##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                    to
 Commission File Number 0-27412
 
 WATCHIT MEDIA, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-3173918(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 3485 W. Harmon Avenue, Las Vegas, Nevada 89103
 (702) 740-1700
  
 o þ
  o o þ
 o þ




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##### Table of Contents



WATCHIT MEDIA, INC.
 INDEX
 Part I  Financial InformationItem 1.
    
    Financial StatementsWatchit Media, Inc.Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPart II  Other InformationItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote to Security HoldersItem 5.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-KSignatureExhibitsEX-31.1: CERTIFICATIONEX-32.1: CERTIFICATION
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Item 1. Financial Statements
 
 WATCHIT MEDIA, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    11Refundable income taxes
    
    
    
    
    
    
    13Accounts receivable, net of allowance for doubtful accounts
of $54 and $54, and $325 and $368 pledged as collateral
security, respectively
    
    
    327
    
    
    
    340Prepaid expenses and other current assets
    
    
    
    
    
    
    92Total current assets
    
    
    327
    
    
    
    456Property and equipment, net
    
    
    144
    
    
    
    177Goodwill
    
    
    2,728
    
    
    
    2,728Other intangibles, net
    
    
    537
    
    
    
    607Other assets
    
    
    
    
    
    
    182Total assets
    
    $
    3,736
    
    
    $
    4,150LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank Overdraft
    
    $
    41
    
    
    $
    Secured borrowings
    
    
    325
    
    
    
    287Accounts payable
    
    
    1,354
    
    
    
    801Accrued compensation and related payroll liabilities
    
    
    253
    
    
    
    269Restructuring liabilities
    
    
    594
    
    
    
    595Other accrued liabilities
    
    
    464
    
    
    
    243Debt
    
    
    264
    
    
    
    Total current liabilities
    
    
    3,295
    
    
    
    2,195Commitments 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
    
    
    
    289Additional paid-in capital
    
    
    83,079
    
    
    
    82,785Accumulated deficit
    
    
    (82,862
    )
    
    
    (81,006
    )Treasury stock
    
    
    (113
    )
    
    
    (113
    )Total stockholders equity
    
    
    441
    
    
    
    1,955Total liabilities and stockholders equity
    
    $
    3,736
    
    
    $
    4,150
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WATCHIT MEDIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    
    658
    
    
    
    609
    
    
    $
    1,241
    
    
    $
    864Cost of revenues
    
    
    308
    
    
    
    232
    
    
    
    619
    
    
    
    345Gross profit
    
    
    350
    
    
    
    377
    
    
    
    622
    
    
    
    519Selling, general and administrative expenses
    
    
    1,164
    
    
    
    740
    
    
    
    2,428
    
    
    
    1,244Operating loss
    
    
    (814
    )
    
    
    (363
    )
    
    
    (1,806
    )
    
    
    (725
    )Other income (expense):Interest expense
    
    
    (35
    )
    
    
    (11
    )
    
    
    (49
    )
    
    
    (20
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Other
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Total other income (expense)
    
    
    (35
    )
    
    
    15
    
    
    
    (49
    )
    
    
    7Loss from continuing operations before income
tax benefit (expense)
    
    
    (849
    )
    
    
    (348
    )
    
    
    (1,855
    )
    
    
    (718
    )Income tax benefit (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Loss from continuing operations
    
    
    (849
    )
    
    
    (348
    )
    
    
    (1,855
    )
    
    
    (651
    )Loss from discontinued operations, net of income
tax benefit of $- and $-
    
    
    
    
    
    
    (279
    )
    
    
    
    
    
    
    (951
    )Net loss
    
    
    (849
    )
    
    
    (627
    )
    
    $
    (1,855
    )
    
    $
    (1,602
    )Earnings per share:Basic and diluted Loss from continuing operations
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.02
    )Loss from discontinued operations
    
    
    (.000
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.04
    )Net loss
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.06
    )Basic and diluted weighted average number of
shares outstanding
    
    
    29,825,666
    
    
    
    28,011,739
    
    
    
    29,825,666
    
    
    
    26,692,079
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WATCHIT MEDIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2006
    
    
    2005Revised SeeNote 1Cash flows from operating activities:Net Loss
    
    $
    (1,855
    )
    
    $
    (651
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization of property and equipment
    
    
    33
    
    
    
    51Common stock issued for services
    
    
    
    
    
    
    Amortization of identifiable intangible assets
    
    
    70
    
    
    
    70Restricted shares issued in connection with director
compensation
    
    
    
    
    
    
    39Provision for doubtful accounts
    
    
    
    
    
    
    8Changes in current assets and liabilities:Accounts receivable
    
    
    13
    
    
    
    (72
    )Prepaid expenses and other current assets
    
    
    92
    
    
    
    (3
    )Bank overdraft
    
    
    41
    
    
    
    Accounts payable and accrued liabilities
    
    
    756
    
    
    
    690Income taxes, net
    
    
    13
    
    
    
    (63
    )Other assets
    
    
    182
    
    
    
    Net cash used in operating activities
    
    
    (655
    )
    
    
    69Cash flows from investing activities:Purchases of property and equipment
    
    
    
    
    
    
    (47
    )Net cash used in investing activities
    
    
    
    
    
    
    (47
    )Cash flows from financing activities:Additional (repayment) of secured borrowings
    
    
    38
    
    
    
    329Proceeds from debt
    
    
    264
    
    
    
    Cost of issuing of Common Stock and warrants
    
    
    
    
    
    
    (57
    )Proceeds from issuance of Common Stock and warrants
    
    
    342
    
    
    
    420Net cash provided by financing activities
    
    
    644
    
    
    
    692Cash flows from discontinued operations:Cash used in discontinued operations
    
    
    
    
    
    
    (1,042
    )Net decrease in cash and cash equivalents
    
    
    (11
    )
    
    
    (328
    )Cash and cash equivalents at beginning of period
    
    
    11
    
    
    
    526Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    198
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WATCHIT MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2006
    
    2005Supplemental disclosures of cash flow information:Interest paid
    
    $
    49
    
    
    $
    20Income taxes refunded
    
    $
    13
    
    
    $
    6Significant non-cash financing and investing activities:Deferred acquisition costs
    
    $
    
    
    
    $
    238Issuance of Common Stock in debt transaction
    
    $
    
    
    
    $
    
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Summary of Significant Accounting Policies and Practices
 Description of Business
     Liquidity
    7




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Stock-Based Compensation
    8




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Six MonthsEndedJune 302006Net loss, as reported
    
    $
    (1,855
    )Deduct: Stock-based compensation expense determined
under fair value based method for awards net of
related tax expense, if applicable
    
    
    Net Loss  pro forma
    
    $
    (1,855
    )Basic and diluted:Net loss per share, as reported
    
    $
    (0.06
    )Effect of stock-based compensation per SFAS 123
    
    
    Basic and diluted
    
    $
    (0.06
    )
  Six Months EndedJune 30, 2006Dividend Yield
    
    
    0
    %Volatility
    
    
    157
    %Risk-free interest rate
    
    
    3.96
    %Expected term
    
    1.25 years
 Basis of Presentation
  Revised Cash Flow
  9




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Note 2  Changes in Stockholders Equity
 Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid in
    
    
    
    
    
    
    Treasury Stock
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Net Loss
    
    
    Shares
    
    
    Amount
    
    
    EquityBalance at December 31, 2005
    
    
    28,868,229
    
    
    $
    289
    
    
    $
    82,785
    
    
    $
    (81,006
    )
    
    
    144,600
    
    
    $
    (113
    )
    
    $
    1,955Issuance of Common Stock in connection with private placement
    
    
    3,333,334
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Issuance of Warrants in connection with private placement
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167Cost 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Cost of registering and issuing securities in connection with purchase of a
business
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Issuance of Common Stock for services
    
    
    770,000
    
    
    
    8
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Stock-based compensation expense related to employee stock options
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Issuance of Common Stock in connection with issuing debt
    
    
    500,000
    
    
    
    5
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (991
    )
    
    
    
    
    
    
    
    
    
    
    (991
    )Balance at June 30, 2006
    
    
    33,668,896
    
    
    $
    337
    
    
    
    83,079
    
    
    $
    (81,997
    )
    
    
    144,600
    
    
    $
    (113
    )
    
    $
    1,306
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Note 3 Acquisition
      Total liabilities assumed
    
    $
    (247
    )Total tangible assets acquired
    
    
    96Identifiable intangible assets:Software
    
    
    73Customer contracts
    
    
    98Archived content video library
    
    
    695Goodwill
    
    
    2,592Total aggregate consideration paid
    
    $
    3,307
  11




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California Visitors Network
   Liabilities assumed
    
    $
    (10
    )Goodwill
    
    
    136Total aggregate consideration paid
    
    $
    126
  OtherGoodwill
    
    
    IntangiblesBalance at December 31, 2005
    
    $
    2,728
    
    
    $
    607Amortization expense
    
    
    
    
    
    
    (70
    )Balance at June 30, 2006
    
    $
    2,728
    
    
    $
    537
  Note 4  Restructuring Programs
  12




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September 2001FacilitiesClosureBalance at December 31, 2005
    
    $
    595Spending, net of sublease receipts on facilities
    
    
    (1
    )Balance at June 30, 2006
    
    $
    594
 Note 5  Discontinued Operations
  Summary of Operating Loss from Discontinued Operations:
 For the Three MonthsEnded March 31,2005Revenues
    
    $
    937Cost of revenues
    
    
    514Gross profit
    
    
    423Selling, general and administrative expenses
    
    
    1,095Operating 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
  Note 7  Stock Based Compensation
 Long-term Incentive Plan
   Weighted AverageNumber of Shares
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    5,419,810
    
    
    $
    0.19Granted
    
    
    1,575,000
    
    
    $
    0.07Cancelled
    
    
    (1,214,936
    )
    
    $
    0.24Outstanding at March 31, 2006
    
    
    5,379,874
    
    
    $
    0.14
  14




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Note 8  Segment Information
  IT services
 Narrowcasting.
  Note 9  Subsequent Events
 Issuances of Common Stock 
     Other
  15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Software Revenue Recognition
  16




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OVERVIEW OF 2006 AND 2005
      17




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Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenues
   18




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Gross Profit
   Selling, General and Administrative Expenses
  Other Income (Expense)
   Loss from Discontinued Operations
  LIQUIDITY AND CAPITAL RESOURCES
   19




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Payments Due by PeriodLess than
    
    1 to 3
    
    4 to 5
    
    After 5Contractual Cash Obligations:
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    YearsOperating leases, net of
sublet arrangements
    
    $
    858
    
    
    $
    769
    
    
    $
    89
    
    
    $
    
    
    
    $
    
 CRITICAL ACCOUNTING ESTIMATES
 Allowance for Doubtful Accounts
  20




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Revenue Recognition
 Software Revenue Recognition,
 Accounting for Income Taxes
 Accounting for Income Taxes.
 Stock-Based Compensation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   21




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Change in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    22




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Item 1A Risk Factors
  
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
     
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer / Chief Financial Officer32.1
    
    Certification pursuant to 18 U.S.C. as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer / Chief Financial Officer.
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SIGNATURE
  WATCHIT MEDIA, INC.Date: February 6, 2007
    /s/ James R. LavelleJames R. LavelleChief Executive Officer 24