**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM10-Q**

 

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| **ý**** ** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                             |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                      |
|                 |       | **For  The Quarterly Period Ended March 31, 2006**                                                                                                                                        |
|                 |       |                                                                                                                                                                                      |
| **o**** **      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                            |
|                 |       |                                                                                                                                                                                      |
| ** **           | ** ** | **For  the Transition Period from               to             ** |

 

**CommissionFile Number 0-27412**

 

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**WATCHITMEDIA, INC.**

**(Exactname of registrant as specified in its charter)**

 

| **Delaware**             | ** ** | **94-3173918**                       |
|--------------------------|------------|--------------------------------------|
| (State of incorporation) |       | (I.R.S. Employer Identification No.) |

 

**655Montgomery Street, Suite 1000, San Francisco, California 94111**

(Address of principal executive offices)

 

**(415)477-9905**

(Registrant’s telephone number, including area code)

 

 

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

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes  ý    No  o

 

Indicate by checkmarkwhether the registrant is large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

 

| Large accelerated  filer  o |   | Accelerated  filer  o |   | Non-accelerated filer  ý |
|---------------------------------------|--------|---------------------------------|--------|-----------------------------------------|

 

Indicated by check markwhether the registrant is a shell Company (as defined in Rule 12b-2 of the Act)Yes  o     No  ý

 

At May 22, 2006, there were 39,079,852 shares of Common Stockoutstanding.

 

 

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**WATCHITMEDIA, INC.**

 

**INDEX**

 

**PartI - Financial Information**

 
| **Item 1.**                                                         | ** ** | **Financial Statements**                                                                            | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------|
|                                                                     |       |                                                                                                |       |       |
| Watchit Media, Inc.                                                      |       |                                                                                                |
|                                                                     |       |                                                                                                |       |       |
|                                                                     |       | Condensed Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005                   |       |       |
|                                                                     |       |                                                                                                |       |       |
|                                                                     |       | Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2006 and 2005 |       |       |
|                                                                     |       |                                                                                                |       |       |
|                                                                     |       | Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 |       |       |
|                                                                     |       |                                                                                                |       |       |
|                                                                     |       | Notes to Condensed Consolidated  Financial Statements                                               |       |       |
|                                                                     |       |                                                                                                |       |       |
| **Item 2.**                                                         | ** ** | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**     | ** ** | ** ** |
|                                                                     |       |                                                                                                |       |       |
| **Item 3.**                                                              | ** ** | **Quantitative and Qualitative  Disclosures About Market Risk**                                     | ** ** | ** ** |
|                                                                     |       |                                                                                                |       |       |
| **Item 4.**                                                              | ** ** | **Controls and Procedures**                                                                         | ** ** | ** ** |
|                                                                     |       |                                                                                                |       |       |
| **Part II — Other Information**                                     | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 1. Legal Proceedings**                                            | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 1A. Risk Factors**                                                | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds** | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 3. Defaults upon Senior  Securities**                             | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 4. Submission of  Matters to a Vote to Security Holders**         | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 5. Other Information**                                            | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Item 6. Exhibits and Reports on Form 8-K**                             | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Signature**                                                            | ** ** | ** **                                                                                          |
|                                                                     |       |                                                                                                |
| **Exhibits**                                                             | ** ** | ** **                                                                                          |

 

2

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**Item1. Financial Statements**

 

**WATCHITMEDIA, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands,except share data)

(Unaudited)

 
| ** **                                                                                                                                   | ** ** | **March 31,   2006** | ** ** | **December 31,   2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                   | ** ** |                 |       |                         |       |
| Current assets:                                                                                                                              |       |                 |       |                         |       |
| Cash and cash  equivalents                                                                                                                   | ** ** | $                    | —     |                         | $          | 11 |   |
| Refundable  income taxes                                                                                                                     |       | 3                    |       | 13                           |       |
| Accounts  receivable, net of allowance for doubtful accounts of $54 and $54, and $368  and $543 pledged as collateral security, respectively |       | 489                  |       | 340                          |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 156                  |       | 92                           |       |
| Total current  assets                                                                                                                        |       | 648                  |       | 456                          |       |
| Property and equipment, net                                                                                                                  |       | 169                  |       | 177                          |       |
| Goodwill                                                                                                                                     |       | 2,728                |       | 2,728                        |       |
| Other intangibles, net                                                                                                                       |       | 572                  |       | 607                          |       |
| Other assets                                                                                                                                 |       | 182                  |       | 182                          |       |
| Total assets                                                                                                                                 | ** ** | $                    | 4,299      |                         | $          | 4,150 |   |
|                                                                                                                                         |       |                 |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               | ** ** |                 |       |                         |       |
| Current liabilities:                                                                                                                         |       |                 |       |                         |       |
| Bank Overdraft                                                                                                                               | ** ** | $                    | 47         |                         | $          | — |   |
| Secured  borrowings                                                                                                                          |       | 368                  |       | 287                          |       |
| Accounts payable                                                                                                                             |       | 1,102                |       | 801                          |       |
| Accrued  compensation and related payroll liabilities                                                                                        |       | 253                  |       | 269                          |       |
| Restructuring  liabilities                                                                                                                   |       | 594                  |       | 595                          |       |
| Other accrued  liabilities                                                                                                                   |       | 464                  |       | 243                          |       |
| Debt                                                                                                                                         |       | 165                  |       | —                       |       |
| Total current  liabilities                                                                                                                   |       | 2,993                |       | 2,195                        |       |
| Commitments and contingencies                                                                                                                |       | —               |       | —                       |       |
| Stockholders’ equity:                                                                                                                   |       |                 |       |                         |       |
| Preferred Stock,  $0.01 par value; 500,000 shares authorized, no shares issued or outstanding                                                |       | —               |       | —                       |       |
| Common Stock,  $0.01 par value; 100,000,000 shares authorized, 33,668,896 and 28,868,229  shares issued, respectively                        |       | 337                  |       | 289                          |       |
| Additional  paid-in capital                                                                                                                  |       | 83,079               |       | 82,785                       |       |
| Accumulated  deficit                                                                                                                         |       | (81,997              | )          | (81,006                      | )          |
| Treasury stock                                                                                                                               |       | (113                 | )          | (113                         | )          |
| Total  stockholders’ equity                                                                                                             |       | 1,306                |       | 1,955                        |       |
| Total  liabilities and stockholders’ equity                                                                                             | ** ** | $                    | 4,299      |                         | $          | 4,150 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

3

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**WATCHITMEDIA, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(In thousands,except share and per share data)

(Unaudited)

 
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenues                                                                   | ** ** | $                                | 546        |   | $ | 255 |   |
| Cost of revenues                                                           |       | 308                              |       | 113 |   |
| Gross profit                                                               |       | 238                              |       | 142 |   |
| Selling, general and administrative expenses                               |       | 1,204                            |       | 504 |   |
| Operating loss                                                             |       | (966                             | )          | (362 | ) |
| Other income (expense):                                                    |       |                             |       |   |   |
| Interest expense                                                           |       | (24                              | )          | (9 | ) |
| Interest income                                                            |       | —                           |       | 1 |   |
| Total other  expense                                                       |       | (24                              | )          | (8 | ) |
| Loss from  continuing operations before income tax benefit (expense)       |       | (990                             | )          | (370 | ) |
| Income tax benefit (expense)                                               |       | (1                               | )          | 67 |   |
| Loss from  continuing operations                                           |       | (991                             | )          | (303 | ) |
| Loss from discontinued operations, net of income tax  benefit of $- and $- |       | —                           |       | (672 | ) |
| Net loss                                                                   | ** ** | $                                | (991       | ) | $ | (975 | ) |
|                                                                       |       |                             |       |   |   |
| Earnings per share:                                                        |       |                             |       |   |   |
| Basic and  diluted –                                                  |       |                             |       |   |   |
| Loss from  continuing operations                                           | ** ** | $                                | (0.03      | ) | $ | (0.01 | ) |
| Loss from  discontinued operations                                         |       | —                           |       | (0.03 | ) |
| Net loss                                                                   | ** ** | $                                | (0.03      | ) | $ | (0.04 | ) |
|                                                                       |       |                                  |       |  |   |
| Basic and diluted weighted average number of shares  outstanding           |       | 29,825,666                       |       | 25,357,756 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**WATCHITMEDIA, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(In thousands)

(Unaudited) 

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                         |       |                                                 |       | **Revised See Note 1** |   |
| Cash flows from operating activities:                                        |       |                                                 |       |   |   |
| Net Loss                                                                     | ** ** | $                                                    | (991       | ) | $ | (975 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                 |       |   |   |
| Depreciation and  amortization of property and equipment                     |       | 25                                                   |       | 26 |   |
| Stock-based  compensation expense related to employee stock options          |       | 35                                                   |       | — |   |
| Common stock  issued for services                                            |       | 63                                                   |       | — |   |
| Amortization of  identifiable intangible assets                              |       | 35                                                   |       | 35 |   |
| Restricted  shares issued in connection with director compensation           |       | —                                               |       | 17 |   |
| Provision for  doubtful accounts                                             |       | —                                               |       | (9 | ) |
| Changes in  current assets and liabilities:                                  |       |                                                 |       |   |   |
| Accounts  receivable                                                         |       | (149                                                 | )          | 88 |   |
| Prepaid expenses  and other current assets                                   |       | (11                                                  | )          | 8 |   |
| Bank overdraft                                                               |       | 47                                                   |       | — |   |
| Accounts payable  and accrued liabilities                                    |       | 515                                                  |       | 502 |   |
| Income taxes,  net                                                           |       | 10                                                   |       | (63 | ) |
| Other  liabilities                                                           |       | —                                               |       | (54 | ) |
| Net cash used in  operating activities                                       |       | (421                                                 | )          | (425 | ) |
| Cash flows from investing activities:                                        |       |                                                 |       |   |   |
| Purchases of  property and equipment                                         |       | (17                                                  | )          | (38 | ) |
| Net cash used in  investing activities                                       |       | (17                                                  | )          | (38 | ) |
| Cash flows from financing activities:                                        |       |                                                 |       |   |   |
| Additional  (repayment) of secured borrowings                                |       | 81                                                   |       | (64 | ) |
| Proceeds from debt                                                           |       | 165                                                  |       | — |   |
| Cost of issuing  of Common Stock and warrants                                |       | (19                                                  | )          | (47 | ) |
| Proceeds from  issuance of Common Stock and warrants                         |       | 200                                                  |       | 155 |   |
| Net cash provided  by financing activities                                   |       | 427                                                  |       | 44 |   |
| Net decrease in  cash and cash equivalents                                   |       | (11                                                  | )          | (419 | ) |
| Cash and cash equivalents at beginning of period                             |       | 11                                                   |       | 526 |   |
| Cash and cash  equivalents at end of period                                  | ** ** | $                                                    | —     |   | $ | 107 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**WATCHITMEDIA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands,except share data)

(Unaudited)

 
| ** **                                                | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| Supplemental disclosures of cash flow information:        |       |                                         |       |   |   |
| Interest paid                                             |       | $                                            | 16         |   | $ | 9 |   |
| Income taxes  paid                                        |       | $                                            | 1          |   | $ | 2 |   |
| Income taxes  refunded                                    | ** ** | $                                            | —     |   | $ | 6 | ** ** |
| Significant non-cash financing and investing  activities: |       |                                         |       |   |   |   |
| Deferred  acquisition costs                               | ** ** | $                                            | —     |   | $ | 8 | ** ** |
| Issuance of Common  Stock in debt transaction             |       | $                                            | 53         |   | $ | — |   |
|                                                           |            |                                              |            |  |  |  |  |  |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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WATCHIT MEDIA,INC.

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

(Dollar amounts inthousands)

 

**Note 1 –Summary of Significant Accounting Policies and Practices**

 

*Descriptionof Business*

 

On December 8, 2005,Watchit Media, Inc. (OTCBB-WMDA) changed the Company’s ticker symbol to WMDAfrom CGZT. The change in the Company’s ticker symbol reflects its change inidentity from Cotelligent, Inc to Watchit Media, Inc. The Company is in theprocess of transitioning all aspects of its former brand, name and identity toWatchit Media, Inc.

 

Watchit Media, Inc. (“WatchitMedia” or the “Company”), a Delaware corporation, provides narrowcastingservices which include digital technologies and production services for videocontent, distribution, scripting and playback on digital display channels.

 

In 2004, the Company wasorganized into two reportable segments, IT services and narrowcasting (whichbecame effective with the acquisition of OnSite Media, Inc. on March 2, 2004).Prior to December 31, 2004, the Company entered into a plan to divest its IT servicessegment. The divestiture was completed on July 15, 2005. Accordingly, theaccompanying consolidated financial statements and related footnotes have beenprepared to present as discontinued operations the Company’s IT servicessegment for all periods presented.

 

These financialstatements include the accounts of Watchit Media, Inc. and its subsidiaries.The results of OnSite Media, Inc. have been included in the Company’s resultsfrom its acquisition date.

 

*Liquidity*

 

The Company has hadoperating losses and negative operating cash flows for the past several fiscalperiods. This has been due to declining demand for IT services and solutionsand investments the Company has made in its new narrowcasting business. As aresult, the Company is exposed to certain risks which include the availabilityof financing, the retention of and dependence on key individuals, the effectsof intense competition, the ability to develop and successfully market newproduct and service offerings, and the ability to streamline operations andincrease revenues. While the Company is now focused on executing a growthstrategy in the narrowcasting market, there can be no assurance the Companywill be profitable in the future.

 

During the past and in2006, management has taken action in response to the continued softness in ITservices in order to preserve cash, including but not limited to significantreductions in headcount, outsourcing certain administrative functions, changingbenefit plan insurance carriers, relocating the headquarters resulting in lowerlease obligations, acquiring a business in an industry with more near termgrowth prospects than IT services, securing a line of credit agreement againstits accounts receivable and announcing the plan to divesting its IT services segment.On February 1, 2005, the Company entered into a Stock and Warrant PurchaseAgreement with certain accredited investors pursuant to which the Company soldCommon Stock and warrants resulting in a cash infusion to the Company. Inaddition, on April 1, 2005 the Company signed a definitive agreement withFastTrack, LLC, an affiliate of Beverly Hills, California private equity firmSkyview Capital, LLC for the sale of its remaining IT services business.

 

On February 20, 2006, theCompany issued a 15% Convertible Promissory Note (the “Note”) to James Lavelle,it’s Chairman and CEO, in exchange for a $65 infusion by Mr. Lavelle to theCompany. The Note is due and payable on demand. The Note has a conversion priceof $.07 per share, for each Common share issued upon conversion of the Note. Inaddition upon conversion Mr. Lavelle will receive two warrants for eachcommon share issued. Each warrant, represents the right to purchase twoadditional unregistered shares.

 

7

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of Common Stock at aprice of $.15 per share. The warrant shall be immediately exercisable uponissuance and shall expire three years from the date of issuance.

 

On March 2, 2006, theCompany obtained $100 from a private investor, who is a related party (theCompany’s Public Relations Manager), in a first round of short term financing(the “Bridge”) in the form of a short term note bearing an interest rate of1.5% per annum, plus 500,000 shares of the Company’s unregistered commonshares. The Bridge is due and payable in September 2006. The Company valued theCommon Stock using the market price of the Company’s Common Stock on March 2,2006, which resulted in an estimated fair value of $53. This amount has beenrecorded as prepaid interest and is being amortized to interest expense.

 

On March 16, 2005, theCompany obtained $200 from a private equity fund, who is not a related party,in a first round of a private placement of the Company’s unregistered stock.3,333,334 shares of the Company’s unregistered common shares and warrants wereissued for this transaction. The same investor has committed to invest another$100 in the next round of funding scheduled to occur in the second quarter of2006.

 

 Management has carefully forecasted itsresults of operations and financial position through March 31, 2007, and hasdetermined that the remaining cash on hand, together with cash available fromthe line of credit (see discussion in subsequent events, regarding notice fromCAPCO) and proceeds from the sales of Common Stock to accredited investors, andproceeds from the sale of the IT services segment, will provide adequate cashto fund its anticipated working capital needs. In the event circumstances arisethat are not factored into the forecast, management will take further action tostreamline operations and to continue looking for financing alternatives.

 

*Stock-BasedCompensation*

 

On January 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options basedon estimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.

 

The Company adopted SFAS123(R) using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the first day ofthe Company’s fiscal year 2006. The Company’s Consolidated Financial Statementsas of and for the three months ended March 31, 2006 reflect the impact of SFAS123(R). In accordance with the modified prospective transition method, theCompany’s Consolidated Financial Statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123(R). Stock-basedcompensation expense recognized under SFAS 123(R) for the three months endedMarch 31, 2006 was $36 which consisted of stock-based compensation expenserelated to employee stock options. There was no stock-based compensationexpense related to employee stock options and employee stock purchasesrecognized during the three months ended March 31, 2006.

 

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s Consolidated Statement of Operations. Prior tothe adoption of SFAS 123(R), the Company accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance with APB25 as allowed under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method,no stock-based compensation expense had been recognized in the Company’sConsolidated Statement of Operations, because the exercise price of the Company’sstock options granted to employees and directors equaled the fair market valueof the underlying stock at the date of grant.

 

8

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The table below reflectsnet income and diluted net income per share pro forma information for the threemonths ended March 31, 2005 as follows:

 
| ** **                                                                                                                               | ** ** | **Three Months   Ended  March 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2005**                                          | ** ** |
| Net loss, as reported                                                                                                                    |       | $                                                 | (975       | ) |
| Deduct:  Stock-based compensation expense determined under fair value based method for  awards net of related tax expense, if applicable |       | 21                                                |       |
| Net Loss – pro forma                                                                                                                |       | $                                                 | (996       | ) |
|                                                                                                                                     |       |                                                   |       |
| Basic and diluted:                                                                                                                       |       |                                              |       |
| Net loss per  share, as reported                                                                                                         |       | $                                                 | (0.04      | ) |
| Effect of stock-based  compensation per SFAS 123                                                                                         | ** ** | **—**                                        | ** ** |
| Basic and  diluted                                                                                                                       |       | $                                                 | (0.04      | ) |

 

The Company calculatedthe value of each option on the grant date using the Black-Scholes optionpricing model as prescribed in SFAS No. 123 using the following assumptions:

 
| ** **              | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| Dividend Yield          |       | 0%                                     |       |
| Volatility              |       | 157%                                   |       |
| Risk-free interest rate |       | 3.96%                                  |       |
| Expected term           |       | 1.25 years                             |       |

 

*Basis of Presentation*

 

We have prepared theaccompanying condensed consolidated financial statements pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to these rules and regulations. These condensed consolidatedfinancial statements should be read in conjunction with our audited financialstatements and footnotes related thereto for the year ended December 31, 2005,included in our annual report on Form 10-K filed with the Securities andExchange Commission on April 17, 2006. The unedited condensed consolidatedfinancial statements include, in our opinion, all adjustments (consisting onlyof normal recurring adjustments) necessary to present fairly our financialposition as of March 31, 2006. The results of operations for such interimperiods are not necessarily indicative of the results to be achieved for thefull year.

 

*Revised Cash Flow*

 

In 2005, the Company hasnot reported operating, investing, and financing portions of the cash flowattributed to its discontinued operations as a single amount.

 

9

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**Note 2 –Changes in Stockholders Equity**

 
| ** **                                                                            | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|---------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                            | ** ** | **Common  Stock** | ** ** | **Paid in** | ** ** | ** **     | ** ** | **Treasury  Stock** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                            | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Net Loss**        | ** ** | **Shares**             | ** ** | **Amount** | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2005                                                         |       | 28,868,229        |       | $           | 289        |           | $          | 82,785              |       | $                      | (81,006    | )          | 144,600    |       | $          | (113 | ) | $ | 1,955 |   |
| Issuance of  Common Stock in connection with private placement                        |       | 3,333,334         |       | 33          |       | —         |       | —              |       | —                 |       | —     |       | 33         |       |
| Issuance of  Warrants in connection with private placement                            |       | —            |       | —      |       | 167            |       | —              |       | —                 |       | —     |       | 167        |       |
| Cost of  registering and issuing securities in connection with private placement      |       | —            |       | —      |       | (9             | )          | —              |       | —                 |       | —     |       | (9         | )          |
| Issuance of  Common Stock in connection with purchase of a business                   |       | 197,333           |       | 2           |       | 8              |       | —              |       | —                 |       | —     |       | 10         |       |
| Cost of  registering and issuing securities in connection with purchase of a business |       | —            |       | —      |       | (10            | )          | —              |       | —                 |       | —     |       | (10        | )          |
| Issuance of  Common Stock for services                                                |       | 770,000           |       | 8           |       | 55             |       | —              |       | —                 |       | —     |       | 63         |       |
| Stock-based  compensation expense related to employee stock options                   |       | —            |       | —      |       | 35             |       | —              |       | —                 |       | —     |       | 35         |       |
| Issuance of  Common Stock in connection with issuing debt                             |       | 500,000           |       | 5           |       | 48             |       | —              |       | —                 |       | —     |       | 53         |       |
| Net loss                                                                              |       | —            |       | —      |       | —         |       | (991                | )          | —                 |       | —     |       | (991       | )          |
| Balance at March  31, 2006                                                            |       | 33,668,896        |       | $           | 337        |           | 83,079     |                | $          | (81,997                | )          | 144,600    |       | $          | (113       | ) | $ | 1,306 |   |
|                                                                                       |            |                   |            |             |            |                |            |                     |            |                        |            |            |            |            |            |  |  |  |  |  |

 

10

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**Note 3–Acquisition**

 

Watchit Media acquiredOnSite Media, Inc, a Nevada corporation, on March 2, 2004. In the acquisition,OnSite was merged with and into Watchit Media USA, Inc. a wholly ownedsubsidiary of Watchit Media, or “Watchit”. OnSite was a ten year old Companythat developed enabling digital technologies and production services aimed atproviding complete solutions for video content creation, distribution,scripting and playback for companies with digital display channels andnetworks. OnSite historically provided this software and service offerings tothe hospitality and gambling industries. This is called narrowcasting.

 

Narrowcasting technologypresents dynamic, compelling motion media that influences the actions ofcaptive audiences. Promotional messages for hotel in-room channels, presentingcommercial messages to casino entertainment facilities and outdoor signage hadbeen the primary business of OnSite. In addition, OnSite developed a uniqueInternet media creation software application which we believe will give thenewly formed Watchit a competitive advantage. Watchit Media intends to leverageits marketing expertise, resources and infrastructure to enhance Watchit’scurrent services, launch new proprietary television programs, add greater valueto current client relationships, add clients in the hospitality market, andexpand to new markets.

 

The Company believes theconvergence of Internet, wireless and video media will soon become a major partof the technology landscape. The Company believes Watchit Media’sinfrastructure, experience in developing wireless and Internet businessapplications and its system integration expertise are an excellent fit with therapidly evolving narrowcasting market.

 

The aggregateconsideration paid for the acquisition was $3,307 (10,679,608 shares of theCompany’s Common Stock issued at fair value of $1,815 and based on the averageclosing price of the Company’s Common Stock for a few days prior to and afterthe signing of the definitive agreement and related public announcement topurchase the business on November 25, 2003, warrants to purchase 5,339,803 sharesof the Company’s Common Stock value using the Black-Scholes with the followingassumptions: (1) risk-free interest rate of 1.95%, (2) a dividend yield of 0%,(3) volatility factor of the expected market price of the Company’s CommonStock of 175%, and (4) a weighted average expected life of 2 years, thatresulted in a valuation of $676, cash consideration of $505 and transactioncosts of $501). Transaction costs of $501 include $195 paid for registration ofsecurities in connection with the acquisition which were netted against theissuance of the shares. Liabilities assumed were approximately $247, andtangible assets acquired were approximately $96. The Company recognized totalintangible assets of $3,458 resulting from the acquisition.

 

The Company has obtainedan independent valuation for the aggregate consideration paid for theacquisition as follows.

 
| Total  liabilities assumed         |   | $      | (247   | )      |
|------------------------------------|--------|--------|--------|--------|
| Total tangible assets acquired     |   | 96     |   |
| Identifiable intangible assets:    |   |   |   |
| Software                           |   | 73     |   |
| Customer  contracts                |   | 98     |   |
| Archived content  video library    |   | 695    |   |
| Goodwill                           |   | 2,592  |   |
| Total aggregate consideration paid |   | $      | 3,307  |   |

 

Immediately following theclose of the transaction, with the issuance of 10,679,608 shares of WatchitMedia Common Stock, the former OnSite stockholders owned 43% of the totalshares of Watchit Media Common Stock then outstanding.

 

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The results of theacquired business were included in the Company’s results of operations from itsacquisition date, March 2, 2004.

 

*CaliforniaVisitors Network*

 

Pursuant to an AssetPurchase Agreement dated September 15, 2005, between the Company and CaliforniaVisitors Network, the aggregate consideration paid to California VisitorsNetwork was $126 (202,667 shares of the Company’s Common Stock issued at fairvalue of $30, based on the average closing price of the Company’s Common Stockon a few days prior to and after the signing of the Asset Purchase Agreementand cash considerations of $66 and future cash payments payable of $30).Liabilities assumed were $10.

 

The Company has accountedfor the aggregate consideration paid for the acquisition as follows:

 
| Liabilities  assumed                |       | $   | (10    | )      |
|-------------------------------------|------------|-----|--------|--------|
| Goodwill                            |       | 136 |   |
| Total aggregate  consideration paid | ** ** | $   | 126    |   |

 

The changes in carryingamounts of goodwill and other intangibles for the three months ended March 31,2006 were as follows.

 
| ** **                   | ** ** | **Goodwill** | ** ** | **Other   Intangibles** | ** ** |
|------------------------------|------------|--------------|------------|-------------------------|------------|
| Balance at December 31, 2005 |       | $            | 2,728      |                    | $          | 607 |   |
| Amortization expense         | ** ** | **—**   |       | (35                     | )          |
| Balance at March  31, 2006   | ** ** | **$**        | **2,728**  | ** **              | $          | 572 |   |

 

The Company has ascribeduseful lives to the identifiable intangible assets that range from 2 to 20years. In the three months ended March 31, 2006 and 2005 the Company recordedamortization on the identifiable intangible assets of $35 and $35, respectively.

 

**Note 4 –Restructuring Programs**

 

In September 2001, aspart of the Company’s efforts to streamline its operations commensurate withits revenue base, the Company identified opportunities to reduce its coststructure. Accordingly, the Company adopted an exit plan which resulted in arestructuring charge of $2,436 during the year ended December 31, 2001. TheSeptember 2001 plan included provisions for severance of approximately 145management and operating staff ($1,034) as well as closure costs associatedwith a plan to consolidate or dispose of certain locations ($1,402). TheSeptember 2001 plan did not meet the requirements in order to accrue employeeseverance costs as of a commitment date, and these severance costs that did notprovide a future benefit were charged to operations when due and payable.

 

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The following summarizesthe activity and balances for these restructuring programs for the three monthsended March 31, 2006.

 
| ** **                                       | ** ** | **September 2001**  | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **Facilities   Closure** | ** ** |
| Balance at December 31, 2005                     |       | $                        | 595        |   |
| Spending, net of sublease receipts on facilities |       | (1                       | )          |
| Balance at March  31, 2006                       |       | $                        | 594        |   |

 

**Note 5 –Discontinued Operations**

 

Prior to December 31,2004, the Company entered into a plan to divest its IT services segment. Thefollowing financial data reflects the summary of operating results for thethree months ended March 31, 2005. The sale of the IT services segment wascompleted on July 15, 2005

 

**Summaryof Operating Loss from Discontinued Operations:**

 
| ** **                                   | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                                           | ** ** |
| Revenues                                     |       | $                                                                  | 937        |   |
| Cost of revenues                             |       | 514                                                                |       |
| Gross profit                                 |       | 423                                                                |       |
| Selling, general and administrative expenses |       | 1,095                                                              |       |
| Operating loss                               |       | (672                                                               | )          |
| Total other  expense                         |       | —                                                             |       |
| Loss before  income tax expense              |       | (672                                                               | )          |
| Income tax expense                           |       | —                                                             |       |
| Net loss                                     |       | $                                                                  | (672       | ) |

 

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**Note 6 –Weighted Average Number of Shares Outstanding**

 

There were no reconcilingitems between the numerator and denominator used to compute basic and dilutedloss per share for the periods presented in the condensed consolidatedstatements of operations. The Company had outstanding stock options, andwarrants of 17,416,088 and 10,310,805 at March 31, 2006 and 2005 respectively,that were not included in EPS for those relevant periods because the Companyreported a loss from continuing operations resulting in an antidilutive effect.

 

***Note 7 – Stock Based Compensation***

 

### ***Long-termIncentive Plan***

 

The Company maintains the1998 Long-Term Incentive Plan (the “1998 Plan”) and the 2000 Long-TermIncentive Plan (the “2000 Plan”). The 1998 Plan was adopted as a replacement tothe Company’s 1995 Long-Term Incentive Plan (the “1995 Plan”). No furtherawards may be granted under the 1995 Plan, although awards granted prior to theadoption of the 1998 Plan remain outstanding under the 1995 Plan in accordancewith their terms. The 2000 Plan is similar to the 1998 Plan, except that (i)awards under the 2000 Plan are to be made primarily to employees who are notofficers or directors, (ii) the 2000 Plan does not contain a limit as to thenumber of shares that may be subject to outstanding awards granted eitherindividually or in the aggregate (whereas the 1998 Plan contains 750,000 perindividual annual limit, and aggregate limit of 18% of total outstandingshares), and (iii) incentive stock options (ISOs) cannot be granted under the2000 Plan. Of the non-qualified options granted to date, a majority isgenerally exercisable beginning one year from the date of the grant incumulative yearly amounts of 25% to 33% of the shares under option and allexpire ten years from the date of the grant. Under the provisions of the plans,stock-based awards are granted at terms and prices determined by theCompensation Committee of the Board of Directors as defined in each plan,except for grants of 10,000 stock options or less, which are administered bythe Chief Executive Officer of the Company.

 

A summary of optiontransactions is described in the table below. All options granted in theperiods below are non-qualified and were granted with exercise prices no lessthan the fair market value of the underlying stock on the date of the grant.

 
| ** **                       | ** ** | **Number of Shares** | ** ** | **Weighted Average   Exercise Price** | ** ** |
|----------------------------------|------------|----------------------|------------|---------------------------------------|------------|
| Outstanding at December 31, 2005 |       | 5,419,810            |       | $                                     | 0.19       |   |
| Granted                          |       | 1,575,000            |       | $                                     | 0.07       |   |
| Cancelled                        |       | (1,214,936           | )          | $                                     | 0.24       |   |
| Outstanding at  March 31, 2006   |       | 5,379,874            |       | $                                     | 0.14       |   |

 

The total compensationcost not yet recognized as of March 31, 2006 related to non-vested options was$107,874 which will be recognized over 3 years.

 

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**Note 8 –Segment Information**

 

Prior to March 2, 2004,Watchit Media was organized into one reportable segment, IT services. Effectivewith the acquisition of OnSite Media, Inc. on March 2, 2004, the Company becameorganized into the following two reportable segments, to align internalmanagement with current service offerings:

 

*ITservices*. IT software and consulting services to businesseswith complex IT operations in addition to maintenance, support and hosting onsoftware products it has licensed.

 

*Narrowcasting.*Creative media development, private venue video programming,installation and integration of Internet protocol (IP) digital technologypresenting video content, distribution, scripting and playback via Broadband toprivate video networks.

 

Prior to December 31,2004, the Company committed to a plan to discontinue its IT services segment.Accordingly, these accompanying consolidated financial statements have beenprepared on a discontinued operations basis effectively reporting theNarrowcasting segment as continuing operations (see accompanying condensedconsolidated statements of operations), and the IT services segment asdiscontinued operations (see Note 5).

 

**Note 9 –Subsequent Events**

 

*Issuancesof Common Stock –*

 

On April 14, 2006, theCompany obtained $20,000 from an accredited investor, who is not a relatedparty, as part of the private placement of the Company’s unregistered stock.333,333 shares of the Company’s unregistered common shares were issued for thistransaction.

 

On April 28, 2006, theCompany obtained $500,000 from two accredited investors, who are not a relatedparty, as part of the private placement of the Company’s unregistered stock. 5,555,555shares of the Company’s unregistered common shares and 2,777,778 warrants wereissued for this transaction.

 

On May 16, 2006, theCompany obtained $125,000 from two accredited investors, who are not a relatedparty, as part of the private placement of the Company’s unregistered stock.1,250,000 shares of the Company’s unregistered common shares and 625,000warrants were issued for this transaction.

 

On May 5, 2006, theCompany filed form SB-2 with the Securities and Exchange Commission registeringall shares and warrants that were to be issued for all funding that wasreceived prior to May 5, 2006. On May 12, 2006, the SEC informed the Companythat the SEC does not plan on reviewing the form SB-2 and the Company mayproceed with requesting effectiveness. The Company plans to do so promptly. 

 

*Other*

 

On May 11, 2006, theCompany received a certified letter from CAPCO, its financing Company, datedMay 3, 2006, providing a formal notice of termination of its contract, inaccordance with paragraph 26 of the Contract of Sale Security Agreementexecuted by Watchit Media, Inc. and CAPCO Financial Company Inc. on October 8,2005. The date of termination is schedule to occur on or near June 4, 2006. TheCompany is in discussions with other traditional factoring companies. CAPCO hasstated that will help with a smooth transition to a new factoring Company. Asof May 18, 2006, the Company has an outstanding balance due CAPCO ofapproximately $42, while CAPCO is holding as collateral, total accountsreceivable of Watchit Media totaling approximately $320 upon which will bereleased upon payment of the $42 plus any accrued interest if the loan were tobe paid on May 18, 2006. The final loan payoff amount and related collateral tobe released, will depend on the loan activity between May 18, 2006 and thefinal date of the termination. Management is actively searching for financingto fund its longer term plans of growth.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Except for statements ofhistorical fact contained herein, any statements contained in this report maybe deemed to be forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. For example, words such as “may,” “will,” “should,”“estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,”“plans,” “expects,” “intends” and similar expressions are intended to identifyforward-looking statements. All such forward-looking statements are based uponcurrent expectations that involve risks and uncertainties. The Company’s actualresults and the timing of certain events may differ significantly from theresults discussed in the forward-looking statements. Factors that might causeor contribute to such a discrepancy include, but are not limited to, thosediscussed under “Risk Factors” in The Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2004 and other filings made with theSecurities and Exchange Commission. The following discussion is qualified inits entirety by, and should be read in conjunction with, the more detailedinformation set forth in our financial statements and the notes theretoincluded elsewhere in this filing. All forward-looking statements included inthis report are based upon information available to The Company as of the datethereof, and The Company assumes no obligation to update any of suchforward-looking statements.

 

The Company was formed inFebruary 1993 to acquire, own and operate IT services businesses. The Companywas a non-operating entity until 1996 when it first began to acquirebusinesses. The Company historically operated on an April 1 to March 31, fiscalyear. In July 2000, the Company changed its fiscal year to December 31,resulting in a nine-month transition period from April 1, 2000 through December31, 2000. In 2004, the Company was organized into two reportable segments, ITservices and narrowcasting (which became effective with the acquisition ofOnSite Media, Inc. on March 2, 2004). The results of OnSite Media, Inc. havebeen included in the Company’s results from its acquisition date. Prior toDecember 31, 2004, the Company entered into a plan to divest its IT servicessegment. Accordingly, the financial information on the Quarterly Report hasbeen restated to present as discontinued operations the Company’s IT servicessegment for all periods presented.

 

On a continuingoperations basis, Watchit Media provides narrowcasting services which includesInternet protocol (IP) technologies and production services for video content,distribution, scripting and playback on digital display video channels andnetworks, as well as maintenance, support and contract services on software andhardware products it licenses. The Company provides these services primarily togaming and hospitality businesses. Narrowcasting, maintenance and supportservices are provided under term contracts of which most are one year orlonger. These contracts are renewable at the discretion of our clients.

 

The Company recognizesrevenue for the subscription of maintenance, support and contract services onsoftware and hardware products it licenses to its narrowcasting clients as theCompany performs the services. Revenues earned for software license sales andservice contracts are recorded based on the provisions of AICPA SOP 97-2, “ *Software Revenue Recognition*,” as amended,which shares the basic criteria described above. For each element in a softwarearrangement (e.g. license, maintenance, and services), the amount of revenuerecognized is based upon vendor specific objective evidence of fair value usingthe residual method. Revenue for production services for video content,distribution, scripting and playback on digital display video channels andnetworks on either a time and materials basis, when services are provided orwhere pursuant to fixed-fee contract, the revenue is generally recognized asservices are rendered on the percentage-of-completion method of accountingbased on hours incurred to total estimated labor hours to complete. Revenuesinclude reimbursable expenses charged to and collected from clients.

 

The Company’s principalcosts are professional compensation directly related to the performance ofservices and related expenses. Gross profits (revenues after professionalcompensation and related expenses) are primarily a function of the number ofgaming and hospitality properties that subscribe to the narrowcasting servicesas well as the number of channels for different narrowcasting services eachproperty elects to subscribe to and the level of video production servicepurchased by the client. Gross profits can be adversely impacted if clients donot renew contracts, if the Company is not effective in managing its serviceactivities, or if fixed-fee engagements for production services are notproperly priced.

 

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Operating income can beadversely impacted by increased administrative staff compensation and expensesrelated to streamlining or expanding the Company’s business, which may beincurred before revenues or economies of scale are generated from suchinvestment.

 

**OVERVIEWOF 2006 AND 2005**

 

In the years leading upto 2004, we strategically shifted from providing general IT services andsolutions to a targeted approach to offering mobile workforce management andWeb services. We changed our go-to-market strategy to better focus our resourcesand leverage our experience and solid client base in these areas. Our decisionto do this was reinforced at the time by market research, financial researchand our own research and analysis indicating that mobile workforce managementand Web services were the next emerging growth markets. Our solutions utilizedbroadly accepted as well as cutting edge technologies. We spent considerabletime on the development of these core competencies after divesting the majorityof our IT staffing business in 2000. In addition, the Company carefullyassessed and exited a number of solutions and service offerings that were notcore to the principal service offerings outlined above.

 

While executing thisstrategy we believed we were focused on offering services that would help usincrease revenue in the near term. From 2001 through the third quarter of 2003the Company continued to invest heavily in a large scale sales, marketing andbusiness development organization working to capture new business. In September2002, the Company hired a marketing executive to develop and implement a moreformalized and systematic marketing program for the Company because of thedifficulty we were having in selling new business to new clients. Marketingprograms re-designed and put in place by early 2003 offered promising resultswhen measured against prior year sales opportunity pipeline and businessbacklog. By the second quarter of 2003, the Company gained more confidence inits marketing program and saw an unprecedented number of prospect and clientproposals. Nevertheless, throughout 2003 we continued to be disappointed byprospects and clients either delaying decisions to initiate projects orpursuing lower cost off-shore technical resource to executing their projects.In spite of the Company’s investments in its selling organization, we were notsuccessful in signing new business with companies we had not done business withbefore. We did, however, continue to sign new contracts with existing clients.

 

In August of 2003, itbecame clear to us that a number of opportunities that only a few months beforelooked promising were not going to close. The Company performed an in-depthreview of each opportunity and concluded that businesses were reticent to usediscretionary expenditures to invest in mobile workforce and Web servicetechnologies (or other new projects) given the fact that their current ITenvironments operated satisfactorily. In addition, fearful of continuing pooreconomic conditions and market pressures, we observed that many of theprospects that decided to pursue projects did so with larger, bettercapitalized firms than Watchit Media.

 

It became evident thatthe outlook for spending in IT services would continue to be uncertain withoutany clear indication of when a turnaround could be expected. Accordingly, inAugust 2003, the Company terminated the majority of its senior executive staffalong with most of the sales and business development organization. At the sametime we aggressively engaged our existing clients and committed ourselves tosupporting their project requirements. In some cases we have been successful insecuring longer term commitments. By scaling back expenses and focusingintensely on generating business from our long term clients we began to stabilizeour revenue trend allowing us to move forward in our attempt to restoreprofitability and positive cash flow.

 

Throughout the remainderof 2003, the Company continued to reduce headcount and looked closely atexpense activity to scale back and streamline operating costs in line withrevenue. The Philadelphia-based operation that supports Watchit Media’s salesforce automation application FastTrack has achieved stable revenue over thepast several years and our clients continue to give us high marks for performanceand client service. In addition, the core team responsible for our customsoftware development activities is helping us to take advantage of recurringprojects with existing clients. By keeping only the top sales accountexecutives and account managers, we have lowered our selling cost and improvedour client relationships and retention.

 

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In April 2003, our ChiefExecutive Officer, James Lavelle, sent a letter to our stockholders indicatingthe Company’s intention to engage in merger and acquisition activities in orderto help improve Watchit Media’s prospects for the future and increase ourscale. As a matter of course since we started our Company in 1996 andsuccessfully executed an aggressive merger and acquisition strategy throughearly 1999, we believed this strategy would help us improve our prospects. Weresearched and analyzed a variety of vertical markets that could provide newgrowth opportunities for us through merger or acquisition. In mid-2003 WatchitMedia signed a letter of intent to acquire a field force automation firm. After90 days of due diligence, we decided not to consummate the transaction.

 

In September 2003,Watchit Media engaged in a dialog with a Las Vegas based narrowcasting Company,OnSite Media, Inc. The combination of Watchit Media’s deep history in Internet,media and wireless technologies and OnSite’s strength in driving video contentto high growth venues in the gaming and hospitality industries lookedpromising. Watchit Media entered into a definitive agreement to acquire OnSiteMedia, Inc. on November 24, 2003, and closed the acquisition transaction onMarch 2, 2004. By integrating OnSite’s business with Watchit Media’sinfrastructure, and by utilizing our public Company know how to position us forthe future, we have set about executing a strategy that we believe will allowus to play an important role in the convergence of Internet, video and mobiletechnology. This is a growing; fast paced market in which we believe theability to integrate these technologies will help us to differentiate us frommany other companies.

 

Upon completion of theacquisition, OnSite Media was renamed Watchit Media, Inc., and is now awholly-owned subsidiary of Watchit Media, Inc. The newly acquired business wasimmediately integrated into the Watchit Media infrastructure from March throughOctober 2004. Our Board of Directors carefully followed and evaluated thefinancial and operating performance of our Company’s two business segments. Whilethe IT services and solutions business continued to struggle, Watchit Mediaperformed well and experienced significant revenue growth, together withstabile to increasing gross margin performance. In addition, Watchit’s near andlonger term business opportunities appeared to indicate the strong possibilityof future revenue growth.

 

 InNovember 2004, we announced our plan to divest our entire IT services andsolutions business and change our name to Watchit Media, Inc. allowing usto focus all of our attention on narrowcasting. On July 13, 2005, theCompany’s stockholders approved the sale of the IT services business located atBroomall, Pennsylvania, the remaining component of our discontinued operations,pursuant to an Asset Purchase Agreement, dated as of April 1, 2005, asamended on June 27, 2005 (the “Asset Purchase Agreement”) entered intobetween the Company and certain of its subsidiaries and FastTech IntegratedSolutions, LLC, an affiliate of Beverly Hills, California-based private equityfirm Skyview Capital, LLC. The transaction was completed on July 15, 2005.Pursuant to the Asset Purchase Agreement, aggregate consideration for thebusiness included: cash at closing of $2,300, subject to closing dateadjustments, and an earn-out of up to $1,450 if certain future revenue targetsare attained over the three years following completion of the sale.

 

**ThreeMonths Ended March 31, 2006 Compared to Three Months Ended March 31, 2005**

 

***Revenues***

 

Revenues increased $291or 114%, to $546 in the three months ended March 31, 2006, from $255 in thethree months ended March 31, 2005. Effective with the acquisition of OnSiteMedia, Inc, March 2, 2004, the Company commenced reporting revenues under itsnarrowcasting segment. The increase in revenues resulted from stabilizingmonthly recurring contract fee based revenue and having a quarterly uplift in2006 with larger platform installations with premier casinos clients.

 

Our narrowcasting clientsretain us to manage a part of their television system infrastructure, producevideo content pertinent to their brand, marketing communications and hotelproperty amenities, and present this content on their Private Video Networks.We have annual renewable contracts with our clients for managing the computerhardware that interfaces with their television systems and, in some cases,their

 

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information systeminfrastructure. Watchit Media charges a base monthly subscription fee for theseservices. Currently, Watchit derives over 35% of its revenue from base monthlysubscription fess under these recurring revenue contracts.

 

In addition, our clientspay us on a time and materials basis for the production of video content. Inthe gaming and hospitality industry, our clients tend to require frequentchanges to the content we produce for them. Video content pertaining to theirentertainment, casino games, cross promotions, and activities are among thedynamic video content we produce.

 

***Gross Profit***

 

Gross profit increased$96 or 68%, to $238 in the three months ended March 31, 2006, from $142 in thethree months ended March 31, 2005. Effective with the acquisition of OnSiteMedia, Inc, March 2, 2004, the Company commenced reporting revenues under itsnarrowcasting segment. The increase in gross profit resulted from higherrevenues offset by a higher mix of hardware platform installations which haveslightly lower margins than the monthly service contracts.

 

As a percentage ofrevenues, the gross margin decreased to 44% in the three months ended March 31,2006, from 56% in the three months ended March 31, 2005. The decrease in grossmargin was the result of the new revenue product mix which contained a higherpercentage of hardware installations passed through to clients with a nominalmark-up which have lower margins than service and labor margins.

 

***Selling, General and Administrative Expenses***

 

Selling, general andadministrative expenses increased $700 or 139%, to $1,204 in the three monthsended March 31, 2006, from $504 in the three months ended March 31, 2005.Effective with the acquisition of OnSite Media, Inc, March 2, 2004, the Companycommenced reporting revenues under its narrowcasting segment. The increase inselling, general and administrative expenses was the result of a different mixof staff, marketing programs and development of new proprietary videoprogramming not yet introduced to clients. In addition, corporate selling,general and administrative expense was allocated between the narrowcasting andIT services segment. Upon completion of the divestiture of the remainingcomponent of the IT services segment on July 15, 2005, corporate selling,general and administrative expenses were allocated solely to the narrowcastingsegment.

 

***Other Income (Expense)***

 

Other income (expense)consists of interest income and interest expense.

 

Interest expense, net ofinterest income, was $14 for the three months ended March 31, 2006 compared to$8 for the three months ended March 31, 2005. The increase in net interestexpense was the result of lower cash balances on hand coupled with interestexpense on secured borrowings.

 

***Loss from Discontinued Operations***

 

Discontinued operationscomprised operations associated with the IT services segment. Loss fromdiscontinued operations was $672 for the three months ended March 31, 2005compared to $0 for the three months ended March 31, 2006.  The sales ofthe IT services and solutions business transaction was completed onJuly 15, 2005.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

In recent years, theCompany has financed its operations principally through its own cash resources.

 

Cash used by operatingactivities was $421 and $425 for the three months ended March 31, 2006 andMarch 31, 2005, respectively. In the three months ended March 31, 2006, theprimary sources of cash provided by operating activities were $515 increase inaccounts payable, $63 of Common Stock issued for services and $60 ofdepreciation and amortization, offset by $991 net loss and $149 increase inaccounts payable. In the three months ended March 31, 2005 the primary sourcesof cash provided

 

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by operating activitieswere $502 increase in accounts payable, $88 in prepaid expenses and othercurrent assets and $61 in depreciation and amortization, offset by $975 netloss

 

Cash used by investingactivities was $17 for the three months ended March 31, 2006, compared to cash usedby investing activities of $38 for the three months ended March 31, 2005. Inthe three months ended March 31, 2006, $17 was used to acquire property andequipment. In the three months ended March 31, 2005 $38 was used to acquireproperty and equipment.

 

Cash provided byfinancing activities was $427 in the three months ended March 31, 2006 comparedto $44 provided from financing activities in the three months ended March 31,2005. In the three months ended March 31, 2006, $200 was provided from theissuance of Common Stock and warrants, $81 from specified borrowings, and $165from issuance of debt, offset by $19 of cost incurred in connection with theissuance of Common Stock and warrants. In the three months ended March 31, 2005,$47 was used for costs incurred in connection with the issuance of stock andwarrants $64 for the repayment of secured borrowings, and $155 in proceeds fromissuance of Common Stock and warrants.

 

Management has carefullyforecasted its results of operations and financial position through March 31,2007, and has determined that the remaining cash on hand, together with cashavailable from the line of credit (see discussion in subsequent events,regarding notice from CAPCO) and proceeds from the sales of Common Stock toaccredited investors, and proceeds from the sale of the IT services segment,will provide adequate cash to fund its anticipated working capital needs. Inthe event circumstances arise that are not factored into the forecast,management will take further action to streamline operations and to continuelooking for financing alternatives.

 

The following tablereflects our contractual cash obligations as of March 31, 2006, excludinginterest, due over the indicated periods.

 
| ** **                                   | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| **Contractual Cash Obligations:**            | ** ** | **Total**                  | ** ** | **Less than  1 Year** | ** ** | **1 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **After 5   Years** | ** ** |
| Operating leases, net of sublet arrangements |       | $                          | 858        |   | $ | 769 |   | $ | 89 |   | $ | — |   | $ | — |   |
|                                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**CRITICALACCOUNTING ESTIMATES**

 

**Allowancefor Doubtful Accounts**

 

The Company provides anallowance for potentially uncollectible accounts receivable under theprovisions of SFAS No. 5, “Accounting for Contingencies,” in the ordinarycourse of business. The allowance is derived as the result of periodic reviewsof aged and known problem accounts during each quarter. In addition, theCompany reserves for unknown issues in its receivables at the balance sheetdate using a formula consistent from quarter to quarter. Management believesthat its approach is appropriate to reserve for potentially uncollectiblereceivables. If management had taken another approach to developing itsreserve, the allowance for doubtful accounts may have been different than thatreported.

 

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**RevenueRecognition**

 

The Company recognizesrevenue for time and materials contracts when there is evidence of anagreement, a fixed or determinable fee, its ability to collect is reasonablyassured, and delivery has occurred. Revenues exclude reimbursable expensescharged to and collected from clients. Revenues pursuant to fixed-fee contractsare generally recognized as services are rendered on the percentage-of-completionmethod of accounting based on hours incurred to total estimated labor hours tocomplete. Revenues earned for software license sales and service contracts arerecorded based on the provisions of AICPA SOP 97-2, “ *Software Revenue Recognition,*“ asamended, which shares the basic criteria described above, except its ability tocollect is probable rather than reasonably assured.

 

**Accountingfor Income Taxes**

 

The Company accounts forincome taxes under SFAS No. 109, “*Accountingfor Income Taxes.*” This pronouncement requires using an asset andliability approach to recognize deferred tax assets and liabilities for the taxconsequences of temporary differences by applying enacted statutory tax ratesto differences between the financial statement carrying amounts and the taxbasis of existing assets and liabilities. The Company has not given benefit toany deferred tax assets or net operating losses in the previous three fiscalyears due to uncertainty of realizing these assets in future periods. Inaddition, the financial statements have provided for certain tax positionstaken by the Company in certain tax periods where the statute of limitationsstill applies.

 

**Stock-BasedCompensation**

 

On January 1, 2006 ouraccounting policy related to stock option accounting changed upon our adoptionof Statement of Financial Accounting Standards (“SFAS”) no. 123 (R), “ShareBased Payment. “SFAS 123 (R) requires us to expense the fair value of employeestock options and other forms of share-based compensation. Under the fair valuerecognition provisions of SFAS 123 (R), share-based compensation cost isestimated at the grant date based on the value of the award and is recognizedas expense ratably over the requisite service period of the award. Determiningthe appropriate fair value model and calculating the fair value of share-basedawards requires judgment, including estimating stock price volatility, therisk-free interest rate, forfeiture rates and the expected life of the equityinstrument. Expected volatility utilized in the model is based on thehistorical volatility of the Company’s stock price and other factors. Therisk-free interest rate is derived from the U.S. Treasury yield in effect atthe time of the grant. The model incorporates forfeiture assumptions based onan analysis of historical data. The expected life of the 2006 grants is derivedfrom historical and other factors. In accordance with the SFAS No. 123 (R), werecorded $36 of share-based compensation in the three-month period ended March31, 2006. Before 2006, we accounted for share-based compensation to employeesin accordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations and followed thedisclosure requirements of SFAS No. 123 (R), “Accounting for Sock-BasedCompensation.”  Thus before the firstquarter of 2006, we did not record any significant compensation cost related toshare-based awards. Periods before our first quarter of 2006 were not restatedto reflect the fair value method of expensing stock options. The impact ofexpensing stock awards on our earnings, is and will continue to be, notsignificant and is further described in Note 1 to the notes to the unauditedconsolidated financial statements.

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

The Company’s policy isto invest its cash in a manner that provides the Company with the appropriatelevel of liquidity to enable the Company to meet its current obligations,primarily accounts payable, capital expenditures and payroll.

 

The Company has investedits existing cash in highly liquid money market accounts and does not usederivative financial instruments, derivative commodity instruments or othermarket risk sensitive instruments, positions or transactions. Accordingly, theCompany believes that it is not subject to any material risks arising fromchanges in interest rates, foreign currency exchange rates, commodity prices,equity prices or other market changes that affect market risk sensitiveinstruments.

 

On August 19, 2002, theCompany acquired Convertible Redeemable Preferred Stock in BluebookInternational Holding Company (“Bluebook”). The Company accounted for thepreferred stock as a trading

 

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security with changes infair value recorded in the consolidated statements of operations. On May 4,2004, the Preferred Stock was fully converted to Common Stock of Bluebook. TheCompany continues to account for the investment at fair value. Accordingly,subsequent to August 19, 2002, the Company was exposed to market risk relatedto changes in the market price of the Common Stock in Bluebook.

 

**Item4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

An evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of the end of the period covered by this report was carriedout by the Company under the supervision and with the participation of theCompany’s management, including the Chief Executive Officer and Chief FinancialOfficer. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures as of the end of the period covered by this report, were designedand were functioning effectively to provide reasonable assurance that theinformation required to be disclosed by the Company in reports filed under theSecurities and Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. A controlssystem, no matter how well designed and operated, cannot provide absoluteassurance that the objectives of the controls systems are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a Company have been detected.

 

*Changein Internal Control over Financial Reporting*

 

No change in the Company’sinternal control over financial reporting occurred during the Company’s mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

We are, from time to time,a party to litigation arising in the normal course of our business.

 

In June 2005, Advance atBranchburg, LLC (“Advance”) filed a lawsuit against us in the Superior Court ofNew Jersey, Law Division, Somerset County. The lawsuit arises out of a commerciallease agreement between Advance as landlord and the Company as tenant.Specifically, Advance alleges that we breached the lease agreement by failingto make base and additional rent payments for the months of March 2005 to thepresent. Advance seeks payment of all amounts allegedly due under the lease,including base rent, late charges, interest and attorneys’ fees and costs.Advance also seeks “loss of bargain” damages, consisting of all rent duethrough the end of the lease term, reduced to present value using an interestrate of 6% per annum. The lawsuit does not specify the specific amount ofdamages sought. At December 31, 2005, we have accrued $595 related to the leaseobligation, which is classified as part of restructuring liabilities. The accrualcovers obligations for base and additional rent and late charges, offset byestimated potential rent from the sublet of the facility. In addition, wemaintain a $180 security deposit with Advance in connection with the lease,classified as part of other long term assets.

 

During 2005 a claim wasfiled against us stating that we breached an employment contract by terminatingan employee without cause. The claimant’s demand is for $170 plus attorneys’fees and costs. We believe that the claim is without merit, however if theclaimant were to prevail the exposure could range from $0 to as much as $250with attorney fees. We carry insurance to cover the cost of these types ofclaims but as of the date of this report, we are unsure of the amount thatwould be covered by insurance, if any.

 

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**Item1A Risk Factors**

 

For information regardingfactors that could affect the Company’s results of operation, financialcondition and liquidity, see the risk factors discussion provided under “RiskFactors” in Item 1A of the Company’s Annual Report on Form 10-K for the yearended December 31, 2005. See also, “Forward-Looking Statements” included inthis Quarterly Report of Form 10-Q.

 

**Item2. Unregistered Sale of Equity Securities and Use of Proceeds**

 

On February 20, 2006, theCompany issued a 15% Convertible Promissory Note (the “Note”) to James Lavelle,it’s Chairman and CEO, in exchange for a $65 infusion by Mr. Lavelle to theCompany. The Note has a conversion price of $.07 per share, for each Commonshare issued upon conversion of the Note. In addition to the conversion shares,Mr. Lavelle received warrants. One warrant will be issued for each common shareconverted. Each warrant represents the right to purchase two additionalunregistered shares of Common Stock at a price of $.15 per share. The warrantshall be immediately exercisable upon issuance and shall expire three yearsfrom the date of issuance.

 

On March 2, 2006, theCompany obtained $100 from a private investor, who is a related party (theCompany’s Public Relations Manager), in a first round of short term financing(the “Bridge”) in the form of a short term note bearing an interest rate of1.5% per annum, plus 500,000 shares of the Company’s unregistered common shares.

 

On March 16, 2005, theCompany obtained $200 from a private equity fund, who is not a related party,in a first round of a private placement of the Company’s unregistered stock.3,333,334 shares of the company’s unregistered common shares and warrants wereissued for this transaction. The same investor has committed to invest another$100 in the next round of funding scheduled to occur in the second quarter of2006.

 

All proceeds received inconnection with the above transactions are applied to working capital.

 

**Item3. Defaults upon Senior Securities**

 

None

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

None

 

**Item5. Other Information**

 

Not applicable

 
| **Item  6.** |   | **Exhibits** |
|--------------|--------|--------------|
|         |   |         |
| (a)          |   | Exhibits     |
|         |   |         |
|         |   | 31.1         | Rule 13a-14(a)  Certification of Chief Executive Officer |
|         |   |         |   |
|         |   | 31.2         | Rule 13a-14(a)  Certification of Chief Financial Officer |
|         |   |         |   |
|         |   | 32.1         | Certification pursuant  to 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 of Chief Executive Officer. Section 1350. |
|         |   |         |   |
|         |   | 32.2         | Certification pursuant  to 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 of Chief Financial Officer. Section 1350. |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|               | **WATCHIT  MEDIA, INC.**                   |
|--------------------|--------------------------------------------|
|               |                                       |
| Date: May 22, 2006 | **/s/  John C. Dong**                      |   |
|               | **John  C. Dong**                          |
|               | **Executive  Vice President,**             |
|               | **Chief  Financial Officer and Treasurer** |

 

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