adverse effect on the
Company’s business, financial condition and results of
operations.
  NOTE
15.    STOCKHOLDERS’ EQUITY
 
 In the
first nine months ended September 30, 2009, the Company released 63,021 shares
of restricted stocks upon vesting; 63,298 shares of common stocks to the former
member of Vibrantads under the reset provision; and 726,582 shares of common
stock to the former members of Digital Instructor under the reset
provision.
 
 During
the year ending December 31, 2008, the Company issued 30,952,347 shares, in
connection with the acquisitions of various subsidiaries.
 
 NOTE
16.     CONVERTIBLE PREFERRED STOCKS AND
WARRANTS
 
 Terms
and Conditions
 
 On June
12, 2009 and July 27, 2009, the Company entered into a Series A Convertible
Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”), with
a limited number of accredited investors (the “Purchasers”). The Company closed
the sale to the Purchasers of 1,951,337 and 270,000 shares, respectively, of the
Company’s Series A Preferred Stock, $0.0001 par value (the “preferred stock”),
at a price per share equal to $1.20 (the “Original Issue Price”) and warrants
(the “warrants”) to purchase up to 975,668 and 135,000 shares, respectively, of
the Company’s common stock, par value $0.0001 (the “common stock”), at an
exercise price of $1.56 per share (the “Warrant Exercise Price”). The Company
has raised aggregate proceeds of $2,341,604 and $324,000, respectively, in these
two financing transactions (the “Financing”). The purchase price for the
preferred stock and warrants was paid in cash.
 
 At the
option of the holder at any time, shares of the preferred stock are convertible
into shares of the Company’s common stock at a conversion price equal to $1.20
per share (the “conversion price”). The conversion price is subject to
adjustment for stock splits, stock dividends and recapitalizations. In addition,
for so long as any shares of preferred stock remain outstanding and the shares
of common stock underlying such shares of preferred stock are not eligible to be
sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the
“Securities Act”), if the Company issues any securities, other than certain
permitted issuances, at a per share price (or equivalent for convertible
securities) which is less than the then current conversion price, the Company
shall reduce the conversion price according to a weighted-average-anti-dilution
formula (the “preferred stock down-round provision”). The Company analyzed the
conversion provision and determined it did not meet the criteria for
bifurcation.
  15
 Table of Contents
 
 The
warrant exercise period ends five years after the date of issuance of the
warrants. The holder of the warrants may exercise the warrants at any time
(subject to the restrictions on exercise and conversion) before the expiration
of the warrants.  At the option of the Company, all warrants shall
automatically be deemed to have been exercised fifteen trading days after
delivery to the Purchasers of written notice of such deemed exercise, provided
that the volume-weighted average closing price of the Company’s common stock
over the ten trading days immediately preceding the date of such notice is at
least $2.50 per share. The exercise price of the warrants and the number of
shares of common stock issuable upon exercise of the warrants are subject to
adjustment for stock splits, stock dividends and recapitalizations. In addition,
if at any time during the period beginning on the date of issuance of the
warrants and ending six months thereafter, the Company issues securities, other
than certain permitted issuances, at a per share price (or equivalent for
convertible securities) which is less than the then current exercise price of
the warrants, the Company shall reduce the exercise price and the number of
shares issuable upon exercise of the warrants according to a weighted-average
anti-dilution formula (the “warrant down-round provision”).
 
 
 Valuation
of Convertible Preferred Stock, Warrants and Embedded Conversion
Feature
 
 On
January 1, 2009, the Company adopted ASC 815, Derivatives and Hedging. ASC
815 requires entities to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock by assessing the instrument’s
contingent exercise provisions and settlement provisions. Instruments not
indexed to their own stock that fail to meet the scope exception of ASC
815-10-15 should be classified as a liability and marked-to-market.
 
 Under ASC
815, the warrants we issued, as described above, were not considered to be
indexed to our stock and have fixed settlement amount based on the terms of the
down-round provision. Accordingly, the warrants do not meet the criteria for
equity classification and are therefore classified as derivative liabilities and
carried at fair value.
 
 A
Black-Scholes option-pricing model was used to obtain the fair value of the
warrants using the following assumptions:
 
 June
      12, 2009 Financing
                
                
                July
      27, 2009 FinancingStock
      price
                
                $
                1.60
                
                
                $
                1.60Exercise
      price
                
                $
                1.56
                
                
                $
                1.56Risk
      free interest rate
                
                
                2.81
                %
                
                
                2.63
                %Volatility
                
                
                100
                %
                
                
                100
                %Expected
      term in years
                
                
                5.0
                
                
                
                5.0Dividend
                
                
                -
                
                
                
                -
 
 The
effect of the forced exercise provision reduced the value of the warrants by an
amount equal to the Black-Scholes value of an option with an exercise price of
$2.50 (with all other inputs the same as described above). The fair value of the
warrants down-round provisions was valued using a probability weighted outcome
model.  Based on the sum of the individual components, the fair value
of the warrants was estimated to be $167,815 and $13,500, respectively, for the
two financings at inception. This warrant liability is marked to market through
current earnings and once the down-round provisions expire, the instruments will
be reclassified as components of stockholders’ equity.
 
 After the
$167,815 and $13,500 respective allocation of proceeds to the warrants, the
remaining gross proceeds of $2,173,789 and $310,500, respectively, of the two
financings, were used to compute the effective conversion price and beneficial
conversion feature.  The calculated fair value of the embedded conversion
feature was the intrinsic value of the computed effective conversion price and
the stock price of the common shares on the issuance date. As a
result, $948,350 and $121,500 were recorded as a deemed dividend in the
second and third quarters, respectively, to the preferred
stockholders.
 
 The
respective closing costs of $144,500 and $25,000 that were related to the
preferred shares issued have been recorded, respectively, during the second and
third quarter of 2009 as a reduction to additional paid-in-capital.
 
 16
 Table of Contents
  Marking-to-Market
 
 ASC 815
requires that the fair value of the aforementioned liabilities be re-measured at
the end of every reporting period with the change in value reported in the
statement of operations.
 
 On
September 30, 2009, as a result of the marking-to-market of the warrant
liability, we recorded a gain of $70,248 in theOther income and expense
line item in our condensed consolidated statement of operations.
 
 NOTE
17.      STOCK OPTIONS, RESTRICTED STOCK, WARRANTS
AND SHARE-BASED COMPENSATION
 EXPENSES
 
 We
currently have one equity compensation plan, the First Amended and Restated Adex
Media, Inc. Employee Stock Option Plan (the “Plan”), as amended in June
2009, which permits the Board of Directors to grant to officers, directors,
employees and third parties incentive stock options (“ISOs”), non-qualified
stock options, and restricted stocks.
 
 Under the
Plan, as amended, options for 10,000,000 shares of common stock are reserved for
issuance.  At September 30, 2009, 3,666,563 options were available for
grant.
  Stock
Options
 
 Option
activities under the Plan are as follows for the nine months ended
September 30, 2009:
 
 Weighted
                
                
                WeightedAverage
                
                
                AverageExercise
                
                
                Remaining
                
                
                AggregatePrice
      per
                
                
                Contractual
                
                
                IntrinsicOutstanding
                
                
                Share
                
                
                Life
      (in Years)
                
                
                ValueOutstanding
      at December 31, 2008
                
                
                4,680,000
                
                
                $
                1.62
                
                
                
                9.41
                
                
                $
                5,159,900Granted
                
                
                1,942,500
                
                
                
                1.49
                
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                (289,063
                )
                
                
                2.02
                
                
                
                -
                
                
                
                -Outstanding
      at September 30, 2009
                
                
                6,333,437
                
                
                $
                1.57
                
                
                
                8.85
                
                
                $
                2,475,978Vested
      and exercisable at September 30, 2009
                
                
                1,531,354
                
                
                $
                1.47
                
                
                
                8.47
                
                
                $
                903,300
 
 The
aggregate intrinsic value in the table above represented the total pre-tax
intrinsic value, which was based on the closing price of our common stock at the
end of the periods. These were the value which would have been received by
option holders if all option holders exercised their options on that
date.
 
 The fair
value of options granted is recognized as an expense over the requisite service
period.  As of September 30, 2009, the fair value of options issued by
the Company was $5,711,384 of which $279,513 has been forfeited. The unamortized
cost of stock options issued remaining at September 30, 2009 was $4,106,927 with
a weighted average expected term for recognition of 2.98 years. At the time of
grant, the estimated fair values per option were from $0.24 to
$4.46.
 
 During
the first quarter of 2009, an aggregate of 500,000 options to purchase common
stock held by two employees were repriced. The repricing of the underwater
options was accounted for under ASC 718, Compensation, Stock
Compensation, as modification. The modification resulted in an
incremental compensation cost of $88,033, of which, $6,469 and $14,414,
respectively, were recognized in the three and nine months ended September 30,
2009. The remaining unrecognized incremental cost will be recognized over the
remaining service period.
 
 Restricted
Stock
 
 The fair
value of restricted stock granted is recognized as an expense over the requisite
service period.  As of September 30, 2009, the fair value of
restricted stock issued by the Company was $149,709. The unamortized cost of
restricted stock issued remaining at September 30, 2009 was $70,918 with a
weighted average expected term for recognition of 2.16 years. At the time of
grant, the fair values per share were from $1.75 to $5.80. Total outstanding
restricted stock was 163,000 shares at September 30, 2009, of which 46,854 was
unvested.
  17
 Table of Contents
 
 We
accounted for non-employee shares of restricted stock in accordance with ASC
505-50,Equity-Based Payment
to Non-Employees. Under ASC 505-50, none of our agreements has a
disincentive for non-performance, we therefore record the charge for the fair
value of the portion of the restricted stock earned from the point in time when
vesting of the restricted stock becomes probable. Final determination of fair
value of the restricted stock occurs upon actual vesting. As such,
non-employees’ shares were revalued and marked-to-market at the stock price on
each reporting date.
 
 During
the first quarter of 2009, we modified one terminated employee’s original grant.
Of the 50,000 shares of restricted stock that such employee was originally
granted, 40,000 shares were canceled and the remaining 10,000 shares were
accelerated as part of the separation agreement. Under ASC 718, the change in
the vesting term of the restricted stock is considered as modification. As such,
we reversed $22,134 compensation expense related to the original grant and
recorded $16,000 compensation expense based on the fair value of the 10,000
shares on the modification date.
 
 Warrants
 
 We
accounted for warrants issued to third-party service providers in accordance to
ASC 505-50, as none of our agreements has a disincentive for non-performance, we
record the charge for the fair value of the portion of the warrants earned from
the point in time when vesting of the warrants becomes probable. Final
determination of fair value of the warrants occurs upon actual vesting. As such,
the warrants were revalued and marked-to-market at each reporting date. During
the nine months ended September 30, 2009, there was no issuance or cancellation
of warrants. We
recorded $62,975 and $97,798, respectively, in warrants expense for the three
and nine months ended September 30, 2009.
 
 Warrants
have been issued with exercise prices ranging between $2.00 and $3.00 per share
as follows:
 
 WeightedWeighted
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Life
      (in Years)
                
                
                ValueOutstanding
      at December 31, 2008
                
                
                75,000
                
                
                $
                2.50
                
                
                
                5.00
                
                
                $
                6,250Outstanding
      at September 30, 2009
                
                
                75,000
                
                
                $
                2.50
                
                
                
                4.25
                
                
                $
                -Exercisable
      at September 30, 2009
                
                
                47,693
                
                
                $
                2.63
                
                
                
                4.25
                
                
                $
                -
  Share-based
Compensation Expenses
 
 We
recognize our share-based payment compensation cost under ASC 718 for employees'
shares and under ASC 505-50 for non-employees' shares. The following table sets
forth the total share-based compensation expense for the periods
indicated:
 
 For
      The Three Months Ended
                
                
                For
      The Nine Months EndedSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Sales
      and marketing - stock options to employees
                
                $
                94,163
                
                
                $
                174,806
                
                
                $
                321,399
                
                
                $
                196,151Sales
      and marketing - restricted stocks to employees
                
                
                3,349
                
                
                
                16,997
                
                
                
                8,818
                
                
                
                16,997General
      and administration - stock options to employees
                
                
                239,261
                
                
                
                56,167
                
                
                
                416,295
                
                
                
                90,875General
      and administration - restricted stocks to employees
                
                
                1,359
                
                
                
                2,758
                
                
                
                (7,652
                )
                
                
                2,758General
      and administration - restricted stocks to non-employees
                
                
                7,837
                
                
                
                17,145
                
                
                
                68,696
                
                
                
                17,145General
      and administration - warrants to non-employees
                
                
                62,975
                
                
                
                -
                
                
                
                97,798
                
                
                
                -Total
      share-based compensation expense
                
                $
                408,944
                
                
                $
                267,873
                
                
                $
                905,354
                
                
                $
                323,926
 
 
 18
 Table of Contents
 
 NOTE
18.    SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT
CUSTOMERS
 
 Segments
are defined by ASC 280, Segment Reporting, as
components of a company in which separate financial information is available and
is evaluated by the chief operating decision maker, or a decision making group,
in deciding how to allocate resources and in assessing performance.
 
 Until the
Company’s acquisition of Digital Instructor in August, 2008, the Company was
comprised of a single segment which was the marketing platform services segment.
As of August 12, 2008, in connection with the acquisition of Digital Instructor,
LLC, the Company added a second segment, which was the products
segment.
 
 In the
second quarter of 2009, the Company changed its internal operating structure
which resulted in changes in the Company's reportable segments. Prior to the
second quarter of 2009, the Company’s product segment primarily operated as a
standalone segment; in particular, the segment contracted with its own marketing
affiliates to generate sales, sourced its own inventory, and performed its own
product branding, etc. During the second quarter of 2009, the Company
restructured its operations by integrating its in-house media buying and
affiliate network together to service the Company’s both internal and external
offers.
 
 In
accordance with the above structural changes, the Company’s chief operating
decision maker has changed the performance measurement segments of the Company
to the following:
 
 1.
              Marketing
      Platform Services – Internal Offers
 2.
              Marketing
      Platform Services – External Offers
 
 
 Marketing
Platform Services – Internal Offers
 
 Primary
activities of this segment are performed to promote the Company’s internal
offers; the Company will source its own inventory from strategic partners, brand
or private label the inventory, perform all fulfillment and logistical support
on an outsourced basis, and bill the end consumer’s credit card directly. The
primary services used to promote the Company’s internal offers include the
following:
 
 (i)
              search
      and contextual based advertising;(ii)
              display
      based advertising; and(iii)
              affiliate
      marketing.
 
 The
revenue received by the Company from its internal offers is a combination of (i)
revenue charged for shipping and handling of the product; (ii) revenue for the
offer subscription charged on a monthly basis until the customer cancels the
subscription; and (iii) revenue from upsell offers sold to the consumer. The
costs to the Company of marketing its internal offers include the costs of
inventory and procurement, and the costs of merchant credit card
processing.
 
 Marketing
Platform Services – External Offers
 
 Primary
activities of this segment include the following platform services for product
offers that are owned by independent third parties:
 
 (i)
              search
      and contextual based advertising;(ii)
              display
      based advertising; and(iii)
              affiliate
      marketing.
 
 The
revenue received by the Company in this segment is composed of a
click-per-action (“CPA”) commissioned based payment from the owner of the offer.
The costs to the Company include costs of direct media buys, and costs paid to
marketing affiliates.
 
 Although
there were changes in the structure of our internal organization, there are no
changes in the composition of the reportable segments. Our previously reported
products segment became the marketing platform services – internal offer
segment; and the marketing platform services segment became the marketing
platform services – external offers segment. As such, there is no need to
restate the segment information disclosed in the prior periods.
 
 The
following table presents information about reported segments along with the
items necessary to reconcile the segment information to the totals reported in
the accompanying condensed consolidated financial statements for the periods
indicated:
 
 19
 Table of Contents
  For
      The
                  Three
      Months Ended
                
                Marketing
      Platform Services - External Offers
                
                
                Marketing
      Platform Services - Internal Offers
                
                
                Total
                
                
                For
      The
                  Nine
      Months Ended
                
                Marketing
      Platform Services - External Offers
                
                
                Marketing
      Platform Services - Internal Offers
                
                
                TotalSeptember
      30, 2009
                
                
                
                
                
                
                
                
                
                
                September
      30, 2009Revenues
                
                $
                3,078,563
                
                
                $
                3,429,139
                
                
                $
                6,507,702
                
                
                Revenues
                
                $
                8,416,063
                
                
                $
                9,744,824
                
                
                $
                18,160,887Cost
      of revenues
                
                
                2,511,901
                
                
                
                1,388,945
                
                
                
                3,900,846
                
                
                Cost
      of revenues
                
                
                6,832,201
                
                
                
                3,354,603
                
                
                
                10,186,804Gross
      profit
                
                $
                566,662
                
                
                $
                2,040,194
                
                
                $
                2,606,856
                
                
                Gross
      profit
                
                $
                1,583,862
                
                
                $
                6,390,221
                
                
                $
                7,974,083Gross
      margin
                
                
                18.4
                %
                
                
                59.5
                %
                
                
                40.1
                %
                
                Gross
      margin
                
                
                18.8
                %
                
                
                65.6
                %
                
                
                43.9
                %Corporate
      expenses
                
                
                
                
                
                
                
                
                
                $
                3,379,545
                
                
                Corporate
      expenses
                
                
                
                
                
                
                
                
                
                $
                10,971,754Stock-based
      compensation
                
                
                
                
                
                
                
                
                
                
                408,944
                
                
                Stock-based
                  compensation
                
                
                
                
                
                
                
                
                
                
                905,354Amortization
      of intangible assets
                
                
                
                
                
                
                
                25,584
                
                
                Amortization
      of intangible assets
                
                
                
                
                
                
                
                112,525Impairment
      of intangible assets
                
                
                
                
                
                
                
                
                
                
                -
                
                
                Impairment
      of  intangible assets
                
                
                
                
                
                
                
                
                
                
                989,834Operating
      loss
                
                
                
                
                
                
                
                
                
                $
                (1,207,217
                )
                
                Operating
      loss
                
                
                
                
                
                
                
                
                
                $
                (5,005,384
                )September
      30, 2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                September
      30, 2008Revenues
                
                $
                1,340,935
                
                
                $
                476,228
                
                
                $
                1,817,163
                
                
                Revenues
                
                $
                2,750,264
                
                
                $
                476,228
                
                
                $
                3,226,492Cost
      of revenues
                
                
                1,219,213
                
                
                
                146,321
                
                
                
                1,365,534
                
                
                Cost
      of revenues
                
                
                2,299,117
                
                
                
                146,321
                
                
                
                2,445,438Gross
      profit
                
                $
                121,722
                
                
                $
                329,907
                
                
                $
                451,629
                
                
                Gross
      profit
                
                $
                451,147
                
                
                $
                329,907
                
                
                $
                781,054Gross
      margin
                
                
                9.1
                %
                
                
                69.3
                %
                
                
                24.9
                %
                
                Gross
      margin
                
                
                16.4
                %
                
                
                69.3
                %
                
                
                24.2
                %Corporate
      expenses
                
                
                
                
                
                
                
                
                
                $
                1,175,610
                
                
                Corporate
      expenses
                
                
                
                
                
                
                
                
                
                $
                2,034,488Stock-based
      compensation
                
                
                
                
                
                
                
                
                
                
                267,873
                
                
                Stock-based
                  compensation
                
                
                
                
                
                
                
                
                
                
                323,926Amortization
      of intangible assets
                
                
                
                
                
                
                
                22,224
                
                
                Amortization
      of intangible assets
                
                
                
                
                
                
                
                22,224Impairment
      of intangible assets
                
                
                
                
                
                
                
                
                
                
                310,000
                
                
                Impairment
      of
                  intangible
      assets
                
                
                
                
                
                
                
                
                
                
                310,000Operating
      loss
                
                
                
                
                
                
                
                
                
                $
                (1,324,078
                )
                
                Operating
      loss
                
                
                
                
                
                
                
                
                
                $
                (1,909,584
                )
  Segment
operating loss consists of the revenues generated by a segment, less the direct
costs of revenue and selling and general and administrative costs that are
incurred directly by the segment. Corporate costs include costs related to
administrative functions that are performed in a centralized manner that are not
attributable to a particular segment. These administrative function costs
include costs for corporate office support, all office facility costs, costs
relating to accounting and finance, human resources, legal, marketing,
information technology and Company-wide business development functions, as well
as costs related to overall corporate management.
 
 We do not
charge intersegment revenue; instead an intercompany management fee is charged
for the sales and marketing services that our Marketing Platform Services
– External Offers segment provides to our Marketing Platform Services
– Internal Offers segment. These intercompany management fees are
eliminated at the consolidation.
  Customer
Base
 
 Major
customers are defined as those customers that have generated revenues which
exceed 10% of our revenues.
 
 For the
three months ended September 30, 2009, there were two customers who accounted
for more than 10% of our consolidated revenue. For the nine months ended
September 30, 2009, no single customer accounted for more than 10% of our
consolidated revenue. For both the three and nine months ended September 30,
2008, one customer accounted for 33% of consolidated revenue, and two other
customers each accounted for 14% of consolidated
revenue.
 
 At
September 30, 2009, there were three customers who each accounted for more than
10% of our consolidated accounts receivable; the aggregated account receivables
from these three customers were 50% at September 30, 2009.
 
 At
December 31, 2008, three customers accounted for an aggregate of 35% of
consolidated accounts receivable.
 
 The
Company does not require collateral or other security for accounts
receivable.  However, credit risk is mitigated by the Company’s
ongoing evaluations and the reasonably short collection
terms.  Accounts receivable are stated net of allowances for doubtful
accounts.  An allowance for doubtful accounts has been provided at
September 30, 2009 and December 31, 2008, based on historic trends and the
Company’s expectation of collectability.  Allowance for doubtful
accounts at September 30, 2009 and December 31, 2008 was $10,960 and $19,737,
respectively.
  Vendor
Base
 
 Major
vendors are defined as those vendors having expenditures made by the Company
which exceed 10% of the Company’s total expenditures.
  20
 Table of Contents
 
 During
the three months ended September 30, 2009, one vendor accounted for more than
10% of our total expenditures. During the nine months ended September 30, 2009,
no single vendor accounted for more than 10% of our total expenditures. During
the three and nine months ended September 30, 2008, there were two vendors and
one vendor  accounted for more than 10% of our total expenditures,
respectively.
 
 Operations
by Geographic Area
 
 The
Company’s operations are domiciled in the United States. The Company does not
have international subsidiaries. Revenue is attributed to a geographic region
based upon the country from which the customer relationship is maintained. As of
September 30, 2009, all of our customer relationships were maintained from the
United States although our customers include advertising and affiliate networks
which are based both in the United States and internationally. In addition, the
direct advertiser who places offers through an advertising or affiliate network
may be located internationally as could be the end consumer who is ultimately
completing the final action which triggers the action for how the Company
generates revenue. However, because the customer relationships are maintained in
the United States, all revenue and income from operations is allocated to the
United States.
 
 Location
of Assets
 
 Our
tangible assets are located at our corporate offices in Mountain View,
California and our offices in Boulder, Colorado. Our inventory is located at a
third party fulfillment center in Wood Dale, Illinois. Our servers for hosting
our platforms are located at third-party locations.
  NOTE
19.      INCOME TAXES
 
 During
the three and nine months ended September 30, 2009, we recorded an income tax
benefit of $1,400 and $401,164 respectively. During the three and nine months
ended September 30, 2008, we recorded $12,923 and $12,123, respectively, in
income tax benefit. The 2009 benefit primarily resulted from a deferred tax
liability adjustment related to the amortization expense and the impairment
charges of Digital Instructor intangible assets we recorded during the
three and nine months ended September 30, 2009.
 
 We file
income tax returns in the U.S. federal jurisdiction, California, and various
state jurisdictions in which we have a subsidiary or branch operation. The tax
years 2007 and 2008 remain open to examination by the U.S. and state tax
authorities.
 
 Our
policy is that we recognize interest and penalties accrued on any unrecognized
tax benefits as a component of our provision for income taxes. We had no accrued
interest or penalties associated with unrecognized tax benefits at September 30,
2009 or December 31, 2008.
 
 NOTE
20.      RECENT ACCOUNTING
PRONOUNCEMENTS
 
 In
August 2009, the FASB issued amended standards on ASC 820, Fair Value Measurements and
Disclosures, for the fair value measurement of liabilities. These amended
standards clarify that in circumstances in which a quoted price in an active
market for the identical liability is not available, we are required to use the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities, or quoted prices for similar liabilities when traded as
assets. If these quoted prices are not available, we are required to use another
valuation technique, such as an income approach or a market approach. These
amended standards are effective for us beginning in the fourth quarter of fiscal
year 2009 and are not expected to have a significant impact on our consolidated
financial statements.
 
 In
October 2009, the FASB issued an amendment on ASC 605, Revenue Recognition, on the
subtopic 605-25, Multiple-Element
Arrangements. The amendment impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, the amendment modifies
the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. The amendment is effective for revenue
arrangement entered or materially modified in fiscal years beginning on or after
June 15, 2010, however early adoption is permitted. We do not expect these new
standards to significantly impact our consolidated financial
statements.
 
 21
 Table of Contents
 
 NOTE
21.      SUBSEQUENT EVENTS
 
 Digital
Instructor Promissory Note Payment
  On
October 16, 2009, the Company delivered the remaining balance of $150,000 on a
Senior Secured Promissory Note dated March 6, 2009 (the “Note”) to Digital
Equity Partners, the holder of the Note (the “Holder”).  Pursuant to
the terms of a Security Agreement dated August 12, 2008 by and between the
Company and the Holder, as amended by that certain Agreement dated March 6, 2009
(the “Security Agreement”), the indebtedness evidenced by the Note was secured
by certain membership interests in Digital Instructor, LLC and the proceeds
therefrom (the “Collateral”).
 
 As a
result of the repayment, all indebtedness evidenced by the Note has been paid in
full.  Accordingly, as a result of the completion of Company’s
obligations under the Note, the Holder’s security interest in the Collateral and
the Security Agreement were terminated on October 16, 2009.
 
 Digital
Instructor Earn Out Dispute
 
 In August
2008, the Company acquired the membership interests of Digital Instructor
pursuant to a certain Membership Interest Purchase Agreement dated August 12,
2008, as amended by that certain agreement dated March 6, 2009 (collectively,
the “Purchase Agreement”), by and between the Company and the selling members
(the “Selling Members”).  As part of the purchase price for the
membership interests, the Company agreed to pay the Selling Members up to an
additional $500,000 if certain gross revenue performance milestones were
achieved (“Earn-Out”).  The schedule of Earn-Out is as follows: (i)
$350,000 is payable within a certain time following the closing date, August 12,
2009, subject to Digital Instructor achieving certain gross revenue performance
milestones and (ii) $150,000 is payable within a certain time following the
expiration of the period commencing on February 12, 2009, and ending on February
12, 2010, subject to Digital Instructor achieving certain gross revenue
milestones.
 
 On
October 12, 2009, the Company provided its determination of the Earn-Out to the
Selling Members. On November 11, 2009, the Company received an Earn-Out
Determination Dispute Notice (the “Notice”) from the Selling Members disputing
the Company’s calculation of the Earn-Out.  The Company disagrees with
the basis of calculation set forth in the Notice and intends to pursue the
procedure for dispute resolution under the Purchase
Agreement.  Pursuant to the terms of the Purchase Agreement, each of
the parties have a right to designate an appointee and once appointed the
appointees are to promptly meet and confer to resolve the dispute within 30 days
after the Company received the Notice.   If the dispute is not
resolved, then the parties will submit the dispute to an independent mutually
acceptable nationally recognized public accounting firm.  In the event
the parties are unable to agree on an accounting firm, then each of the parties
will designate a nationally recognized public accounting firm.  These
two firms will mutually agree and appoint an independent third accounting firm
to resolve the dispute. The finding by such accounting firm will be final and
binding.
 
 The
Company has evaluated the subsequent events through November 13, 2009, the
financial statements issuance date. The financial statements included
herein do not reflect the impact of these subsequent events.
     
 22
 Table of Contents
 
 ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 Management’s
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933,
as amended, that involve risks and uncertainties. When used in this report, the
words, “intend,”  anticipate,” “believe,” “estimate,” “plan,”
“expect,” “could,” “project,” “may,” “should,” “potential,” “continue” and
similar expressions as they relate to us are included to identify
forward-looking statements. These statements are based on our current beliefs,
expectations, and assumptions and are subject to a number of risks and
uncertainties, many of which are set forth in this Form 10-Q. Our actual results
and events could differ materially from those anticipated in these
forward-looking statements as a result of various factors. These forward-looking
statements are made as of the date of this Form 10-Q, and we assume no
obligation to explain the reason why actual results may differ. In light of
these assumptions, risks, and uncertainties, the forward-looking events
discussed in this Form 10-Q might not occur. These statements are not guarantees
of future performance and involve certain risks and uncertainties that are
difficult to predict. Factors that could cause actual result and events to
differ materially from those state herein include, but not are not limited to
the information contained under the caption “Part I, Item 2 – Management’s
Discussion and Analysis of Financial Condition and Results of Operation” and
“Part II, Item 1A. Risk Factors.” We disclaim any obligation to update
information in any forward-looking statement. The information contained in this
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009
is not a complete description of the Company’s business or the risks associated
with an investment in the Company’s securities. Each reader should carefully
review and consider the various disclosures made by the Company in this
Quarterly Report on Form 10-Q and in the Company’s other filings with the
Securities and Exchange Commission (“SEC”).
 
 The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto, included in this Quarterly
Report on Form 10-Q, and our audited consolidated financial statements for the
fiscal year ended December 31, 2008 included in our Annual Report on Form 10-K,
as amended by Amendment No. 1 on Form 10-K/A, Amendment  No. 2 on
Form 10K/A, Form 10-Q for the period ending March 31, 2009 and Form 10-Q for the
period ending June 30, 2009 , each as filed with the Securities and
Exchange Commission. Our results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of results to be
expected for any future period.
  COMPANY OVERVIEW
 
 Adex
Media, Inc. (“we”, “us”, “our”, the “Company” or “Adex”) is an early-stage
integrated internet marketing publisher with a focus on offering third
party advertising customers or promoting its own offers through a multi-channel
internet advertising platform. Adex’s marketing platform provides a range of
services including (i) search and contextual based marketing; (ii) display
marketing; (iii) lead generation; and (iv) affiliate marketing.
 
 Recent
Events
 
 On
October 16, 2009, the Company delivered the remaining balance of $150,000 on a
Senior Secured Promissory Note dated March 6, 2009 (the “Note”) to Digital
Equity Partners, the holder of the Note (the “Holder”).  Pursuant to
the terms of a Security Agreement dated August 12, 2008 by and between the
Company and the Holder, as amended by that certain Agreement dated March 6, 2009
(the “Security Agreement”), the indebtedness evidenced by the Note was secured
by certain membership interests in Digital Instructor, LLC (“Digital
Instructor”) and the proceeds therefrom (the “Collateral”).  As a
result of the repayment, all indebtedness evidenced by the Note has been paid in
full.  Accordingly, as a result of the completion of Company’s
obligations under the Note, the Holder’s security interest in the Collateral and
the Security Agreement were terminated on October 16, 2009.
 
 In August
2008, the Company acquired the membership interests of Digital Instructor
pursuant to a certain Membership Interest Purchase Agreement dated August 12,
2008, as amended by that certain agreement dated March 6, 2009 (collectively,
the “Purchase Agreement”), by and between the Company and the selling members
(the “Selling Members”).  As part of the purchase price for the
membership interests, the Company agreed to pay the Selling Members up to an
additional $500,000 if certain gross revenue performance milestones were
achieved (“Earn-Out”).  The schedule of Earn-Out is as follows: (i)
$350,000 is payable within a certain time following the closing date, August 12,
2009, subject to Digital achieving certain gross revenue performance milestones
and (ii) $150,000 is payable within a certain time following the expiration of
the period commencing on February 12, 2009, and ending on February 12, 2010,
subject to Digital Instructor achieving certain gross revenue
milestones.
  23
 Table of Contents
 
 On
October 12, 2009, the Company provided its determination of the Earn-Out to the
Selling Members. On November 11, 2009, the Company received an Earn-Out
Determination Dispute Notice (the “Notice”) from the Selling Members disputing
the Company’s calculation of the Earn-Out.  The Company disagrees with
the basis of calculation set forth in the Notice and intends to pursue the
procedure for dispute resolution under the Purchase
Agreement.  Pursuant to the terms of the Purchase Agreement, each of
the parties have a right to designate an appointee and once appointed the
appointees are to promptly meet and confer to resolve the dispute within 30 days
after the Company received the Notice.   If the dispute is not
resolved, then the parties will submit the dispute to an independent mutually
acceptable nationally recognized public accounting firm.  In the event
the parties are unable to agree on an accounting firm, then each of the parties
will designate a nationally recognized public accounting firm.  These
two firms will mutually agree and appoint an independent third accounting firm
to resolve the dispute. The finding by such accounting firm will be final and
binding.
 
 BUSINESS
SEGMENTS
 
 In the
second quarter of 2009, the Company changed its internal operating structure
which resulted in changes in the Company’s reportable segments. Prior to the
second quarter of 2009, the Company’s product segment primarily operated as a
standalone segment; in particular, the segment contracted with its own marketing
affiliates to generate sales, sourced its own inventory, and performed its own
product branding, etc. During the second quarter of 2009, the company
restructured its operations by integrating its in house media buying and
affiliate network together to service the Company’s both internal and external
offers.
 
 In
accordance with the above structural changes, the Company’s chief operating
decision maker has changed the performance measurement segments of the Company
to the following:
 
 1.
              Marketing
      Platform Services – Internal Offers
 2.
              Marketing
      Platform Services – External Offers
 
 Marketing
Platform Services – Internal Offers
 
 Primary
activities of this segment are performed to promote the Company’s internal
offers; the Company will source its own inventory from strategic partners, brand
or private label the inventory, perform all fulfillment and logistical support
on an outsourced basis, and bill the end consumer’s credit card directly. The
primary services used to promote the Company’s internal offers include the
following:
 
 (i)
              search
      and contextual based advertising;(ii)
              display
      based advertising; and(iii)
              affiliate
      marketing.
 
 The
revenue received by the Company from its internal offers is a combination of (i)
revenue charged for shipping and handling of the product; (ii) revenue for the
offer subscription charged on a monthly basis until the customer cancels the
subscription; and (iii) revenue from upsell offers sold to the consumer. The
costs to the Company of marketing its internal offers include the costs of
inventory and procurement, and the costs of merchant credit card
processing.
 
 Marketing
Platform Services – External Offers
 
 Primary
activities of this segment include the following platform services for product
offers that are owned by independent third parties:
 
 (i)
              search
      and contextual based advertising;(ii)
              display
      based advertising; and(iii)
              affiliate
      marketing.
 
 The
revenue received by the Company in this segment is composed of a
click-per-action (“CPA”) commissioned based payment from the owner of the offer.
The costs to the Company include costs of direct media buys, and costs paid to
marketing affiliates.
 
 Although
there were changes in the structure of our internal organization, there are no
changes in the composition of the reportable segments. Our previously reported
products segment became the marketing platform services – internal offer
segment; and the marketing platform services segment became the marketing
platform services – external offers segment. As such, there is no need to
restate the segment information disclosed in the prior periods.
  24
 Table of Contents
  The
following table presents information about reported segments along with the
items necessary to reconcile the segment information to the totals reported in
the accompanying condensed consolidated financial statements for the periods
indicated:
 For
      The
                    Three
      Months Ended
                  
                  Marketing
      Platform Services - External Offers
                  
                  
                  Marketing
      Platform Services - Internal Offers
                  
                  
                  Total
                  
                  
                  For
      The
                    Nine
      Months Ended
                  
                  Marketing
      Platform Services - External Offers
                  
                  
                  Marketing
      Platform Services - Internal Offers
                  
                  
                  TotalSeptember
      30, 2009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  September
      30, 2009Revenues
                  
                  $
                  3,078,563
                  
                  
                  $
                  3,429,139
                  
                  
                  $
                  6,507,702
                  
                  
                  Revenues
                  
                  $
                  8,416,063
                  
                  
                  $
                  9,744,824
                  
                  
                  $
                  18,160,887Cost
      of revenues
                  
                  
                  2,511,901
                  
                  
                  
                  1,388,945
                  
                  
                  
                  3,900,846
                  
                  
                  Cost
      of revenues
                  
                  
                  6,832,201
                  
                  
                  
                  3,354,603
                  
                  
                  
                  10,186,804Gross
      profit
                  
                  $
                  566,662
                  
                  
                  $
                  2,040,194
                  
                  
                  $
                  2,606,856
                  
                  
                  Gross
      profit
                  
                  $
                  1,583,862
                  
                  
                  $
                  6,390,221
                  
                  
                  $
                  7,974,083Gross
      margin
                  
                  
                  18.4
                  %
                  
                  
                  59.5
                  %
                  
                  
                  40.1
                  %
                  
                  Gross
      margin
                  
                  
                  18.8
                  %
                  
                  
                  65.6
                  %
                  
                  
                  43.9
                  %Corporate
      expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,379,545
                  
                  
                  Corporate
      expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  10,971,754Stock-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  408,944
                  
                  
                  Stock-based
                    compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  905,354Amortization
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  25,584
                  
                  
                  Amortization
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  112,525Impairment
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  Impairment
      of
                    intangible
      assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  989,834Operating
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,207,217
                  )
                  
                  Operating
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (5,005,384
                  )September
      30, 2008
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  September
      30, 2008Revenues
                  
                  $
                  1,340,935
                  
                  
                  $
                  476,228
                  
                  
                  $
                  1,817,163
                  
                  
                  Revenues
                  
                  $
                  2,750,264
                  
                  
                  $
                  476,228
                  
                  
                  $
                  3,226,492Cost
      of revenues
                  
                  
                  1,219,213
                  
                  
                  
                  146,321
                  
                  
                  
                  1,365,534
                  
                  
                  Cost
      of revenues
                  
                  
                  2,299,117
                  
                  
                  
                  146,321
                  
                  
                  
                  2,445,438Gross
      profit
                  
                  $
                  121,722
                  
                  
                  $
                  329,907
                  
                  
                  $
                  451,629
                  
                  
                  Gross
      profit
                  
                  $
                  451,147
                  
                  
                  $
                  329,907
                  
                  
                  $
                  781,054Gross
      margin
                  
                  
                  9.1
                  %
                  
                  
                  69.3
                  %
                  
                  
                  24.9
                  %
                  
                  Gross
      margin
                  
                  
                  16.4
                  %
                  
                  
                  69.3
                  %
                  
                  
                  24.2
                  %Corporate
      expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,175,610
                  
                  
                  Corporate
      expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,034,488Stock-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  267,873
                  
                  
                  Stock-based
                    compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  323,926Amortization
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  22,224
                  
                  
                  Amortization
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  22,224Impairment
      of intangible assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  310,000
                  
                  
                  Impairment
      of
                    intangible
      assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  310,000Operating
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,324,078
                  )
                  
                  Operating
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,909,584
                  )
 Segment
operating loss consists of the revenues generated by a segment, less the direct
costs of revenue and selling and general and administrative costs that are
incurred directly by the segment. Corporate costs include costs related to
administrative functions that are performed in a centralized manner that are not
attributable to a particular segment. These administrative function costs
include costs for corporate office support, all office facility costs, costs
relating to accounting and finance, human resources, legal, marketing,
information technology and company-wide business development functions, as well
as costs related to overall corporate management.
 
 We do not
charge intersegment revenue; instead an intercompany management fee is charged
for the sales and marketing services that our Marketing Platform Services
– External Offers segment provides to our Marketing Platform Services
– Internal Offers segment. These intercompany management fees are
eliminated at the consolidation.
 
 CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and
reported amounts of revenues and expenses during the reporting
period.  The SEC has defined a company’s critical accounting policies
as policies that are most important to the portrayal of a company’s financial
condition and results of operations, and which require a company to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition, we
have identified our most critical accounting policies and estimates to be as
follows: (i) provision for doubtful accounts; (ii) accrued liabilities; (iii)
estimates of when internally developed software is deemed probable to be
completed and ready for intended use; (iv) assumptions on stock option
forfeiture rates, expected terms, and volatility rates of our underlying shares;
(v) estimates of useful lives underlying our depreciable and intangible assets;
(vi) reserves for excess and obsolete inventory; (vii) asset impairments; (viii)
income taxes; and (ix) reserve for credit card charge backs and
returns.  Although we believe that our estimates, assumptions and
judgments are reasonable, they are based upon information presently available.
Actual results may differ significantly from these estimates if the assumptions,
judgments and conditions upon which they are based turn out to be inaccurate. A
further discussion can be found inItem 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, as amended by Amendment No. 1 on Form 10-K/A
and Amendment No.2 on Form 10-K/A, or in Part I. Item 2 on Form 10-Q
for period ending March 31, 2009 and Form 10-Q for period ending June 30, 2009,
each as filed with the SEC.
 
  25
 Table of Contents
  To
conform to current period presentation, we have reclassified the accrual of
credit card chargeback fees and credit card fees from “Accrued liabilities” to
“Credit card processor holdbacks, net of reserves, accrued credit card
chargeback fees and accrued credit card fees” line item on our condensed
consolidated balance sheet.
  SIGNIFICANT
ACCOUNTING POLICIES
 
 Revenue
Recognition
 
 The
Company’s revenues consist of marketing services to promote both third party
offers as well as its own internal offers. The Company evaluates revenue
recognition using the following basic criteria and recognizes revenue when all
four criteria are met:
 
 (i)
              Evidence
      of an arrangement: Evidence of an arrangement with the customer that
      reflects the terms and conditions for delivery of services must be present
      in order to recognize revenue;(ii)
              Delivery:
      Delivery is considered to occur when the service is performed and the risk
      of loss and reward have been transferred to the
  customer;(iii)
              Fixed
      or determinable fee: If a portion of the arrangement fee is not fixed or
      determinable, we recognize that amount as revenue when the amount becomes
      fixed or determinable; and(iv)
              Collection
      is deemed probable: We conduct a credit review of each customer involved
      in a significant transaction to determine the creditworthiness of the
      customer. Collection is deemed probable if we expect the customer to be
      able to pay amounts under the arrangement as those amounts become due. If
      we determine that collection is not probable, we recognize revenue when
      collection becomes probable (generally upon cash
    collection).
 
 The
Company’s marketing platform service revenue –external offers to third
parties consists mostly of revenue derived from direct advertisers, affiliate
networks, ad networks, and list managers. The Company’s marketing platform
service – internal offers consists mostly of revenue derived
from on-line consumers.
 
 The
Company’s marketing platform service revenue to third parties is mostly derived
on a cost-per-action (“CPA”) basis, also known as pay-per-action (“PPA”) basis.
Under this pricing model, advertisers, affiliate networks, ad networks, and list
managers pay the Company when a specified action (a purchase, a form submission,
or other action linked to the advertisement) has been completed.
 
 The
Company markets its internal offers on a free trial subscription basis. Title to
all internal offers shipped pass to the consumer upon receipt by the consumer
and the expiration of the free trial period. Upon receipt by the consumer, the
Company records non-refundable shipping and handling revenue. The consumer has
between 7 to 11 days from when the internal offer was ordered during which
they can notify the company of their intent to cancel and return the product
shipped in which case the consumer’s credit card will not be billed for the
product sales price. If the customer chooses to keep the product beyond the free
trial period, the customer’s credit card will be billed and the customer’s
subscription will begin automatically once the free trial period has expired.
Accordingly, the Company does not record revenue until acceptance occurs which
is deemed to be after the free trial period has expired without notification of
rejection of the product. Every month thereafter, the consumer will be shipped
additional items under the offer and billed accordingly until the consumer
cancels the subscription.
  Classification
of Direct Media Costs and Payments Made to Affiliates
 
 Payments
made or accrued for our sales and marketing affiliates or payments made for
direct media buys that relate to promoting our internal offers are recorded as
sales and marketing expenses. Payments made or accrued for our sales and
marketing affiliates or direct media buys for external offers are recorded as
cost of revenues.
  RESULTS
OF OPERATIONS
 
 The
results of operations that follow should be read in conjunction with our
critical accounting policies and estimates summarized above as well as our
condensed consolidated financial statements and notes thereto contained inPart I. Item 1 of this
Quarterly Report. The following table sets forth certain condensed consolidated
statements of operations data as a percentage of net revenues for the periods
indicated.
   26
 Table of Contents
 
 For
      The Three Months Ended*
                
                
                For
      The Nine Months Ended*September
      30,
                
                
                September
      30,
                
                
                Change
                
                
                September
      30,
                
                
                September
      30,
                
                
                Change2009
                
                
                2008
                
                
                in
      %
                
                
                2009
                
                
                2008
                
                
                in
      %Revenues:Marketing
      platform services -
                  external offers
                
                $
                3,078,563
                
                
                $
                1,340,935
                
                
                
                129.6
                %
                
                $
                8,416,063
                
                
                $
                2,750,264
                
                
                
                206.0
                %Percentage of net revenues
                
                
                47.3
                %
                
                
                73.8
                %
                
                
                
                
                
                
                46.3
                %
                
                
                85.2
                %Marketing
      platform services -
                  internal offers
                
                
                3,429,139
                
                
                
                476,228
                
                
                
                620.1
                %
                
                
                9,744,824
                
                
                
                476,228
                
                
                
                1946.3
                %Percentage of net revenues
                
                
                52.7
                %
                
                
                26.2
                %
                
                
                
                
                
                
                53.7
                %
                
                
                14.8
                %Total
      revenues:
                
                
                6,507,702
                
                
                
                1,817,163
                
                
                
                258.1
                %
                
                
                18,160,887
                
                
                
                3,226,492
                
                
                
                462.9
                %Cost
      of revenues:Marketing
      platform services -
                  external offers
                
                
                2,511,901
                
                
                
                1,219,213
                
                
                
                106.0
                %
                
                
                6,832,201
                
                
                
                2,299,117
                
                
                
                197.2
                %Percentage of net revenues
                
                
                38.6
                %
                
                
                67.1
                %
                
                
                
                
                
                
                37.6
                %
                
                
                71.3
                %Marketing
      platform services -
                  internal offers
                
                
                1,388,945
                
                
                
                127,526
                
                
                
                989.1
                %
                
                
                3,296,270
                
                
                
                127,526
                
                
                
                2484.8
                %Percentage of net revenues
                
                
                21.3
                %
                
                
                7.0
                %
                
                
                
                
                
                
                18.2
                %
                
                
                4.0
                %Amortization
      of acquired product
                  licenses
                
                
                -
                
                
                
                18,795
                
                
                
                n/a
                
                
                
                58,333
                
                
                
                18,795
                
                
                
                210.4
                %Total
      cost of revenues:
                
                
                3,900,846
                
                
                
                1,365,534
                
                
                
                185.7
                %
                
                
                10,186,804
                
                
                
                2,445,438
                
                
                
                316.6
                %Percentage of net revenues
                
                
                59.9
                %
                
                
                75.1
                %
                
                
                
                
                
                
                56.1
                %
                
                
                75.8
                %Gross
      profit
                
                
                2,606,856
                
                
                
                451,629
                
                
                
                477.2
                %
                
                
                7,974,083
                
                
                
                781,054
                
                
                
                920.9
                %Percentage of net revenues
                
                
                40.1
                %
                
                
                24.9
                %
                
                
                
                
                
                
                43.9
                %
                
                
                24.2
                %Operating
      expenses:Product
      development
                
                
                -
                
                
                
                17,300
                
                
                
                n/a
                
                
                
                -
                
                
                
                52,550
                
                
                
                n/aPercentage of net revenues
                
                
                n/a
                
                
                
                1.0
                %
                
                
                
                
                
                
                n/a
                
                
                
                1.6
                %Sales
      and marketing
                
                
                2,716,664
                
                
                
                1,021,662
                
                
                
                165.9
                %
                
                
                9,428,746
                
                
                
                1,350,135
                
                
                
                598.4
                %Percentage of net revenues
                
                
                41.7
                %
                
                
                56.2
                %
                
                
                
                
                
                
                51.9
                %
                
                
                41.8
                %General
      and administrative
                
                
                1,071,825
                
                
                
                404,521
                
                
                
                165.0
                %
                
                
                2,448,362
                
                
                
                955,729
                
                
                
                156.2
                %Percentage of net revenues
                
                
                16.5
                %
                
                
                22.3
                %
                
                
                
                
                
                
                13.5
                %
                
                
                29.6
                %Amortization
      of intangible assets
                
                
                25,584
                
                
                
                22,224
                
                
                
                15.1
                %
                
                
                112,525
                
                
                
                22,224
                
                
                
                406.3
                %Impairment
      of intangible assets
                
                
                -
                
                
                
                310,000
                
                
                
                n/a
                
                
                
                989,834
                
                
                
                310,000
                
                
                
                219.3
                %Total
      operating expenses
                
                
                3,814,073
                
                
                
                1,775,707
                
                
                
                114.8
                %
                
                
                12,979,467
                
                
                
                2,690,638
                
                
                
                382.4
                %(1,207,217
                )
                
                
                (1,324,078
                )
                
                
                8.8
                %
                
                
                (5,005,384
                )
                
                
                (1,909,584
                )
                
                
                -162.1
                %Operating
      lossInterest
      and other income, net
                
                
                (8,170
                )
                
                
                13,489
                
                
                
                -160.6
                %
                
                
                (7,738
                )
                
                
                45,582
                
                
                
                -117.0
                %Percentage of net revenues
                
                
                -0.1
                %
                
                
                0.7
                %
                
                
                
                
                
                
                -
                
                
                
                1.4
                %Mark-to-market
      loss on warrant liability
                
                
                88,786
                
                
                
                -
                
                
                
                n/a
                
                
                
                70,248
                
                
                
                -
                
                
                
                n/aLoss
      before provision for income taxes
                
                
                (1,126,601
                )
                
                
                (1,310,589
                )
                
                
                14.0
                %
                
                
                (4,942,874
                )
                
                
                (1,864,002
                )
                
                
                -165.2
                %(Benefit)
      provision for income tax
                
                
                (1,400
                )
                
                
                (12,923
                )
                
                
                89.2
                %
                
                
                (401,164
                )
                
                
                (12,123
                )
                
                
                3209.1
                %$
                (1,125,201
                )
                
                $
                (1,297,666
                )
                
                
                13.3
                %
                
                $
                (4,541,710
                )
                
                $
                (1,851,879
                )
                
                
                -145.2
                %Net
      loss
 *
Numbers and percentages might not foot due to rounding.
  Revenues
 
 Net
revenues from our external offers for the three and nine months ended September
30, 2009 increased by $1.7 million or 129.6% and $5.7 million or 206.0%,
respectively, compared to the same periods a year ago. Growth in the net
revenues in the marketing platform services – external offers segment was
primarily due to the expansion of our distribution infrastructure through both
our affiliate network and our in-house media buying teams that marketed these
external offers.
 
 Net
revenues from our internal offers for the three and nine months ended September
30, 2009 increased by $3.0 million or 620.1% and $9.3 million or 1,946.3%,
respectively, compared to the same periods a year ago. Growth in the net
revenues in the marketing platform services – internal offers segment primarily
reflected the expansion of our distribution infrastructure through both our
in-house media buying teams and affiliate network that marketed our internal
offers, especially in our teeth whitening product.
 
 Our
revenues are impacted by the mix of advertising offers we market, changes in
consumer demand for these offers, and changes in our customer base. Changes in
consumer demand and increased competitors in the space could cause revenue from
these types of offers to change significantly.
 
 27
 Table of Contents
 
 Cost
of Revenues
 
 Marketing
Platform Services – External Offers
 
 Our cost
of revenues for marketing platform services – external offers is summarized as
follows for the three and nine months ended September 30, 2009 and
2008:
  For
      The Three Months Ended
                
                
                For
      The Nine Months EndedSeptember
      30,
                
                
                September
      30,
                
                
                Change
                
                
                September
      30,
                
                
                September
      30,
                
                
                Change2009
                
                
                2008
                
                
                in
      %
                
                
                2009
                
                
                2008
                
                
                in
      %Media
      buys
                
                $
                2,386,732
                
                
                $
                963,407
                
                
                
                147.7
                %
                
                $
                5,413,454
                
                
                $
                1,672,190
                
                
                
                223.7
                %Affiliates
      payments
                
                
                118,840
                
                
                
                172,277
                
                
                
                -31.0
                %
                
                
                1,376,403
                
                
                
                529,831
                
                
                
                159.8
                %Affiliate
      network software
                
                
                2,800
                
                
                
                5,529
                
                
                
                -49.4
                %
                
                
                11,130
                
                
                
                7,829
                
                
                
                42.2
                %Web
      site development and hosting
                
                
                2,676
                
                
                
                10,932
                
                
                
                -75.5
                %
                
                
                13,058
                
                
                
                18,699
                
                
                
                -30.2
                %Merchant
      service fees
                
                
                613
                
                
                
                1,940
                
                
                
                -68.4
                %
                
                
                8,414
                
                
                
                1,940
                
                
                
                333.7
                %Shipping
      and handling
                
                
                101
                
                
                
                2,575
                
                
                
                -96.1
                %
                
                
                5,160
                
                
                
                2,575
                
                
                
                100.4
                %Others
                
                
                139
                
                
                
                62,553
                
                
                
                -99.8
                %
                
                
                4,582
                
                
                
                66,053
                
                
                
                -93.1
                %Total
                
                $
                2,511,901
                
                
                $
                1,219,213
                
                
                
                106.0
                %
                
                $
                6,832,201
                
                
                $
                2,299,117
                
                
                
                197.2
                %
  The cost
of revenues in the external offers segment increased by $1.3 million or 106.0%
and $4.5 million or 197.2%, respectively in the three and nine months ended
September 30, 2009, compared to the same periods a year ago. The increase was
primarily due to increased volume of internal media buys and an increase in
volume of payments made to marketing affiliates to support and scale the
increased revenue in the segment for the periods.
  Marketing
Platform Services –Internal Offers
 
 Our cost
of revenues for marketing platform services – internal offers is summarized as
follows for the three and nine months ended September 30, 2009 and
2008:
  For
      The Three Months Ended
                  
                  
                  For
      The Nine Months EndedSeptember
      30,
                  
                  
                  September
      30,
                  
                  
                  Change
                  
                  
                  September
      30,
                  
                  
                  September
      30,
                  
                  
                  Change2009
                  
                  
                  2008
                  
                  
                  in
      %
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  in
      %Inventory
      sold, manufacturing and distribution costs
                  
                  $
                  360,632
                  
                  
                  $
                  32,006
                  
                  
                  
                  1026.8
                  %
                  
                  $
                  855,509
                  
                  
                  $
                  32,006
                  
                  
                  
                  2573.0
                  %Inventory
      write-downs & adjustments
                  
                  
                  126,076
                  
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  157,788
                  
                  
                  
                  -
                  
                  
                  
                  n/aMerchant
      credit card fees
                  
                  
                  512,072
                  
                  
                  
                  82,977
                  
                  
                  
                  517.1
                  %
                  
                  
                  1,218,162
                  
                  
                  
                  82,977
                  
                  
                  
                  1368.1
                  %Shipping
      and handling fees
                  
                  
                  245,793
                  
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  775,846
                  
                  
                  
                  -
                  
                  
                  
                  n/aLicense
      fees
                  
                  
                  48,079
                  
                  
                  
                  18,795
                  
                  
                  
                  155.8
                  %
                  
                  
                  123,079
                  
                  
                  
                  18,795
                  
                  
                  
                  554.8
                  %Salaries
      and benefits
                  
                  
                  32,442
                  
                  
                  
                  12,543
                  
                  
                  
                  158.6
                  %
                  
                  
                  104,943
                  
                  
                  
                  12,543
                  
                  
                  
                  736.7
                  %Third
      party service providers
                  
                  
                  63,851
                  
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  66,926
                  
                  
                  
                  -
                  
                  
                  
                  n/aOthers
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  52,350
                  
                  
                  
                  -
                  
                  
                  
                  n/aTotal
                  
                  $
                  1,388,945
                  
                  
                  $
                  146,321
                  
                  
                  
                  849.2
                  %
                  
                  $
                  3,354,603
                  
                  
                  $
                  146,321
                  
                  
                  
                  2192.6
                  %
 During
the three and nine months ended September 30, 2009, we incurred zero and
$58,333, respectively, in amortization of acquired product licenses that were
included in costs of revenues, compared to $18,795 for the three and nine months
ended September 30, 2008. The increase in amortization amount for the nine month
ended September 30, 2009, represented the amortization of acquired product
license agreements in connection with our acquisition of Digital Instructor. The
value assigned to the acquired product license agreements was $700,000 at the
date of the acquisition and was completely impaired during the second quarter of
2009.
 
 The total
cost of revenues in the internal offers segment increased by $1.2 million or
849.2% and $3.2 million or 2,192.6%, respectively, in the three and nine months
ended September 30, 2009, compared to the same periods a year ago. The increase
was primarily due to increased cost associated with merchant credit card fees
and shipping and handling fees in the segment for the periods.
 
 28
 Table of Contents
 
 Gross
profit
 
 For the
three months ended September 30, 2009, the gross profit in our marketing
platform services – external offers segment was 18.4% compared to 9.1% for the
same period a year ago. For the nine months ended September 30, 2009, the gross
profit for this segment was 18.8% compared to 16.4% for the same period a year
ago. The increase in gross profit percentages was primarily due to
economies of scale we realized in our in-house media buys and payment made to
our marketing affiliates to support  and scale our growth in this
segment.
 
 For the
three months ended September 30, 2009, the gross profit in our marketing
platform services – internal offers segment was 59.5% compared to 69.3% for the
same period a year ago. For the nine months ended September 30, 2009, the gross
profit for this segment was 65.6% compared to 69.3% for the same period a year
ago. The decrease in gross profit percentage was primarily due to (i) an
increase in merchant credit card processing fees predominantly from processing
consumer chargebacks; and (ii) fines levied by the credit card associations for
the high level of consumer chargebacks we incurred. In addition, during the
third quarter of 2009, we took approximately $126,076 in reserves for inventory
related to certain offers that the Company did not expect to recover; for the
nine months ended September 30, 2009, this inventory reserve was approximately
$157,788.
 
 We
anticipate that gross profit will continue to be impacted by fluctuations in the
volume and mix of our revenue from each of our operating segments, and offers
marketed within each of the segments.
 
 Operating
expenses
 
 Sales
and marketing expenses
 
 Sales and
marketing expenses increased by $1.7 million or 165.9% during the three months
ended September 30, 2009 compared to the same period a year ago; it increased by
$8.1 million or 598.4% during the nine months ended September 30, 2009 compared
to the same period a year ago. Both increases primarily reflect the increased
volume of direct media buys and increased volume in payments made to marketing
affiliates to support and scale the growth in revenue from our internal offers
segment.
 
 Share-based
compensation expense included in sales and marketing expenses was $97,512 and
$330,217, respectively, for the three and nine months ended September 30, 2009;
stock based compensation expense was $191,803 and $213,148 for the same periods
a year ago.
 
 
 General
and administrative expenses
 
 General
and administration expenses increased by $0.7 million or 166.7% during the three
months ended September 30, 2009 compared to the same period a year ago; it
increased by $1.5 million or 156.2% during the nine months ended September 30,
2009 compared to the same period a year ago. As a result of becoming a
publicly-traded company, we incurred more personnel costs, share-based
compensation costs, legal, accounting, auditing, insurance, facility costs, and
tax planning and compliance fees in the three and nine months ended September
30, 2009 compared to the same periods a year ago.
 
 Share-based
compensation expense included in general and administrative was $311,432 and
$575,137, respectively, for the three and nine months ended September 30, 2009;
share-based compensation expense was $76,070 and $110,778 for the same periods a
year ago.
  GOODWILL
 
 In
connection with the impairment test of our intangible assets during the second
quarter of 2009, we performed an interim impairment test on our goodwill
balances. The test performed compared the implied fair value of goodwill to the
carrying amount of goodwill on our balance sheet. Our estimate of the implied
fair value of the goodwill was based on the quoted market price of our common
stock and shares outstanding on June 1, 2009. Accordingly, each reporting unit
was assigned an implied fair value by using an income based approach. Our
goodwill impairment test indicated that no goodwill impairment was required
reflecting the implied fair value of each of our reporting units exceeded the
carrying amount. A second step to measure the amount of impairment loss was
accordingly not required.
 
 As of
September 30, 2009, the balance in goodwill was $8,448,789, of which $1,945,366
is attributable to the marketing platform services – external offering segment
and $6,503,423 is attributable to the marketing platform services – internal
offering segment.
 
 29
 Table of Contents
 
 INTANGIBLE
ASSETS
 
 During
the second quarter of 2009, the Company made certain changes to its acquired Bay
Harbor Marketing, LLC (“Bay Harbor”) business unit model whereby the company
discontinued its lead generation services for financial advisors and redeployed
the underlying acquired technology engine for marketing its internal offers to
consumers.
 
 Also
during the second quarter of 2009, the Company shifted its marketing resources
away from the three educational offers that were acquired and being marketed
through Digital Instructor in place of new health and beauty based internal
offers. The Company believes that certain health and beauty based internal
offers will provide the Company with a longer lifetime value per consumer and
higher profit margins but plans to continue to seek opportunistic educational
offers that have high lifetime values per consumer.
 
 Given the
impairment indicators of the acquired intangible assets discussed above, we
performed a test of purchased intangible assets for recoverability. The
assessment of recoverability is based upon the assumptions and future usefulness
of the assets.
 
 The
analysis determined that the carrying amounts of the intangible assets exceeded
the implied fair values under the test for impairment per ASC 360 and the
difference was allocated to the intangible assets of the impacted asset group on
a pro-rata basis using the relative carrying amounts of the assets. We recorded
an impairment charge of approximately $1.0 million, of which $587,968 related to
product licensing agreements (acquired from Digital Instructor), $251,986 to
product trade names (acquired from Digital Instructor), $58,661 to customer
database (acquired from Digital Instructor), $80,640 to company trade name
(acquired from Bay Harbor) and $10,579 to marketing collateral (acquired from
Bay Harbor). In addition, the remaining lives of the marketing collateral and
company trade names were shortened from 38 months to 12 months and from 48
months to 12 months, respectively.
 
 If our
assumptions regarding projected revenues or gross margin rates are not achieved,
we may be required to record additional intangible asset impairment charges in
future periods, if any such change or other factors constitute a triggering
event. It is not possible at this time to determine if any such future
impairment charge would result or, if it does, whether such charge would be
material.
 
 The
estimated future amortization expenses for our purchased intangible assets are
summarized below:
 
 Amortization
      Expense(by
      fiscal year)Remainder
      of 2009
                
                $
                25,5842010
                
                
                74,0752011
                
                
                41,1112012
                
                
                40,0002013
                
                
                25,868Total
                
                $
                206,638
  CONVERTIBLE
PREFERRED STOCKS AND WARRANTS
 
 Terms
and Conditions
 
 On June
12, 2009 and July 27, 2009, the Company entered into a Series A Convertible
Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”), with
a limited number of accredited investors (the “Purchasers”). The Company closed
the sale to the Purchasers of 1,951,337 and 270,000 shares, respectively, of the
Company’s Series A Preferred Stock, $0.0001 par value (the “preferred stock”),
at a price per share equal to $1.20 (the “Original Issue Price”) and warrants
(the “warrants”) to purchase up to 975,668 and 135,000 shares, respectively, of
the Company’s common stock, par value $0.0001 (the “common stock”), at an
exercise price of $1.56 per share (the “Warrant Exercise Price”). The Company
has raised aggregate proceeds of $2,341,604 and $324,000, respectively, in the
first and second financing transactions (the “Financing”). The purchase price
for the preferred stock and warrants was paid in cash.
  30
 Table of Contents
 
 At the
option of the holder at any time, shares of the preferred stock are convertible
into shares of the Company’s common stock at a conversion price equal to $1.20
per share (the “conversion price”). The conversion price is subject to
adjustment for stock splits, stock dividends and recapitalizations. In addition,
for so long as any shares of preferred stock remain outstanding and the shares
of common stock underlying such shares of preferred stock are not eligible to be
sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the
“Securities Act”), if the Company issues any securities, other than certain
permitted issuances, at a per share price (or equivalent for convertible
securities) which is less than the then current conversion price, the Company
shall reduce the conversion price according to a weighted-average-anti-dilution
formula (the “preferred stock down-round provision”). The Company analyzed the
conversion provision and determined it did not meet the criteria for
bifurcation.
 
 The
warrant exercise period ends five years after the date of issuance of the
warrants. The holder of the warrants may exercise the warrants at any time
(subject to the restrictions on exercise and conversion) before the expiration
of the warrants.  At the option of the Company, all warrants shall
automatically be deemed to have been exercised fifteen trading days after
delivery to the Purchasers of written notice of such deemed exercise, provided
that the volume-weighted average closing price of the Company’s common stock
over the ten trading days immediately preceding the date of such notice is at
least $2.50 per share. The exercise price of the warrants and the number of
shares of common stock issuable upon exercise of the warrants are subject to
adjustment for stock splits, stock dividends and recapitalizations. In addition,
if at any time during the period beginning on the date of issuance of the
warrants and ending six months thereafter, the Company issues securities, other
than certain permitted issuances, at a per share price (or equivalent for
convertible securities) which is less than the then current exercise price of
the warrants, the Company shall reduce the exercise price and the number of
shares issuable upon exercise of the warrants according to a weighted-average
anti-dilution formula (the “warrant down-round provision”).
 
 Valuation
of Convertible Preferred Stock, Warrants and Embedded Conversion
Feature
 
 On
January 1, 2009, the Company adopted ASC 815, Derivatives and Hedging. ASC
815 requires entities to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock by assessing the instrument’s
contingent exercise provisions and settlement provisions. Instruments not
indexed to their own stock that fail to meet the scope exception of ASC
815-10-15 should be classified as a liability and marked-to-market.
 
 Under ASC
815, the warrants we issued, as described above, were not considered to be
indexed to our stock and have fixed settlement amount based on the terms of the
down-round provision. Accordingly, the warrants do not meet the criteria for
equity classification and are therefore classified as derivative liabilities and
carried at fair value.
 
 A
Black-Scholes option-pricing model was used to obtain the fair value of the
warrants using the following assumptions:
  June
      12, 2009 Financing
                
                
                July
      27, 2009 FinancingStock
      price
                
                $
                1.60
                
                
                $
                1.60Exercise
      price
                
                $
                1.56
                
                
                $
                1.56Risk
      free interest rate
                
                
                2.81
                %
                
                
                2.63
                %Volatility
                
                
                100
                %
                
                
                100
                %Expected
      term in years
                
                
                5.0
                
                
                
                5.0Dividend
                
                
                -
                
                
                
                -
 
 The
effect of the forced exercise provision reduced the value of the warrants by an
amount equal to the Black-Scholes value of an option with an exercise price of
$2.50 (with all other inputs the same as described above). The fair value of the
warrants down-round provisions was valued using a probability weighted outcome
model.  Based on the sum of the individual components, the fair value
of the warrants was estimated to be $167,815 and $13,500, respectively, for the
two financings at inception. This warrant liability is marked to market through
current earnings and once the down-round provisions expire, the instruments will
be reclassified as components of stockholders’ equity.
 
 After the
$167,815 and $13,500 respective allocation of proceeds to the warrants, the
remaining gross proceeds of $2,173,789 and $310,500, respectively, of the two
financings, were used to compute the effective conversion price and beneficial
conversion feature.  The calculated fair value of the embedded conversion
feature was the intrinsic value of the computed effective conversion price and
the stock price of the common shares on the issuance date. As a
result, $948,350 and $121,500 were recorded as a deemed dividend in the
second and third quarters, respectively, to the preferred
stockholders.
 
 The
respective closing costs of $144,500 and $25,000 that were related to the
preferred shares issued have been recorded, respectively, during the second and
third quarter of 2009 as a reduction to additional paid-in-capital.
 
 31
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 Marking-to-Market
 
 ASC 815
requires that the fair value of the aforementioned liabilities be re-measured at
the end of every reporting period with the change in value reported in the
statement of operations.
 
 On
September 30, 2009, as a result of the marking-to-market of the warrant
liability, we recorded a gain of $70,248 in theOther income and expense
line item in our condensed consolidated statement of operations.
 
 Interest
and other income (expense), net
 
 Interest
and other income (expense), net primarily consist of:
 
 ·
              Interest
      income;·
              Interest
      expense;·
              Foreign
      exchange gains or losses; and·
              Finance
      charges.
 
 Interest
and other income (expense) during the three months ended September 30, 2009
decreased to a net expense of $8,170 from a net income of $13,489 from the same
period a year ago; for the nine months ended September 30, 2009, the net expense
decreased to $7,738 from a net income of $45,582 compared to the same period a
year ago. The reduction in interest and other income (expense) was primarily due
to the reduced interest income from our lower balances kept in interest bearing
short-term investments, non-cash interest expense related to the accretion on
our promissory notes, and fluctuation in foreign exchange rates.
 
 As a
portion of our revenues from our marketing platform services – external offer
segment are denominated in British Pounds, we are therefore subject to foreign
currency exchange rate exposure. Although we have not experienced significant
foreign exchange rate gains or losses to date, we may in the future, especially
to the extent that we do not engage in hedging. We do not enter into currency
derivative financial instruments for trading or speculative
purposes.
 
 
 Benefit
for income tax
 
 During
the three and nine months ended September 30, 2009, we recorded an income tax
benefit of $1,400 and $401,164 respectively. During the three and nine months
ended September 30, 2008, we recorded $12,923 and $12,123, respectively, in
income tax benefit. The 2009 benefit primarily resulted from a deferred tax
liability adjustment related to the amortization expense and the impairment
charges of Digital Instructor intangible assets we recorded during the
three and nine months ended September 30, 2009.
 
 We file
income tax returns in the U.S. federal jurisdiction, California, and various
state jurisdictions in which we have a subsidiary or branch operation. The tax
years 2007 and 2008 remain open to examination by the U.S. and state tax
authorities.
 
 Our
policy is that we recognize interest and penalties accrued on any unrecognized
tax benefits as a component of our provision for income taxes. We had no accrued
interest or penalties associated with unrecognized tax benefits at September 30,
2009 or December 31, 2008.
 
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
September 30, 2009, we had unrestricted cash, cash equivalents and short-term
investments of $2.5 million compared to $3.2 million as of December 31, 2008.
The cash and short-term investments balances include $2.7 million in gross
proceeds from the issuance of series A preferred stock in the second and third
quarters of 2009, offset by $0.2 million in financing costs, the repayment of
$0.4 million in promissory notes related to previous acquisitions, and cash used
in operations during the year.
 
 During
the second quarter of 2009, we classified $100,000 of cash as restricted cash.
This cash is collateralized as part of securing commercial card accounts with
one major credit card company. The collateral is held in a ninety-day
certificate of deposit (“CD”) at which time it matures. The CD will
automatically renew for subsequent ninety-day terms unless terminated. The
credit card company has a security interest in the CD and the company is
prohibited from pledging or assigning the CD.
 
 A summary
of our cash flow activities for the nine months ended September 30, 2009 and
2008 are summarized below:
 
 32
 Table of Contents
  September
      30,
                
                
                September
      30,2009
                
                
                2008Cash
      flows used in  operating activities
                
                $
                (2,585,554
                )
                
                $
                (644,563
                )Cash
      flows provided by (used in) investing activities
                
                
                1,695,421
                
                
                
                (3,872,514
                )Cash
      flows provided by financing activities
                
                
                2,086,104
                
                
                
                5,161,797Net
      increase in cash and cash equivalents
                
                
                1,195,971
                
                
                
                644,720Cash
      and cash equivalents at beginning of period
                
                
                683,576
                
                
                
                5,379Cash
      and cash equivalents at end of period
                
                $
                1,879,547
                
                
                $
                650,099
  Significant
non-cash charges for the nine months ended September 30, 2009
included:
 
 ·
              deprecation
      and amortization expenses of $35,713 and $170,858,
      respectively;·
              share-based
      compensation expenses of $905,354;·
              impairment
      charges on intangible assets of $989,834;·
              inventory
      provision for obsolescence of $157,788;·
              bad
      debt expense of $122,909.
 Our
primary source of liquidity is cash, cash equivalents, short term investments,
and credit card processor holdbacks. We intend to continue to assess our
cost structure in relationship to our revenue levels and to make appropriate
adjustments to expense levels as required.
 
 In the
second and third quarters of 2009, we raised gross proceeds of approximately
$2.7 million (net proceeds of $2.5 million) through the sale of our series A
preferred stock and warrants. We believe that our existing cash and cash
equivalents, short-term investments, credit card processor holdbacks, plus our
expected cash flows from operating and financing activities will be sufficient
to fund operating activities and capital expenditures, and provide adequate
working capital through the remainder of fiscal year 2009 and into fiscal
2010.
 
 In order
for us to execute on our business plan for fiscal 2010, we may need to raise
additional funds through public or private debt or equity financings or reduce
our cost structure.  For example, depending on payment terms with our
marketing affiliates and publishers, we may be required to pay our marketing
publishers for media buys and our affiliates for commissions on leads generated
for our internal offers before we collect the corresponding funds from the
credit card processors. To the extent we are required to pay our marketing
publishers and affiliates in advance of when we receive payments from our
processors, this will negatively impact the amount of cash we have on hand to
grow our operations. We are also required to pay our marketing affiliates on
total leads delivered which include leads related to our internal offers where
the consumer has cancelled or declined the offer within the free trial period or
has returned the product within the product return period. Our cash flow
balances rely significantly on our ability to ensure that cash generated from
sales of our internal offers exceed the cash paid out to our marketing
affiliates. To the extent we realize high volume of end consumers who early
cancel our internal offers within the free trial period, we will still be
required to pay both our media publishers for media space we purchased and our
marketing affiliates a commission, and this could have a significant impact on
our cash float position and liquidity.
 
 The sale
of equity or debt securities would likely result in additional dilution to our
stockholders, could require us to pledge our assets to secure the financing, and
could impose restrictive covenants on us.  We cannot be certain that
additional financing will be available in amounts or on terms acceptable or
favorable to us, or at all.  If we are unable to obtain the additional
financing, we would be required to reduce the scope of our planned expansion and
sales and marketing efforts, which would harm our business, financial condition
and operating results, and/or cause us to sell assets or otherwise restructure
our business to remain viable.
 
 Recent
Accounting Pronouncements
 
 Please
refer to “Part I, Item 1.
Financial Statements” and “Notes to Unaudited Condensed
Consolidated Financial Statements, Note 20 – Recent Accounting
Pronouncements.”
  Off-Balance
Sheet Arrangements
 
 We have
not entered into any other material off-balance sheet arrangements or
transactions as of September 30, 2009.
 
 33
 Table of Contents
 
 Item 3.
                Quantitative
      and Qualitative Disclosures about Market
Risk
 Not
applicable.
 
 Item 4T.
              Controls
      and Procedures
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
 We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objective, and management
is required to exercise its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
 
 Management,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, has carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15.  Based upon that evaluation and as of
September 30, 2009, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2009.
 
 We do
not, however, expect that our disclosure controls or internal controls over
financial reporting will prevent all errors or all instances of fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system's objectives will be met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people or by
management override of a control. A design of a control system is also based
upon certain assumptions about potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and may not be detected.
 
 (b)
Changes in Internal Control over Financial Reporting
 
 There
have been no changes in the Company’s internal controls over financial reporting
identified in connection with the evaluation of disclosure controls and
procedures discussed above that occurred during the quarter ended September 30,
2009 or subsequent to that date that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 34
 Table of Contents
 
 
 PART II.
              OTHER
      INFORMATION
 
 Item 1.   Legal Proceeding
 
 In August
2009, Dr. Mehmet Oz, Zo Co 1, LLC, OW Licensing Company, LLC and Harpo, Inc.
(collectively, the “Plaintiffs”) filed a complaint in the United States District
Court Southern District of New York against approximately fifty named defendants
and up to 500 additional “Doe” defendants (the “Complaint”).  The
Complaint includes allegations against the defendants relating to their
marketing and advertisement activities in connection with certain products,
including certain products marketed and sold by the Company.  The
Plaintiffs seek monetary and injunctive relief for alleged claims that the
defendants’ products, advertisements and/or promotions violate their rights of
privacy and publicity, resulting in trademark and copyright infringement, false
endorsement and sponsorship, unfair competition, false advertising, deceptive
acts and practices, and cyber squatting.
  
 The
Company is exploring an early resolution and settlement of any potential
liability with Plaintiffs’ counsel; however, the Company intends and is prepared
to defend itself against the claims by responding to the Complaint and asserting
affirmative defenses.  Although the Company believes it may have
meritorious defenses to the Plaintiffs’ allegations, due to the inherent
uncertainties of the judicial system and the multi-party nature of this
Complaint, the Company is currently unable to predict the outcome of this
matter.  The Company is currently unable to determine whether an
unfavorable outcome will have a material adverse effect on the
Company’s business, financial condition and results of
operations.
 
 Item 1A. Risk Factors
 
 There
are numerous and varied risks, known and unknown, that may prevent us from
achieving our goals.  If any of these risks actually occur, our
business, financial condition or results of operation may be materially
adversely affected.  In such case, the trading price of our common
stock could decline and investors could lose all or part of their investment.
Our business involves a high degree of risk. Therefore, in evaluating us and our
business you should carefully consider the risks set forth below.
 
 Risks
Relating to the Company
 
 Our
limited operating history makes evaluation of our business
difficult.
 
 Abundantad
acquired the assets of Kim and Lim, LLC d/b/a Pieces Media (“Pieces”), which had
been operating since November 2005. Abundantad was incorporated in February,
2008 and Adex was incorporated in April 2008.  Pursuant to the
Abundantad merger, Abundantad has been in business with Adex as the parent
company since May, 2008. We therefore have limited historical financial
data upon which to base planned operating expenses or forecast accurately future
operating results.  Further, our limited operating history will make
it difficult for investors and securities analysts to evaluate our business and
prospects.  You must consider our prospects in light of the risks,
expenses and difficulties we face as an early-stage company with a limited
operating history.  We are completely reliant upon new management
for our future operations and success.
 
 Deterioration
of economic conditions could harm our business.
 
 Current
uncertainty in global economic conditions poses a risk to our business as
consumers may defer discretionary purchases, such as our internal offers,
in response to tighter credit and negative financial news, which could
negatively affect demand for and sales of our internal offers as well as our
external offers. Weak economic conditions in our target markets, or a
reduction in consumer spending even if economic conditions improve, would likely
adversely impact both our business segments, operating results, and financial
condition in a number of ways.
 
 We
will likely need additional funding to support our expanding operations and
capital expenditures which may not be available to us and which lack of
availability could adversely affect our business.
 
 We have
no committed sources of additional capital.  Prior to the Abundantad
merger, Abundantad raised gross proceeds of approximately $5.8 million (net
proceeds of approximately $5.7 million) in equity from private investors during
March and April 2008.  In June and July 2009, we raised approximately
$2.7 million (net proceeds of approximately $2.5 million) in private placement.
We will likely need additional funds to support our growth, fund future
acquisitions, pursue business opportunities, react to unforeseen difficulties,
or to respond to competitive pressures.  There can be no assurance
that any financing arrangements will be available in amounts or on terms
acceptable to us, if at all.  Furthermore, the sale of additional
equity or convertible debt securities may result in further dilution to existing
stockholders.
 
 35
 Table of Contents
 
 If we
raise additional funds through the issuance of debt, we will be required to
service that debt and are likely to become subject to restrictive covenants and
other restrictions contained in the instruments governing that debt, which may
limit our operational flexibility.  If adequate additional funds are
not available, we may be required to delay, reduce the scope of or
eliminate material parts of the implementation of our business strategy,
including the possibility of additional acquisitions or internally developed
businesses.
 
 In the
event that we are unable to execute on our business plan and are unable to
secure additional financing for growth, we will be required to scale back
operations significantly including but not limited to restructuring our work
force.
 
 We
have incurred net losses in our 2008 fiscal year and in the first nine months of
2009 and may not become profitable.
 
 During
the year ended December 31, 2008, we incurred a net loss of $2.4 million. During
the first nine months of 2009, we incurred a net loss of $4.5 million. Our
ability to generate revenues and to become profitable depends on many factors,
including without limitation, the market acceptance of our offers, our ability
to control costs and our ability to implement our business strategy. There can
be no assurance that we will become or remain profitable.
 
 Five
customers accounted for approximately 62% of our consolidated revenue during
2008 and 25% of our consolidated revenue during the first nine months of 2009;
loss of either of these customers would have a material adverse effect on our
business.
 
 For the
nine months ended September 30, 2009, 25% of our revenue was generated from
five customers. One of the same customers accounted for 26% of our September 30,
2009 accounts receivable.
 
 For the
year ended December 31, 2008, one customer accounted for 26% of our consolidated
revenue and another customer accounted for 15% of our consolidated
revenue.
 
 The loss
of either of these customers would have a material adverse impact on our
business.
 
 Mergers
and acquisitions could divert our management’s attention and be difficult to
integrate, and could cause ownership dilution to our stockholders.
 
 Our
business strategy is focused, in part, on the identification, structuring,
completion and integration of mergers and acquisitions that are complementary to
our business model.  For example, during fiscal 2008, we merged with
Abundantad, we purchased all the membership interests in Digital Instructor,
LLC, the assets of Vibrantads, LLC, and the assets of Bay Harbor Marketing,
LLC.  Future growth and profitability depend, in part, on the success
of such mergers and acquisitions.  Acquisitions, strategic
relationships and investments in the technology and internet sectors involve a
high degree of risk.
 
 We may be
unable to find a sufficient number of attractive opportunities, if any, to meet
our objectives.  Although many technology and internet companies have
grown in terms of revenue, relatively few companies are profitable or have
competitive market share.  Our potential acquisitions, relationships
or investment targets and partners may have histories of net losses and may
expect net losses for the foreseeable future. We have also incurred impairment
charges related to the assets we acquired through our acquisitions. We may
continue to realize impairment charges on our past and future
acquisitions.
 
 Merger
and/or acquisition transactions are accompanied by a number of risks that could
harm us and our business, operating results, and financial
condition:
 
 ·
              we
      could experience a substantial strain on our resources, including time and
      money, and we may not be  successful in completing the
      acquisitions;·
              our
      management’s attention may be diverted from our ongoing business
      concerns;·
              while
      integrating new companies, we may lose key executives or other
      employees;·
              we
      could experience customer dissatisfaction or performance problems with an
      acquired company or technology;·
              we
      may become subject to unknown or underestimated liabilities of an acquired
      entity; or incur unexpected expenses or losses from such acquisitions;
      and·
              We
      may incur impairment charges related to goodwill or other intangible
      assets or other unanticipated events or circumstances, any of which could
      harm our business.
 
 Consequently,
we might not be successful in integrating any acquired businesses, products or
technologies, and might not achieve anticipated revenue and cost
benefits.
 
 36
 Table of Contents
  We
may be unable to effect a merger or acquisition or we may incorrectly ascertain
the merits or risks of an acquired company.
 To the
extent we complete a merger or acquisition; we may be affected by numerous risks
inherent in the business operations of the acquired entity.  Although
our management will endeavor to evaluate the risks inherent in the target
entity’s business or industry, we cannot assure you that we will properly
ascertain or assess all of the significant risk factors.
 
 We
may be unable to attract and retain key employees.
 
 We
presently employ a limited number of persons with internet, public-company or
consumer products experience.  Failure to attract and retain necessary
technical personnel and skilled management could adversely affect our
business.  The success and growth of our business will depend on the
contributions of our Chief Executive Officer, Scott Rewick, our Chief Operating
Officer, Brian Carrozzi, and our ability to attract, retain and motivate highly
skilled and qualified personnel.  If we fail to attract, train and
retain sufficient numbers of these highly qualified people, our prospects,
business, financial condition and results of operations will be materially and
adversely affected.  Our success will depend on the skills, experience
and performance of key members of our management team.  The loss of
any key employee could have an adverse effect on our prospects, business,
financial condition, and results of operations.  Although we intend to
issue stock options or other equity-based compensation to attract and retain
employees, such incentives may not be sufficient to attract and retain key
personnel.
 
 Although
we have an experienced senior management team, the lack of depth of our
management team could put us at a competitive disadvantage.  Not all
members of our management team will possess public-company experience, which
could impair our ability to comply with legal and regulatory requirements such
as those imposed by the Sarbanes-Oxley Act of 2002. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis.  We cannot assure you that our management will be
able to implement programs and policies in an effective and timely manner that
adequately responds to such increased legal, regulatory compliance and reporting
requirements.  Our failure to do so could lead to the imposition of
fines and penalties and result in the deterioration of our
business.
 
 We
may be unable to effectively manage our growth.
 
 Our
strategy envisions growing our business.  If we fail to effectively
manage our growth, our financial results could be adversely
affected.  Growth may place a strain on our management systems and
resources.  We must continue to refine and expand our business
development capabilities, our systems and processes and our access to financing
sources.  As we grow, we must continue to hire, train, supervise and
manage new employees.  We cannot assure you that we will be able
to:
 
 ·
              meet
      our capital needs;·
              expand
      our systems effectively or efficiently or in a timely
    manner;·
              allocate
      our human resources optimally;·
              identify
      and hire qualified employees or retain valued employees;
  or·
              incorporate
      effectively the components of any business that we may acquire in our
      effort to achieve growth.
 
 If we are
unable to manage our growth, our operations and financial results could be
adversely affected.
 
 The
loss of our management could harm our current and future operations and
prospects.
 
 We are
heavily dependent on the continued services of the management and employees of
acquired businesses.  We do not expect to have employment agreements
that provide a fixed term of employment with all of the members of senior
management, and members of management will have the right, in certain
circumstances, to terminate their employment.  Each of those
individuals without employment agreements may voluntarily terminate their
employment at any time.  In certain cases, our senior members of
management may be entitled to severance payments for termination by the Company
or their own voluntary termination of their employment.
 
 If
we are unable to obtain adequate insurance, our financial condition could be
adversely affected in the event of uninsured or inadequately insured loss or
damage.  Our ability to effectively recruit and retain qualified
officers and directors could also be adversely affected if we experience
difficulty in obtaining adequate directors’ and officers’ liability
insurance.
 
 We may
not be able to obtain insurance policies on terms affordable to us that would
adequately insure our business, internal product offers, and property against
damage, loss or claims by third parties. To the extent our business or property
suffers any damages, losses or claims by third parties, which are not covered or
adequately covered by insurance, the financial condition of the Company may
be materially adversely affected.
 
 37
 Table of Contents
  We may be
unable to maintain sufficient insurance as a public company to cover liability
claims made against our officers and directors.  If we are unable to
adequately insure our officers and directors, we may not be able to retain or
recruit qualified officers and directors to manage the Company.
 
 Our
founders and directors may have interests that are different than other
shareholders and may influence certain actions.
 
 Our
founders currently own and may continue to own a majority of the shares of our
common stock and will control a significant amount of shares following further
acquisitions.  Therefore, our founders and directors may be able to
influence the outcome of various actions that require stockholder approval
including the election of our directors; delaying, preventing or approving a
transaction in which stockholders might receive a premium over the prevailing
market price for their shares; and preventing or causing changes in control or
management.  In addition, certain of our founders own interests in or
participate in the management of other businesses, some of which may tend to
compete with us, and there are no restrictions on such activities or affairs of
such persons.
 
 Risks
Relating to Our Business
 
 If
we do not maintain and grow a critical mass of advertisers, our operating
results could be adversely affected.
 
 Our
success depends, in part, on maintenance and growth of a critical mass of
third-party advertisers for our external offering segment, and a continued
interest in performance-based and other advertising services.  If,
alone or through any business acquired by us, we are unable to achieve a growing
base of third-party advertisers, we may not successfully develop or market
technologies, products or services that are competitive or accepted by merchant
advertisers.  Any decline in the number of merchant advertisers could
adversely affect our operating results generally.
 
 
 We
depend on several of the major search engines and social networking sites to
continue to provide us traffic and if they do not, it could have a material
adverse effect on the value of our services.
 
 We depend
on several of the major internet search engines, namely Google, Yahoo!, MSN and
AOL, and social media Web sites, namely Facebook, to provide traffic for offers
we market.  We monitor the traffic delivered in an attempt to optimize
the quality of traffic we will deliver.  We review factors such as
non-human processes, including robots, spiders, scripts (or other software),
mechanical automation of clicking and other sources and causes of low-quality
traffic, including, but not limited to, other non-human clicking
agents.  Even with such monitoring in place, there is a risk that a
certain amount of low-quality traffic will be provided which, if not contained,
may be detrimental both for our internal offers and for our merchant advertiser
relationships.  Low-quality traffic (or traffic that is deemed to be
less valuable) may prevent us from growing our internal offers and base of
merchant advertisers and cause us to lose relationships with existing
merchant advertisers.
 
 
 With
respect to our internal offers segment, we rely on payments made by credit card
from end-users. Failure to maintain or increase our merchant processing lines of
credit, or loss of our credit card acceptance privileges would seriously hamper
our ability to process the sale of our internal offers.
 
 The
payment by end-users for the purchase of our internal offers is made online by
credit card. As a result, we must rely on banks or payment processors to extend
us merchant processing lines of credit to process these transactions, and we
must pay a fee for this service. From time to time, credit card associations may
increase the interchange fees that they charge for each transaction using one of
their cards. Any such increased fees will increase our operating costs and
reduce our profit margins. Our ability to increase our revenues relies heavily
on our ability to increase our merchant processor lines of credit. There is no
assurance we will be successful in maintaining or increasing our merchant
processing lines of credits which would prevent us from billing consumers of our
internal offers.
 
 We also
are required by our processors to comply with credit card association operating
rules, and we have agreed to reimburse our processors for any fines they are
assessed by credit card associations as a result of processing payments for us.
For example, credit card association rules impose a limit on the maximum number
of credit card chargebacks permitted per month. The credit card associations and
their member banks set and interpret the credit card rules. Visa, MasterCard,
American Express, Discover, or other card associations could adopt new operating
rules or re-interpret existing rules that we or our processors might find
difficult to follow. Any disputes or problems associated with our payment
processors could impair our ability to give customers the option of using credit
cards to fund their payments. If we were unable to accept credit cards, our
business would be seriously damaged. We also are subject to fines or increased
fees from MasterCard and Visa if we fail to detect that merchants are engaging
in activities that are illegal or activities that are considered “high risk,”
primarily the sale of certain types of product. We may be required to expend
significant capital and other resources to monitor these
activities.
 
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  Credit
card processors set certain fees for the use of their services.  These fees
may be increased in the future, which would result in additional expense and
lower profitability on credit card transactions handled by these credit card
processors.  Many credit card processors or the independent sales
organizations that represent them hold an amount in reserve (typically a six
month rolling reserve in the amount of 10% - 20% of revenue), which is held to
protect the credit card processor from any losses sustained if we cease
operations while consumer credits and fees continue. To the extent these
processors or independent sales organizations do not release the reserves to us,
our cash flows will be significantly impacted.
 
 There
is a risk that we may experience a significant reduction in, the imposition of
limits on, or loss of our credit card processing capacity.
 
 In
connection with our marketing and sale of certain products, we often experience
a significant number of fraudulent credit card charges, declines, and
charge-backs on credit cards used by end consumers.  VISA and MasterCard
set certain criteria, including but not limited to charge-back ratios, to which
we must adhere.  We use third-party services in order to manage and
minimize charge-back transactions during the normal course of business. 
However, if we maintain ratios above the limits set by VISA and MasterCard, our
credit card processing accounts may be limited or terminated and we may have
difficulties finding merchant processors to handle our transactions.  In
addition, the processors could also set maximum processing limits per month on
the volume of transactions they will process.  This could result in a
severe reduction in revenue and hamper our growth potential. As of
September 30, 2009 and December 31, 2008, the balance of credit card processor
holdbacks, net of aforementioned accruals, was $574,164 and $243,213,
respectively.  The balance of the allowance of credit card processors
charge-backs and customer return refunds at September 30, 2009 and December 31,
2008 was $454,383 and $144,040, respectively. The balance of the accrual for
credit card processors fees and credit card fees at September 30, 2009 and
December 31, 2008 was $254,356 and $57,280, respectively. The Company also
maintains an allowance for uncollectible credit card processor
holdbacks.  The balance for this accrual at both September 30,
2009 and December 31, 2008 was $23,323. To the extent the processors or
independent sales organizations do not release the net holdbacks to us, our cash
flows will be significantly impacted.
 
 To the
extent our charge-back ratios increase, our gross and operating margins will
likely decrease.  In the event our processors terminate our lines of
credit, we will be unable to bill consumers and therefore unable to market our
internal offers. If we are unable to comply with the card association rules, in
particular to stay within the allowed chargeback thresholds, our corporate
profile will be placed in a terminated merchant match file and we will likely
not be able to process billings through credit cards any longer, which will
materially adversely affect our ability to bill our on-line
customers.
 
 Our
internal offers segment operates in a continuity or negative option
model.
 
 Our
internal offers segment operates under a free trial period in which the consumer
has the right to cancel the order within a certain amount of time without the
consumer’s credit card being charged. In addition, the consumer typically has
thirty days to return a portion of the product for full or partial
credit.  Changes in consumer spending and general economic conditions
may increase the instance of consumer cancellations during the trial period
resulting in lower revenue.
 
 In
addition, to the extent we use affiliates to market our internal offers, we are
required to pay our affiliates for all leads delivered to us including leads
that have been cancelled by the consumer within the free trial period. If the
internal offers revenue generated from leads not resulting in early
cancellations during the free trial period does not exceed payments made to
affiliates for all leads delivered, we may experience negative operating
margins.
 
 We
rely on third-party manufacturers to produce all our inventories, and our
third-party manufactures may fail to adequately serve our
customers.
 
 All our
inventories are produced by third-party manufacturers, and substantially all
inventories are located at a third-party fulfillment facility in Wood Dale,
Illinois.  We rely on our manufacturers to perform all fulfillment and
logistical support. Any failure by our third-party manufacturers to ship
inventory in a timely manner will have an adverse effect on our business and
results of operations.
 
  39
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 If
our third-party manufacturers’ fulfillment operations are interrupted for any
significant period of time, our business and results of operations would be
substantially harmed.
 Our
success depends on our ability to successfully receive and fulfill orders and to
promptly deliver offers to our customers. Our third-party manufacturers handle
the packaging, labeling, returns and shipping at a fulfillment facility located
in Wood Dale, Illinois. The fulfillment center is susceptible to damage or
interruption from human error, fire, flood, power loss, telecommunications
failure, terrorist attacks, acts of war, break-ins, earthquake and similar
events. Any interruptions in such third-party fulfillment center operations for
any significant period of time could substantially harm our business and results
of operations.
  To
the extent we use affiliates to market our internal offers, we are susceptible
to fraud.
 
 In
addition to our own in-house media buying group, we use affiliates and affiliate
networks to market many of our internal offers. Many affiliates and affiliate
networks offer incentives to consumers to place orders for offers that we market
without any intent to keep the offer past the free trial period. In addition,
some affiliates and affiliate networks have used stolen credit cards or gifts
cards to place orders for offers that we market. In both instances above, we are
required to pay our affiliates for the leads delivered while the consumer
cancels the order within the free trial period and we are unable to collect from
the consumer. To the extent we are unable to detect or remove fraudulent
affiliates or affiliate networks, our cash flows will be significantly
impacted.
  We
may be subject to litigation for infringing the intellectual property rights of
others.
 
 Our
success will depend, in part, on our ability to protect our intellectual
property and to operate without infringing on the intellectual property rights
of others.  We currently do not have any pending patent applications
or issued patents for the intellectual property embodied in the products sold
through our internal offers.  Thus, we cannot guarantee that any of
our intellectual property will be adequately safeguarded, or that our
intellectual property will not be challenged by third parties.  We may
be subject to patent infringement claims or other intellectual property
infringement claims that would be costly to defend and could limit our ability
to use certain critical technologies.
 
 If we
were to acquire or develop a product or business model that a third-party
construes as infringing on a patent, then the owner of the patent could
demand that we license the patented technology, re-engineer our product(s) or
revise our business model according to terms that may be extremely expensive
and/or unreasonable.
 
 Any
patent litigation could negatively impact our business by diverting resources
and management attention from other aspects of the business and adding
uncertainty as to the ownership of technology and services that we view as
proprietary and essential to our business.  In addition, a successful
claim of patent infringement against us and our failure or inability to license
the infringed or similar technology on reasonable terms, or at all, could
have a material adverse effect on our business.
 
 As
disclosed in Item 1 of Part II of this Form 10-Q, in August 2009, Dr. Mehmet Oz,
Zo Co 1, LLC, OW Licensing Company, LLC and Harpo, Inc. (collectively, the
“Plaintiffs”) filed a complaint in the United States District Court Southern
District of New York against approximately fifty named defendants and up to 500
additional “Doe” defendants (the “Complaint”).  The Complaint includes
allegations against the defendants relating to their marketing and advertisement
activities in connection with certain products, including certain products
marketed and sold by the Company.  The Plaintiffs seek monetary and
injunctive relief for alleged claims that the defendants’ products,
advertisements and/or promotions violate their rights of privacy and publicity,
resulting in trademark and copyright infringement, false endorsement and
sponsorship, unfair competition, false advertising, deceptive acts and
practices, and cyber squatting.
 
 The
Company is exploring an early resolution and settlement of any potential
liability with Plaintiffs’ counsel; however, the Company intends and is prepared
to defend itself against the claims by responding to the Complaint and asserting
affirmative defenses.  Although the Company believes it may have
meritorious defenses to the Plaintiffs’ allegations, due to the inherent
uncertainties of the judicial system and the multi-party nature of this
Complaint,  the Company is currently unable to predict the outcome of
this matter.  The Company is currently unable to determine whether an
unfavorable outcome will have a material adverse effect on the Company’s
business, financial condition and results of operations.  However,
in  the event the court orders an injunction, the Company will be
required to stop using the Plaintiffs’ names, likeness, in connection with its
products.  Such an injunction may have a material adverse effect on
the Company’s business, operating results and financial condition.
 
 
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  We
may be involved in lawsuits to protect or enforce any patents that we may be
granted, which could be expensive and time consuming.
 If we
acquire patent rights in the future, we may initiate patent litigation to
protect or enforce our patent rights or others may sue us to invalidate patents
on which we rely.  We may also become subject to interference
proceedings conducted in the patent and trademark offices of various
countries to determine the priority of inventions.  The defense and
prosecution, if necessary, of intellectual property suits, interference
proceedings and related legal and administrative proceedings is costly and
may divert our technical and management personnel from their normal
responsibilities.  We may not prevail in any of these
suits.  An adverse determination of any litigation or defense
proceedings could put our patents at risk of being invalidated or interpreted
narrowly and could put our patent applications at risk of not being
issued.
 
 Furthermore,
because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of
litigation.  In addition, during the course of this kind of
litigation, there could be public announcements of the results of hearings,
motions or other interim proceedings or developments in the
litigation.  If securities analysts or investors perceive these
results to be negative, it could have an adverse effect on the trading price of
our common stock.
 
 It
may become more difficult or expensive for us to license intellectual property,
thereby causing us to market fewer internal offers.
 
 Our
ability to compete and successfully market our internal offers depends in part
on our acquiring and controlling proprietary intellectual property. Our internal
offers embody trademarks, trade names, logos, or copyrights that may be licensed
from third parties. If we cannot maintain the licenses that we currently have,
or obtain additional licenses for offers that we plan to market, we will market
fewer internal offers and our business will suffer. We cannot assure that our
licenses will be extended on reasonable terms or at all, or that we will be
successful in acquiring or renewing licenses to property rights with significant
commercial value.
 
 Compliance
with new and existing governmental regulations could increase our costs
significantly and adversely affect our results of operations.
 
 Government
regulations may prevent or delay the sale of our products, or require their
reformulation, either of which could result in lost revenues and increased costs
to us. The FDA may determine that these products or one of their ingredients
presents an unacceptable health risk, and may determine that a particular claim
or statement that we use is an impermissible drug claim, is not substantiated,
or is an unauthorized version of a “health claim.”  Any of these
actions could prevent us from marketing such products or making certain claims
or statements of nutritional support or efficacy regarding the products. The FDA
could also require us to remove such products from the market. Any recall or
removal would result in additional costs to us, including lost revenues from any
products that we are required to remove from the market, which could be
material. Any product recall or removal could also lead to liability,
substantial costs, and reduced growth prospects.
 
 Additional
or more stringent regulations of cosmetics and dietary supplements have been
considered from time to time and may be enacted in the future. These
developments could require reformulation of products to meet new standards,
recalls or discontinuance of products not able to be reformulated, additional
record-keeping requirements, increased documentation of product properties,
additional or different labeling, scientific substantiation, adverse event
reporting, or other new requirements. Any of these developments could increase
our costs significantly and negatively impact our business. Additionally, our
third-party suppliers or vendors may not be able to comply with such new rules
without incurring substantial expenses.
 
 Product
liability lawsuits against us could cause us to incur substantial liabilities
and to limit commercialization of any products that we may market and
distribute.
 
 As a
marketer and distributor, we face an inherent risk of product liability exposure
related to the sale of our internal offers. If we cannot successfully defend
against claims that our product offers or product offer candidates caused
injuries, we could incur substantial liabilities. Regardless of merit or
eventual outcome, liability claims may result in:
 
 ●
              decreased
      demand for our offers or any products that we may
  develop;●
              injury
      to our reputation;●
              the
      withdrawal of a product offer from the market;●
              costs
      to defend the related litigation;●
              diversion
      of management time and attention;●
              loss
      of revenue; and●
              inability
      to commercialize the product offers that we may
  develop.
 
 Some of
our contracts with wholesalers and other customers may require us to carry
product liability insurance.
 
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  We have a
product liability insurance coverage that is subject to a per occurrence
deductible. The annual cost of the product liability insurance is based on
our level of sales and our policy coverage.  The amount of insurance
that we currently hold may not be adequate to cover all liabilities that we may
incur. Insurance coverage is increasingly expensive. We may not be able to
maintain insurance coverage at a reasonable cost and may not be able to obtain
insurance coverage that will be adequate to satisfy any liability that may
arise. In addition, our carriers have the ability to discontinue our liability
coverage at any point in time and we may be unable to obtain alternative
coverage.
 
 We
rely on contract manufacturers to produce all of our branded offers we market.
Disruptions in our contract manufacturers’ systems or losses of manufacturing
certifications could adversely affect our sales and customer
relationships.
 
 Our
contract manufacturers produce 100% of our branded offers we market. Any
significant disruption in those operations for any reason, such as regulatory
requirements and loss of certifications, power interruptions, fires, hurricanes,
war or threats of terrorism could adversely affect our sales and customer
relationships.
 
 Our
business is subject to economic, political, and other risks associated with
international operations.
 
 Because
many of the offers we market are offered in foreign countries, our business is
subject to risks associated with doing business internationally.
 
 Accordingly,
our future results could be harmed by a variety of factors, including less
effective protection of intellectual property, more stringent regulation by food
and health regulatory agencies, changes in foreign currency exchange rates,
changes in political or economic conditions, trade-protection measures and
import or export licensing requirements. Furthermore, there can be no assurance
that our business will not suffer from any of these other risks associated with
doing business in a foreign country.
 
 Our
corporate compliance and corporate governance programs cannot guarantee that we
are in compliance with all potentially applicable regulations.
 
 The
development, manufacturing, pricing, marketing, sales and reimbursement of our
internal offers and internal offer candidates, together with our general
operations, are subject to extensive regulation by federal, state and other
authorities within the United States. We are a relatively small company and we
rely heavily on third parties to conduct many important functions and we cannot
guarantee that we are in compliance with all potentially applicable federal and
state regulations. If we fail to comply with any of these regulations, we may be
subject to a range of enforcement actions, including significant fines,
litigation or other sanctions. Any action against us for a violation of these
regulations, even if we successfully defend against such actions, could cause us
to incur significant legal expenses, divert our management’s attention and harm
our reputation.
  Risks
Relating to Our Industry
 
 If
we are unable to compete in the highly competitive performance-based advertising
and marketing industries, we may experience reduced demand in both our operating
segments.
 
 We expect
to operate in a highly competitive environment.  We will compete with
other companies in the following areas:
 
 ·
              
              sales
      to third party merchant advertisers of performance-based and other
      advertising;·
              
              services
      that allow merchants to manage their advertising campaigns across multiple
      networks and monitor the success of these campaigns;
and·
              
              sales
      to consumers of free trial continuity product
  offers.
 
 Although
we expect to pursue a strategy that allows us to potentially partner with all
relevant companies in the industry, there are certain companies in the industry
that may not wish to partner with us.
 
 We expect
competition to intensify in the future because current and new competitors can
enter our market with little difficulty.  The barriers to entering our
market are relatively low.  In fact, many current internet and media
companies presently have the technical capabilities and advertiser bases to
enter the industry.  Further, if the consolidation
trend continues among the larger media companies with greater brand
recognition, the share of the market remaining for us and other smaller
providers could decrease, even though the number of smaller providers could
continue to increase.  These factors could adversely affect our
competitive position in the search marketing services industry.
 
 42
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  Some of
our competitors, as well as potential entrants into our market, may be better
positioned to succeed in this market.  They may have:
 
 ·
              
              longer
      operating histories;·
              
              more
      management experience;·
              
              an
      employee base with more extensive experience;·
              
              a
      better ability to service customers in multiple cities in the United
      States and internationally by virtue of the location of sales
      offices;·
              
              larger
      customer bases;·
              
              greater
      brand recognition; and·
              
              significantly
      greater financial, marketing and other
  resources.
 
 In
addition, many current and potential competitors can devote substantially
greater resources than we can to promotion, Web site development and systems
development.  Furthermore, there are many established and
well-financed competitors that could acquire or create competing companies or
joint ventures in market segments or countries of interest to us, which could
increase competition and reduce the demand for any of our services.
 
 Regulation
of continuity or negative option businesses may adversely affect our
operations.
 
 Companies
operating continuity or negative option models operate under guidelines mandated
by state and federal regulatory agencies, including the Federal Trade Commission
(“FTC”) and the offices of various state Attorneys General.  These
guidelines may be changed or amended by the FTC at any time, requiring us to
make changes in our operations which could severely impact revenue and
profitability.
 
 In
addition, the FTC, state agencies and consumer advocacy groups typically monitor
companies like ours to ensure compliance with these guidelines and may challenge
our compliance at any time.  This could lead to increased legal fees
and possible changes to or termination of our continuity programs, all of which
would have a negative impact on our revenues and profitability.
 
 We
are susceptible to general economic conditions, and a downturn in advertising
and marketing spending by merchants could adversely affect our operating
results.
 
 Our
operating results will be subject to fluctuations based on general economic
conditions, in particular those conditions that impact merchant-consumer
transactions.  If there were to be a general economic downturn that
affected consumer activity in particular, however slight, then we would expect
that business entities, including our merchant advertisers and potential
merchant advertisers, could substantially and immediately reduce their
advertising and marketing budgets.  We believe that during periods of
lower consumer activity, merchant spending on advertising and marketing is more
likely to be reduced, and more quickly, than many other types of business
expenses.  These factors could cause a material adverse effect on our
operating results.
 
 If
we are unable to respond to the rapid technological change characteristic of our
industry, our products and services may not be competitive.
 
 The
market for our services is characterized by rapid change in business models and
technological infrastructure, and we will need to constantly adapt to changing
markets and technologies to provide competitive services.  We believe
that our success will depend, in part, on our ability to develop our services
for both our target market and for applications in new
markets.  However, we may not be successful and our competitors may
develop innovations that render our products and services obsolete or
uncompetitive.
 
 Our
technical systems will be vulnerable to interruption and damage that may be
costly and time-consuming to resolve and may harm our business and
reputation.
 
 A natural
or man-made disaster or other cause could interrupt our services indefinitely
and severely damage our business, prospects, financial condition and results of
operations.  Our systems and operations will be vulnerable to damage
or interruption from fire, floods, network failure, hardware failure, software
failure, power loss, telecommunications failures, break-ins, terrorism, war or
sabotage, computer viruses, denial of service attacks, penetration of our
network by unauthorized computer users and “hackers,” and other similar
events.
 
 43
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 We
presently may not possess and may not have developed or implemented adequate
protections or safeguards to overcome any of these events.  We also
may not have anticipated or addressed many of the potential events that could
threaten or undermine our technology network.  Any of these
occurrences could cause material interruptions or delays in our business, result
in the loss of data, render us unable to provide services to our customers,
expose us to material risk of loss or litigation and liability, materially
damage our reputation and our visitor traffic may decrease as a
result.  In addition, if a person is able to circumvent our security
measures, he or she could destroy or misappropriate valuable information or
disrupt our operations which could cause irreparable damage to our reputation or
business.  Similar industry-wide concerns or events could also
damage our reputation or business.  Our insurance, if obtained,
may not be adequate to compensate us for all losses that may occur as a result
of a catastrophic system failure or other loss, and our insurers may not be able
or may decline to do so for a variety of reasons.
 
 If we
fail to address these issues in a timely manner, we may lose the confidence of
our merchant advertisers, our revenue may decline and our business could
suffer.
 
 We
rely on third-party co-location providers, and a failure of service by these
providers could adversely affect our business and reputation.
 
 We rely
on third-party co-location providers to host our main servers.  If
these providers experience any interruption in operations or cease operations
for any reason or if we are unable to agree on satisfactory terms for continued
hosting relationships, we would be forced to enter into a relationship with
other service providers or assume hosting responsibilities
ourselves.  If we are forced to switch hosting facilities, we
may not be successful in finding an alternative service provider on
acceptable terms or in hosting the computer servers ourselves.  We may
also be limited in our remedies against these providers in the event of a
failure of service.  In the past, short-term outages have occurred in
the service maintained by co-location providers which could recur.  We
also may rely on third-party providers for components of our technology
platform, such as hardware and software providers, credit card processors and
domain name registrars.  A failure or limitation of service or
available capacity by any of these third-party providers could adversely affect
our business and reputation.
 
 Our
quarterly results of operations might fluctuate due to changes in the search
engine-based algorithms, which could adversely affect our revenue and in turn
the market price of our common stock.
 
 Our
revenue is heavily dependent on how search engines treat our content in their
indexes.  If search engines determine that our content is not high
quality, they may not rank our content as highly in their indexes resulting in a
reduction in our traffic, which may cause lower than expected
revenues.  We are greatly dependent on a small number of major search
engines, namely Google, Yahoo!, MSN, and AOL.  Search engines tend to
adjust their algorithms periodically and each adjustment tends to have an impact
on how our content ranks in their indexes.  These constant
fluctuations could make it difficult for us to predict future
revenues.
 
 We
depend on the growth of the internet and internet infrastructure for our future
growth and any decrease or less-than-anticipated growth in internet usage could
adversely affect our business prospects.
 
 Our
future revenue and profits, if any, depend on the continued widespread use of
the internet as an effective commercial and business medium.  Factors
which could reduce the widespread use of the internet include:
 
 ·
              possible
      disruptions or other damage to the internet or telecommunications
      infrastructure;·
              failure of the individual networking infrastructures of our merchant
      advertisers and distribution partners to alleviate potential overloading
      and delayed response times;·
              a
      decision by merchant advertisers to spend more of their marketing dollars
      in offline areas;·
              increased
      governmental regulation and taxation; and·
              actual
      or perceived lack of security or privacy
  protection.
 
 In
particular, concerns over the security of transactions conducted on the internet
and the privacy of users may inhibit the growth of the internet and other online
services, especially online commerce.  In order for the online
commerce market to develop successfully, we, and other market participants, must
be able to transmit confidential information, including credit card information,
securely over public networks.  Any decrease or less than anticipated
growth in internet usage could have a material adverse effect on our business
prospects.
 
 
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  Government
regulations and legal uncertainties relating to the internet and on-line
commerce may adversely affect our business and operating results.
 Companies
engaging in on-line search, commerce and related businesses face uncertainty
related to future government regulation of the internet.  Due to the
rapid growth and widespread use of the internet, legislatures at the federal and
state levels are enacting and considering various laws and regulations relating
to the internet.  Furthermore, applicability to the internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, libel, obscenity and personal privacy is
uncertain.  Lawmakers adopted the majority of those laws prior to the
advent of the internet and related technologies and, as a result, the laws do
not expressly contemplate or address the unique issues presented by the internet
and related technologies.  Such existing and new laws may negatively
affect our business and operating results, expose us to substantial compliance
costs and liabilities, and impede the growth in use of the
internet.
 
 The
following existing and proposed federal laws could negatively impact our
business:
 
 ·
              the
      Digital Millennium Copyright Act and its related safe harbors, which are
      intended to reduce the liability of online service providers for listing
      or linking to third-party Web sites that include materials that infringe
      copyrights or other rights of others;·
              the
      Federal Trade Commission Act, which requires, among other things, that all
      disclosures in connection with online offers and promotions be “clear and
      conspicuous”;·
              the
      CAN-SPAM Act of 2003 and certain similar state laws, which are intended to
      regulate interstate commerce by imposing limitations and penalties on the
      transmission of unsolicited commercial electronic mail via the internet;
      and·
              pending
      and adopted consumer protection and privacy
  legislation.
 
 Courts
may apply these laws in unintended and unexpected ways.  As a company
that provides services over the internet, we may be subject to an action brought
under any of these or future laws governing online services.  Many of
the services of the internet are automated and companies such as ours may be
unknowing conduits for illegal or prohibited materials.  We cannot
predict how courts will rule in many circumstances; for example, it
is possible that some courts could find strict liability or impose “know
your customer” standards of conduct in certain circumstances.
 
 In 1998,
the Internet Tax Freedom Act was enacted, which generally placed a three-year
moratorium on state and local taxes on internet access and on multiple or
discriminatory state and local taxes on electronic commerce.  This
moratorium was recently extended.  We cannot predict whether this
moratorium will be extended in the future or whether future legislation will
alter the nature of the moratorium.  If this moratorium is not
extended in its current form, state and local governments could impose
additional taxes on internet-based transactions, and these taxes could decrease
our ability to compete with traditional retailers and could have a material
adverse effect on our business, financial condition, results of operations and
cash flow.
 
 We may
also be subject to costs and liabilities with respect to privacy
issues.  Several internet companies have incurred costs and paid
penalties for violating their privacy policies.  Further, federal and
state governments may adopt new legislation with respect to user
privacy.  Foreign governments may also pass laws which could
negatively impact our business or may prosecute us for our products and services
based on existing laws.  The restrictions imposed by, and costs of
complying with, current and possible future laws and regulations related to our
business could harm our business and operating results.  In addition,
our failure to comply with applicable laws and regulations could result in
fines, sanctions and other penalties and additional restrictions on our
collection, transfer or use of personal data.  These developments
could materially and adversely affect our business, results of operations and
financial condition.
 
 The
increasing use of the internet and the resulting burden on the
telecommunications infrastructure has prompted telephone carriers to request
that the Federal Communications Commission (“FCC”) regulate internet service
providers and impose access fees on those providers.  If the FCC
imposes access fees, the costs of using the internet could increase
dramatically.  This could result in the reduced use of the internet as
a medium for commerce, which could have a material adverse effect on our
internet business operations.
 
 We will
also be subject to regulation not specifically related to the internet,
including laws affecting direct marketing, advertising, and sweepstakes and
other contests.  If courts and regulators interpret current laws
unfavorably, or if additional legislative or regulatory restrictions develop, we
may be forced to revise our business strategy.  We cannot predict
whether alternative strategies would yield favorable results, and our failure to
develop successful alternative strategies could materially and adversely affect
our results of operations and financial condition.
 
 Future
regulation of search engines may adversely affect the commercial utility of our
search marketing services.
 
 The
Federal Trade Commission (“FTC”) has recently reviewed the way in which search
engines disclose paid placements or paid inclusion practices to internet
users.  In 2002, the FTC issued guidance recommending that all search
engine companies ensure that all paid search results are clearly
distinguished from non-paid results, that the use of paid inclusion is clearly
and conspicuously explained and disclosed and that other disclosures are made to
avoid misleading users about the possible effects of paid placement or paid
inclusion listings on search results.  Such disclosures if ultimately
mandated by the FTC or voluntarily made by us may reduce the desirability of any
paid placement and paid inclusion services that we offer.  We believe
that some users may conclude that paid search results are not subject to the
same relevancy requirements as non-paid search results, and will view paid
search results less favorably.  If such FTC disclosure reduces the
desirability of paid placement and paid inclusion services, and “click-throughs”
of paid search results decrease, the commercial utility of our search
marketing services could be adversely affected.
 
 45
 Table of Contents
 
 We
may incur liabilities for the activities of users of our services, which could
adversely affect our service offerings.
 
 The law
relating to the liability of providers of online services for activities of
their users and for the content of their merchant advertiser listings is
currently unsettled and could damage our business, financial condition and
operating results.  Our insurance policies may not provide coverage
for liability arising out of activities of our users or merchant advertisers for
the content of our listings.  Furthermore, we may not be able to
obtain or maintain adequate insurance coverage to reduce or limit the
liabilities associated with our businesses.  We may not
successfully avoid civil or criminal liability for unlawful activities
carried out by consumers of our services or for the content of our
listings.  Our potential liability for unlawful activities of users of
our services or for the content of our listings could require us to implement
measures to reduce our exposure to such liability, which may require us, among
other things, to spend substantial resources or to discontinue certain service
offerings.
 
 Our
ability to grow will depend on effectively competing against Google and other
competitors that are competing in or about to enter the pay-for-performance
business.
 
 Our
business plans depend in part on our ability to effectively offer an alternative
pay-for-performance solution to advertisers relative to Google and other
competitive offerings.  If enough advertisers in this new, evolving
business model choose to spend a significant portion of their
pay-for-performance advertising budgets with competitors such as Google, our
ability to grow our revenues will be limited.
 
 We offer
advertising on Web sites other than our own.  The Web sites that will
list their unsold advertising space with us to include in our offerings are not
bound by contracts that ensure us a consistent supply of advertising
space-inventory. In addition, publishers can change the amount of inventory they
make available to us at any time. If a Web site publisher decides not to make
advertising space from its Web sites available to us, we may not be able to
replace this advertising space with advertising space from other Web sites that
have comparable traffic patterns and user demographics quickly enough to fulfill
our advertisers’ requests. This could result in lost revenues.
 
 Our
growth depends on our ability to maintain a predictable inventory of advertising
space on our own and third-party Web sites. To attract new advertising
customers, we must maintain a consistent supply of attractive advertising space.
We intend to expand our advertising inventory by selectively adding to our owned
published content new publishers that offer attractive demographics, innovative
and quality content and growing user traffic.
 
 The
market for internet advertising and related services is intensely competitive.
We expect this competition to continue to increase because there are no
significant barriers to entry. Increased competition may result in price
reductions for advertising space, reduced margins and loss of our market share.
We will compete with the following types of companies:
 
 ·
              internet
      advertising networks that focus on a CPA model, such as Value Click Media
      and CPX Interactive;·
              internet
      affiliate networks using a performance-based model, such as Media
      Breakaway/CPA Empire, Hydra Media and Media Whiz
  Holdings;·
              e-mail
      publishers and Data/List Management firms that use performance based
      models such as Datran;·
              internet
      navigational and Web search engine companies moving into the
      pay-for-performance space such as Google; and·
              traditional
      advertising and direct marketing media, such as radio, cable, television,
      print and direct marketing.
 
 We also
compete with traditional advertising media, such as direct mail, television,
radio, cable and print, for a share of advertisers’ total advertising
budgets.  Many of our current and potential competitors enjoy
competitive advantages over us, such as longer operating histories, greater name
recognition, larger customer bases, greater access to advertising space on
high-traffic Web sites, and significantly greater financial, technical and
marketing resources. We may not be able to compete successfully, and
competitive pressures may materially and adversely affect our business, results
of operations and financial condition.
  
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  Risks
Relating to the Common Stock
 
 The
market price of our common stock is likely to be highly volatile and subject to
wide fluctuations.
 The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors, many of which
are beyond our control, including:
 
 ·
              announcements of new products or services by our
    competitors;·
              fluctuations in revenue attributable to changes in the search engine-based
      algorithms that  rank the relevance of
      our      content;·
              quarterly
      variations in our revenues and operating expenses;·
              announcements
      of technological innovations or new products or services by
      us;·
              sales
      of common stock by our founders and directors or other selling
      stockholders;·
              competitive
      pricing pressures;·
              our
      ability to obtain working capital financing;·
              additions
      or departures of key personnel;·
              the
      limited number of people who hold our common stock;·
              sales
      of large blocks of our common stock when restricted shares become freely
      tradable;·
              our
      ability to execute our business plan;·
              operating
      results that fall below expectations;·
              loss
      of any strategic relationship;·
              regulatory
      developments;·
              period-to-period
      fluctuations in our financial results;·
              the
      potential absence of securities-analyst coverage;·
              conditions
      or trends in the industry; and·
              general
      market conditions.
 
 In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies.  These market fluctuations may also materially
and adversely affect the market price of our common stock.
 
 Our
operating results may fluctuate significantly, and these fluctuations may cause
the price of our common stock to fall.
 
 Our
operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses.  If our results
of operations do not meet the expectations of current or potential investors,
the price of our common stock may decline.
 
 Our
common stock is controlled by insiders.
 
 Following
the Abundantad merger, the founders and investors of Abundantad now beneficially
own a majority of the outstanding shares of our common stock.  Such
concentrated control of the Company may adversely affect the price of our common
stock.  Our principal security holders may be able to control matters
requiring approval by our security holders, including the election of
directors.  Such concentrated control may also make it difficult for
our stockholders to receive a premium for their shares of our common stock if we
merge with a third party or enter into different transactions which require
stockholder approval.  In addition, certain provisions of Delaware law
could have the effect of making it more difficult or more expensive for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of us.  Accordingly, these former Abundantad shareholders will
have the power to control the election of all of our directors and the approval
of actions for which the approval of our stockholders is required.  If
you acquire common stock, you may have no effective voice in the management of
the Company.
 
 Anti-takeover
provisions may limit the ability of another party to acquire us, which could
cause our stock price to decline.
 
 We are
subject to the Delaware General Corporate Law, which provides, subject to
enumerated exceptions, that if a person acquires 15% or more of our voting
stock, the person is an “interested stockholder” and may not engage in “business
combinations” with us for a period of three years from the time the person
acquired 15% or more of our voting stock.
 
 
 We
are subject to the reporting requirements of federal securities laws, which can
be expensive and may divert resources from other projects, thus impairing its
ability to grow.
 
 We are a
public reporting and trading company and, accordingly, subject to the
information and reporting requirements of the Exchange Act and other federal
securities laws, including compliance with the Sarbanes-Oxley Act of 2002
(the “Sarbanes-Oxley Act”).  We expect to incur significant costs of
preparing and filing annual and quarterly reports, proxy statements
and other information with the SEC and furnishing audited reports to
stockholders.
 
 47
 Table of Contents
  It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley
Act.  We may need to hire additional financial reporting, internal
controls and other finance personnel in order to develop and implement
appropriate internal controls and reporting procedures.  If we are
unable to comply with the internal controls requirements of the Sarbanes-Oxley
Act, then we may not be able to obtain the independent accountant certifications
required by such act, which may preclude us from keeping our filings with the
SEC current.
 
 Because
we became public by means of a reverse merger with Abundantad into a
wholly-owned subsidiary of Adex, we may not be able to attract the attention of
major brokerage firms.
 
 There may
be risks associated with Abundantad becoming public through a “reverse
merger.”  Securities analysts of major brokerage firms may not provide
coverage of us since there is no incentive to brokerage firms to recommend the
purchase of our common stock.  We can give no assurance that brokerage
firms will, in the future, want to conduct any secondary offerings on behalf of
our Company.
 
 If
we fail to establish and maintain an effective system of internal controls, we
may not be able to report our financial results accurately or prevent
fraud.  Any inability to report and file our financial results
accurately and timely could harm our reputation and adversely impact the trading
price of our common stock.
 
 Effective
internal controls are necessary for us to provide reliable financial reports and
prevent fraud.  If we cannot provide reliable financial reports or
prevent fraud, we may not be able to manage our business as effectively as we
would if an effective control environment existed, and our business and
reputation with investors may be harmed.  As a result, our small size
and any current internal control deficiencies may adversely affect our financial
condition, results of operation and access to capital.  We have not
performed an in-depth analysis to determine if historical undiscovered failures
of internal controls exist, and may in the future discover areas of our internal
controls that need improvement.
 
 Public-company
compliance may make it more difficult for us to attract and retain officers and
directors.
 
 As a
public company, the rules and regulations of the Exchange Act and Sarbanes-Oxley
Act may make it more difficult and expensive for us to obtain director and
officer liability insurance in the future and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage.  As a result, it may be more
difficult for us to attract and retain qualified persons to serve on our
board of directors or as executive officers.
 
 Persons
associated with securities offerings, including consultants, may be deemed to be
broker-dealers, which may expose us to claims for rescission or
damages.
 
 If any
person associated with any of our securities offerings is deemed to be a
broker-dealer and is not registered with the SEC, we may face claims for
rescission and other remedies.  We may become engaged in costly
litigation to defend these claims, which would lead to increased expenditures
for legal fees and divert managements’ attention from operating the
business.  If we could not successfully defend these claims, we may be
required to return proceeds of any affected offering to investors, which would
harm our financial condition.
 
 We
do not expect to pay dividends in the future.  Any return on
investment may be limited to the value of our common stock.
 
 Aside
from the accounting treatment of the consideration we paid to Kim and Lim, LLC
for the acquisition of the assets, and the beneficial conversion feature on the
series A preferred share financing we completed in June and July of 2009, both
of which were treated as dividend paid, we have never paid cash dividends on our
common stock and do not anticipate doing so in the foreseeable
future.  The payment of dividends on our common stock will depend on
earnings, financial condition and other business and economic factors affecting
us at such time as our board of directors may consider relevant.  If
we do not pay dividends, our common stock may be less valuable because a return
on your investment will only occur if our stock price appreciates.
 
 
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 Table of Contents
  There
is currently no liquid trading market for our common stock and we cannot ensure
that one will ever develop or be sustained.
 To date
there has been no liquid trading market for our common stock.  We
cannot predict how liquid the market for our common stock might
become.  As soon as is practicable, we anticipate applying for listing
of our common stock on the NASDAQ Capital Market or other national securities
exchange, assuming that we can satisfy the initial listing standards for such
exchange.  We currently do not satisfy the initial listing standards,
and cannot ensure that we will be able to satisfy such listing standards or that
our common stock will be accepted for listing on any such
exchange.  Should we fail to satisfy the initial listing standards of
such exchanges, or our common stock is otherwise rejected for listing and
remains quoted on the OTC Bulletin Board or is suspended from the OTC
Bulletin Board, the trading price of our common stock could suffer and the
trading market for our common stock may be less liquid and our common stock
price may be subject to increased volatility.
 
 Furthermore,
for companies whose securities are quoted on the OTC Bulletin Board, it is more
difficult to obtain (1) accurate quotations, (2) coverage for significant news
events because major wire services generally do not publish press releases about
such companies, and (3) needed capital.
 
 Our
common stock may be deemed a “penny stock,” which would make it more difficult
for our investors to sell their shares.
 
 Our
common stock may be subject to the “penny stock” rules adopted under Section
15(g) of the Exchange Act.  The penny stock rules generally apply to
companies whose stock is not listed on a national securities exchange and trades
at less than $5.00 per share, other than companies that have had average revenue
of at least $6,000,000 for the last three years or that have tangible net worth
of at least $5,000,000 ($2,000,000 if the company has been operating for three
or more years).  These rules require, among other things, that brokers
who trade penny stock to persons other than “established customers” complete
certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain
circumstances.  Many brokers have decided not to trade penny stocks
because of the requirements of the penny stock rules and, as a result, the
number of broker-dealers willing to act as market makers in such securities is
limited.  If we remain subject to the penny stock rules for any
significant period, it could have an adverse effect on the market, if any, for
our securities.  If our securities are subject to the penny stock
rules, investors will find it more difficult to dispose of our
securities.
 
 Offers
or availability for sale of a substantial number of shares of our common stock
may cause the price of our common stock to decline.
 
 If our
stockholders sell substantial amounts of our common stock in the public market,
it could create a circumstance commonly referred to as an “overhang” and in
anticipation of which the market price of our common stock could
fall.  The existence of an overhang, whether or not sales have
occurred or are occurring, also could make more difficult our ability to raise
additional financing through the sale of equity or equity-related securities in
the future at a time and price that we deem reasonable or
appropriate.  The shares of our common stock issued to certain of the
former stockholders of Abundantad in the Abundantad merger are subject to a
lock-up agreement prohibiting sales of such shares for a period of 15
months following the Abundantad merger.  Following such date, all of
those shares become freely tradable, subject to securities laws and SEC
regulations regarding sales by insiders.    We note that
recent revisions to Rule 144 may result in certain shares of our common
stock becoming eligible for resale into the public market without registration
in as little as six months after their issuance.
 
 Because
our directors and executive officers are among our largest stockholders, they
can exert significant control over our business and affairs and have actual or
potential interests that may depart from those of our other
stockholders.
 
 Our
directors and executive officers own or control a significant percentage of our
common stock. Additionally, such persons may hold exercise rights under options
or warrants they may hold now or in the future. The interests of such persons
may differ from the interests of our other stockholders. As a result, in
addition to their board seats and offices, such persons will have significant
influence and control over corporate actions requiring stockholder approval,
irrespective of how the Company’s other stockholders may vote, including the
following actions:
 
 ·
              to
      elect or defeat the election of our directors;·
              to
      amend or prevent amendment of our Certificate of Incorporation or
      By-laws;·
              to
      effect or prevent a merger, sale of assets or other corporate transaction;
      and·
              to
      control the outcome of any other matter submitted to our stockholders for
      vote.
 
 Such
persons’ stock ownership may discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the company, which in
turn could reduce our stock price or prevent our stockholders from realizing a
premium over our stock price.
  
 49
 Table of Contents
 
 Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds
  In
connection with the Company’s acquisition of Vibrantads, LLC, under the six
month share reset provision, we determined the VWAP was $1.60 and accordingly,
63,298 additional shares of common stock were issued to the former member of
Vibrantads, LLC on July 21, 2009. In connection with this issuance, the Company
has relied on the exemption from registration under the Securities Act of 1933,
as amended (“Securities Act”) pursuant to Section 4(2) thereof.  Such
shares of common stock are restricted shares, and the holders thereof may not
sell, transfer or otherwise dispose of such shares without registration under
the Securities Act or an exemption therefrom.
 
 In
connection with the Company’s acquisition of Digital Instructors, LLC, under the
twelve month share reset provision, we determined the VWAP was $1.65 and
accordingly, 306,543 additional shares of common stock were issued to the former
member of Digital Instructor, LLC on August 12, 2009. In connection with this
issuance, the Company has relied on the exemption from registration under the
Securities Act of 1933, as amended (“Securities Act”) pursuant to Section 4(2)
thereof.  Such shares of common stock are restricted shares, and the
holders thereof may not sell, transfer or otherwise dispose of such shares
without registration under the Securities Act or an exemption
therefrom.
 
 In
connection with the vesting schedule of the restricted stocks, 1,562 shares to a
non-employee and 1,396 shares to two full time employees were vested during the
second quarter of 2009.  The Company has relied on the exemption from
registration under the Securities Act pursuant to Section 4(2)
thereof.  Such shares of common stock are restricted shares, and the
holders thereof may not sell, transfer or otherwise dispose of such shares
without registration under the Securities Act or an exemption
therefrom.
 
 As
previously disclosed on the Company’s Form 8-K filed with the SEC on July 30,
2009, on July 27, 2009, the Company issued 270,000 shares of the Company’s
series A preferred stock, $0.0001 par value (the “preferred stock”), at a price
per share equal to $1.20 (the “Original Issue Price”) and warrants (the
“warrants”) to purchase up to 135,000 shares of the Company’s common stock, par
value $0.0001 (the “common stock”), at an exercise price of $1.56 per share (the
“Warrant Exercise Price”). The Company has raised aggregate proceeds of $324,000
in the financing transaction (the “Financing”). The purchase price for the
preferred stock and warrants was payable in cash. The Company intended to use
the cash raised in the financing to expand its business operation. The Company
has relied on the exemption from registration under the Securities Act pursuant
to Section 4(2) thereof.  Such shares of common stock are restricted
shares, and the holders thereof may not sell, transfer or otherwise dispose of
such shares without registration under the Securities Act or an exemption
therefrom.
 
 Item 3. Defaults Upon Senior Securities
 
 None
 
 Item 4. Submission of Matters to a Vote of Security
Holders
 
 None.
 
 
 Item 5. Other Information
 
 None
 
 
 50
 Table of Contents
 
 
 Item 6.  Exhibits
 
 Exhibit
      No.
              Description3.1
              Certificate
      of Incorporation (1)3.2
              Bylaws
      (1)3.3
              First
      Amended and Restated Adex Media, Inc. Employee Stock Option
      Plan (2)3.4
              First
      Amended and Restated Certificate of Incorporation of Adex Media, Inc.
      (2)3.5
              First
      Amended and Restated Bylaws (2)3.6
              Certificate
      of Designations, Preferences and Rights of Series A Convertible Preferred
      Stock of Adex Media, Inc. (3)10.1
              Employment
      Agreement by and between Adex Media, Inc., and Kevin
    Dufficy*10.2
              Form
      of Stock Option Agreement (3)31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 *31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 *32.1
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 *32.2
              Certificate
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002*
 ______________
 * Filed
herewith
 
 (1)
              Incorporated
      by reference herein to the Company’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on May 16, 2008.(2)
              Incorporated
      by reference herein to the Company’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on June 15,
2009.(3)
              Incorporated
      by reference herein to the Company’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on August 28,
  2009.
 
 
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 Table of Contents
 
 
 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.
 
 ADEX MEDIA,
      INC.Date:
      November 13, 2009
              By:
              /s/
      Scott RewickScott
      RewickChief
      Executive Officer(Principal
      Executive Officer)ADEX
      MEDIA, INC.Date:
      November 13, 2009
              By:
              /s/
      Ben ZadikBen
      ZadikChief
      Financial Officer(Principal
      Financial and Accounting Officer)