Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2009
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OR
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number:
0-30428
MIVA, Inc.
(Exact name of registrant as
specified in its charter)
Delaware
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88-0348835
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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5220
Summerlin Commons
Blvd.
Fort Myers, Florida 33907
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(239)
561-7229
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(Address of principal executive offices,
including zip code)
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(Registrants telephone number,
including area code)
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Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
There were 35,566,627 shares of the Registrants Common
Stock outstanding on April 30, 2009.
FORM 10-Q
MIVA, Inc.
Table of Contents
2
Table of Contents
PART 1. FINANCIAL INFORMATION
ITEM
1. Financial Statements
MIVA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except par values)
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March 31,
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December 31,
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2009
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2008
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(Unaudited)
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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11,554
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$
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6,699
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Accounts receivable, less allowances of $2,358 and $1,242 at March 31, 2009 and December 31, 2008.
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2,927
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11,204
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Deferred tax assets
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167
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167
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Income tax receivable
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247
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Prepaid expenses and other current assets
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1,096
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1,584
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TOTAL CURRENT ASSETS
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15,744
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19,901
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Property and equipment, net
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224
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4,975
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Restricted cash
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344
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2,000
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Other assets
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682
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703
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TOTAL ASSETS
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$
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16,994
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$
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27,579
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LIABILITIES AND STOCKHOLDERS
EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
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4,162
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$
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6,609
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Accrued expenses
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6,944
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9,620
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Current portion of long-term debt
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546
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783
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Deferred revenue
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623
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1,914
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TOTAL CURRENT LIABILITIES
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12,275
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18,926
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Deferred tax liabilities long-term
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167
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167
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Long-term debt
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4,595
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Other long-term liabilities
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1,530
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1,305
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TOTAL LIABILITIES
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13,972
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24,993
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STOCKHOLDERS EQUITY
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Preferred stock, $.001 par value; authorized, 500 shares; none issued
and outstanding
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Common stock, $.001 par value; authorized, 200,000 shares; issued
35,052 and 34,480, respectively; outstanding 33,296 and 32,731, respectively
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35
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34
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Additional paid-in capital
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269,834
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268,841
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Treasury stock; 1,756 and 1,749 shares at cost, respectively
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(6,720
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(6,719
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Accumulated other comprehensive income
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12,914
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12,393
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Accumulated Deficit
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(273,041
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(271,963
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)
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TOTAL STOCKHOLDERS EQUITY
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3,022
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2,586
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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16,994
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$
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27,579
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The accompanying notes are an integral part of these
consolidated statements.
3
Table of Contents
MIVA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(Unaudited)
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For the Three Months
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Ended March 31,
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2009
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2008
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Revenues
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$
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6,234
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$
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12,070
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Cost of services
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456
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746
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Gross profit
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5,778
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11,324
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Operating expenses
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Marketing, sales, and service
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4,753
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8,170
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General and administrative
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3,077
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4,222
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Product development
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698
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848
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Amortization
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492
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Total operating expenses
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8,528
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13,732
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Loss from operations
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(2,750
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(2,408
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Interest income (expense), net
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(82
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103
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Loss before provision for income taxes
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(2,832
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(2,305
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Income tax expense
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14
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13
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Loss from continuing operations
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(2,846
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(2,318
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)
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Loss from discontinued operations
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(5,158
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(2,808
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Gain on sale of discontinued operations
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6,926
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Net loss
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$
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(1,078
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$
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(5,126
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Basic and diluted earnings (loss) per share
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Continuing operations
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$
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(0.08
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$
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(0.07
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Discontinued operations and gain on sale
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$
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0.05
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$
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(0.09
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)
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Weighted-average number of common shares outstanding
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Basic
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33,197
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32,546
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Diluted
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33,197
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32,546
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The accompanying
notes are an integral part of these consolidated statements.
4
Table of Contents
MIVA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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For the Three Months
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ended March 31,
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2009
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2008
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Cash Flows from Operating Activities
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Net loss
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$
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(1,078
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$
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(5,127
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Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
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Provision for doubtful accounts
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1,533
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40
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Depreciation and amortization
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270
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1,370
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Equity based compensation
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993
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725
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Gain on sale of business
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(6,926
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Changes in operating assets and liabilities
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Accounts receivable
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7,068
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(111
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)
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Prepaid expenses and other current assets
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489
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(241
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)
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Income taxes receivable
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70
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(17
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Deferred revenue
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(1,268
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)
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112
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Accounts payable, accrued expenses and other liabilities
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(3,312
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)
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(4,082
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)
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Net Cash (used in) operating activities
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(2,161
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(7,331
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)
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Cash Flows from Investing Activities
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Release of line of credit restricted collateral
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2,000
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Net increase in restricted cash for letter of credit
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(344
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)
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Net proceeds from sale of business
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10,439
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Purchase of capital items including internally developed software
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(133
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(856
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Net Cash provided by (used in) investing activities
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11,962
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(856
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Cash Flows from Financing Activities
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Repayment of secured line of credit
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(4,351
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)
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Payments made on capital leases and notes payable
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(832
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)
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Net Cash used in financing activities
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(5,183
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)
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Effect of Foreign Currency Exchange Rates
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237
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926
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Increase / (Decrease) in Cash and Cash Equivalents
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4,855
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(7,261
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)
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Cash and Cash Equivalents, Beginning of Period
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6,699
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29,905
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Cash and Cash Equivalents, End of Period
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$
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11,554
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$
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22,644
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Supplemental Disclosures of Cash Flow Information:
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Interest paid
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$
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80
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$
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Income taxes paid
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$
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$
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Supplemental Schedule of Noncash Investing and Financing Activities:
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Treasury stock received to satisfy tax withholding liabilities
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$
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(1
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)
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$
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The accompanying notes are an integral part of these consolidated
statements.
5
Table of Contents
MIVA, Inc.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
NOTE A - NATURE OF BUSINESS
MIVA, Inc., together with its wholly-owned subsidiaries,
collectively, the Company, we, us or MIVA, is an online advertising
network company.
MIVA Direct
We offer a range of products and services through our Miva Direct
division. MIVA Direct offers home page, desktop application, and Internet
browser toolbar products under the ALOT brand. Our customizable ALOT Home Page,
ALOT Desktop and ALOT Toolbar are designed to make the Internet easy for
consumers by providing direct access to affinity content and search results.
These products generate over 2 million Internet searches per day.
MIVA Media
On March 12, 2009, we sold certain assets relating to our MIVA
Media division. Following the sale, we
no longer operate the MIVA Media business (see NOTE C Sale of MIVA Media
Division), and as a result these operations are presented as discontinued for
all periods presented.
The majority of our revenue at MIVA Direct is
generated through Internet search queries at our website. MIVA Direct products
generate search queries to our website http://search.alot.com, where we provide
algorithmic and sponsored search functionality to consumers through our
contractual relationships with third-party providers.
These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31,
2008.
NOTE B -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for fair
presentation of results for the interim periods have been reflected in these
unaudited condensed consolidated financial statements. Operating results for the three months ended March 31,
2009, are not necessarily indicative of the results that may be expected for
the entire year.
The unaudited
condensed consolidated financial statements include the accounts and operations
of MIVA, Inc. and all of our subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation.
Liquidity
Despite the Companys negative operating performance in 2009 and 2008,
we currently anticipate that our working capital of approximately $3.4 million,
including cash and cash equivalents of approximately $11.6 million as of March 31,
2009, along with cash flows from operations will be sufficient to meet our
liquidity needs for working capital and capital expenditures over at least the
next 12 months.
6
Table of Contents
In the future,
we may seek additional capital through the issuance of debt or equity to fund
working capital, expansion of our business and/or acquisitions, or to
capitalize on market conditions. Our
future liquidity and capital requirements will depend on numerous factors including
the pace of expansion of our operations, competitive pressures, and
acquisitions of complementary products, technologies or businesses. As we require additional capital resources,
we may seek to sell additional equity or debt securities or look to enter into
a new revolving loan agreement. The sale
of additional equity or convertible debt securities could result in additional
dilution to existing stockholders. There
can be no assurance that any financing arrangements will be available in
amounts or on terms acceptable to us, if at all. Our forecast of the period of time through
which our financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties and actual
results could vary materially as a result of the factors described above.
Use of
Estimates
The
preparation of the condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions in determining the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Significant estimates in these consolidated
financial statements include estimates of: income taxes; tax valuation
reserves; restructuring reserve; loss contingencies; allowances for doubtful
accounts; share-based compensation; and useful lives for depreciation and
amortization. Actual results could differ
materially from these estimates.
Cash and
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. We
did not maintain a balance in short-term investments as of March 31, 2009
or December 31, 2008.
Allowance
for Doubtful Accounts
The Company
records its allowance for doubtful accounts based on its assessment of various
factors. The Company considers
historical experience, the age of the accounts receivable balances, the credit
quality of its customers, current economic conditions, and other factors that
may affect our customers ability to pay to determine the level of allowance
required.
Comprehensive
Loss
Total
comprehensive loss is comprised of net loss and net foreign currency translation
adjustments. Total comprehensive loss
for the three months ended March 31, 2009 and 2008, was $(0.6) million and
$(4.8) million, respectively. The
difference between total comprehensive loss and net loss is the direct result
of foreign currency translation adjustments.
Accumulated
Other Comprehensive Income
At March 31,
2009, Accumulated Other Comprehensive Income showed a gain of approximately
$12.9 million. The sale of MIVA Media
did not include the transfer to the buyer of any significant assets or
liabilities related to OCI. Currently,
the Company has no intent to liquidate its foreign subsidiaries. However, should the company decide to
liquidate the foreign entities in a future period, it would likely cause a
significant gain from the release of the related currency translation
adjustments in Other Comprehensive Income to earnings which includes the gains
associated with the parents intercompany loans to its foreign subsidiaries.
Advertising
Costs
Advertising costs are expensed as incurred, and are included in
Marketing, Sales and Service expense. We incurred approximately $4.3 million
and $7.6 million in advertising expense for the three months ended March 31,
2009 and 2008, respectively. The
majority of these costs were incurred to promote the Companys desktop consumer
software products.
7
Table of Contents
Income
Taxes
Income taxes
are accounted for in accordance with the Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS 109, deferred income taxes are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities, loss carry-forwards, and tax credit
carry-forwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized.
Concentration of Credit Risk
Financial
instruments that potentially subject us to significant concentration of credit
risk consist primarily of cash, cash equivalents, and accounts receivable. As
of March 31, 2009, substantially all of our cash and cash equivalents were
managed by a number of financial institutions. As of March 31, 2009 our
cash and cash equivalents with certain of these financial institutions exceed
FDIC insured limits. Accounts receivable are typically unsecured and are
derived from revenue earned from customers primarily located in the United
States. As of March 31, 2009, one customer (Google) accounted for
approximately 62.0% of the accounts receivable balance and represented approximately
92.6% and 92.1% of consolidated revenues for three month periods ended March 31,
2009 and 2008.
New
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations (SFAS 141(R)). SFAS 141(R) establishes
the principles and requirements for how an acquirer: (i) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is to be applied
prospectively to business combinations consummated on or after the beginning of
the first annual reporting period on or after December 15, 2008, with
early adoption prohibited. Previously, any release of valuation allowances for
certain deferred tax assets would serve to reduce goodwill whereas under the
new standard any release of valuation allowances related to acquisitions
currently or in prior periods will serve to reduce our income tax provision in
the period in which the reserve is released.
Additionally, under SFAS 141(R) transaction related expenses, which
were previously capitalized as deal cost, will be expensed as incurred. We had no capitalized deal costs or
acquisitions pending at December 31, 2008. Therefore, we did not have any
transition adjustments resulting from our adoption of SFAS 141(R) on January 1,
2009.
In April 2009, the FASB issued Staff Position No. 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies, (FSP No. 141(R)-1). FSP No. 141(R)-1 amends and clarifies
SFAS 141(R) to address application issues on the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. This FASB Staff Position is effective for
fiscal years beginning on or after December 15, 2008. The FASB Staff Position is effective for us
beginning January 1, 2009 and applies to business combinations completed
on or after that date.
8
Table of Contents
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment
of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting
standards that require (i) noncontrolling interests to be reported as a
component of equity, (ii) changes in a parents ownership interest while
the parent retains its controlling interest to be accounted for as equity
transactions, and (iii) any retained noncontrolling equity investment upon
the deconsolidation of a subsidiary to be initially measured at fair value.
SFAS 160 is effective for fiscal years and interim periods within those fiscal
years, beginning on or after December 15, 2008, with early adoption
prohibited. Our adoption of
SFAS 160 on January 1, 2009 did not have a material effect on our
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15,
2007, with earlier application encouraged.
In February 2008, the FASB deferred the effective date of SFAS 157
by one year for certain non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). On January 1, 2008,
we adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
has been delayed by one year, which we adopted on January 1, 2009. The adoption of SFAS 157 did not have a
material effect on our financial position or results of operations. The book
values of cash and cash equivalents, accounts receivable and accounts payable
approximate their respective fair values due to the short-term nature of these
instruments.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 identifies the sources of accounting
principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in the
United States for non-governmental entities.
SFAS 162 was effective November 2008. The adoption of SFAS 162 had no material
impact on the Companys financial statements.
In April 2009, the FASB issued Staff Position No. FAS 107-1
and
APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. It requires the fair value for all financial
instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments (SFAS No. 107), to be disclosed in the interim
periods as well as in annual financial statements. This standard is
effective for the quarter ending after June 15, 2009. We are
currently assessing the potential impact that adoption of this standard may
have on our financial statements.
NOTE C SALE OF MIVA MEDIA DIVISION AND DISCONTINUED OPERATIONS
Sale of MIVA MEDIA Division
On March 12, 2009, we and certain of our
subsidiaries entered into and consummated an Asset Purchase Agreement with
Adknowledge, Inc. (Adknowledge) and certain of its subsidiaries pursuant
to which we sold to Adknowledge certain assets relating to our MIVA Media
Division, including the MIVA name, for cash consideration of approximately
$11.6 million, plus assumption of certain balance sheet liabilities, and
subject to certain retained assets and liabilities, including assets and
liabilities of the MIVA Media division in France, and post-closing adjustments
estimated at approximately $0.7 million, which resulted in a gain on sale of
approximately $6.9 million during the quarter ended March 31, 2009 (the
MIVA Media Sale). We incurred
approximately $1.2 million of legal and financial advisory fees in connection
with the MIVA Media Sale, which are included in the net gain on sale.
9
Table of Contents
In addition, in connection with the MIVA
Media Sale, we agreed to provide to and receive from Adknowledge certain
transition services. As of March 31, 2009 approximately $0.9 million is
due to Adknowledge as a result of net cash collected on their behalf and
expenses incurred by the Company for transition services provided by
Adknowledge since the date of sale, and the estimated post-closing adjustment
of $0.7 million, offset by certain expenses paid on behalf of Adknowledge by
the Company, which is included in accrued expenses in the accompanying
condensed consolidated balance sheet as of March 31, 2009.
The Company and Adknowledge made customary
representations, warranties and covenants in the Asset Purchase Agreement and
each party has certain indemnification obligations under the Asset Purchase
Agreement. Further, the Asset Purchase
Agreement prohibits the Company from competing in the business of owning and
operating a pay-per-click network connecting advertisers and third party
publishers for five years, and prohibits the Company from diverting or
soliciting past, existing or prospective clients, customers, or sources of
financing of Adknowledge or from employing or soliciting for employment
Adknowledges employees (including the Companys employees that transferred to
Adknowledge pursuant to the terms of the Asset Purchase Agreement) for two
years. In addition, the Asset Purchase
Agreement prohibits Adknowledge from employing or soliciting for employment the
Companys employees who did not transfer to Adknowledge pursuant to the terms
of the Asset Purchase Agreement for two years.
As a result of the MIVA Media Sale, and our decision during the quarter
ended March 31, 2009, to cease operations of the MIVA Media division in
France, in accordance with the provisions of SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144), the operations
of the MIVA Media division, including those in France, are presented as
discontinued operations and, accordingly, these operating results are
segregated and reported as discontinued operations in the accompanying
condensed consolidated statements of operations for all periods presented. No
income tax expense has been allocated to discontinued operations for any period
presented. The MIVA Media divisions results of operations for the three months
ended March 31, 2009 and 2008, and the gain on sale of the division for
the three months ended March 31, 2009 were as follows:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
11,053
|
|
$
|
20,945
|
|
|
|
|
|
|
|
Cost and expenses
|
|
16,211
|
|
23,753
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
$
|
(5,158
|
)
|
$
|
(2,808
|
)
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
(5,158
|
)
|
(2,808
|
)
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
$
|
6,926
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Table of Contents
The following is a summary of the net assets sold in the MIVA Media Sale as of the March 12, 2009, closing date:
Accounts receivable, net
|
|
$
|
3,379
|
|
Other receivables
|
|
132
|
|
Prepaid expenses
|
|
391
|
|
Property and equipment, net
|
|
4,760
|
|
Accounts payable
|
|
(2,283
|
)
|
Accrued expenses and other current
liabilities
|
|
(1,620
|
)
|
Current portion of long-term debt
|
|
(234
|
)
|
Deferred Revenue
|
|
(1,272
|
)
|
Long-term debt
|
|
(409
|
)
|
|
|
|
|
Net assets sold
|
|
$
|
2,844
|
|
NOTE DAMENDMENT OF PEROT MASTER SERVICES AGREEMENT
On May 11, 2007, the Company entered into a Master Services
Agreement with Perot Systems, pursuant to which the Company outsourced certain
of its information technology infrastructure services, application development
and maintenance, MIVA Media US support services, and transactional accounting
functions.
The Master Services Agreement had a term of 84 calendar months
commencing June 1, 2007, unless earlier terminated or extended pursuant to
its terms. Aggregate fees payable by the Company to Perot Systems under
the Master Services Agreement were expected to be approximately $41.8 million,
but as a result of the August 2008 amendment to the Master Services
Agreement described below, the total was reduced to approximately $37.9
million. As of March 31, 2009, the Company incurred approximately
$13.1 million of operating expenses for services received under the agreement
since the agreements inception. Such expenses incurred during the three month
periods ended March 31, 2009 and 2008, are presented as discontinued
operations as a result of the MIVA Media Sale.
On April 10, 2008, we entered into an
approximate $2.4 million software development statement of work with Perot
Systems, pursuant to which the Company will pay Perot Systems to develop a new
global advertiser and distribution partner application called the
Transformation Project. The Transformation Project involves the development
and implementation of one enhanced consolidated global system to replace MIVA
Medias existing Internet advertising management and distribution partner
management systems. As of March 12,
2009, the date of the MIVA Media Sale, in connection with the Transformation
Project, we had incurred approximately $3.2 million of costs, including $2.6
million of cost with Perot Systems, and $0.6 million of internal development
costs, all of which had been capitalized and was to be amortized over the five
year estimated useful life of the software once it was placed in service. This Transformation Project was sold in March 2009
as part of the MIVA Media Sale.
On August 26, 2008, we entered into an amendment to the Master
Services Agreement that, among other things, allowed us to in-source certain
functions (MIVA EU Information Technology functionality and administration and
finance and accounting support). These
changes took effect immediately and eliminated the related charges for those
services without termination fees as called for in the original contract. In return, we agreed to a reduction in
certain service level agreement (SLA) requirements, the elimination of
benchmarking pricing, a modified termination payment schedule, and a 10 day
payment cycle for invoices.
11
Table of Contents
On February 1,
2009, the Company entered into an amendment to the Master Services
Agreement. Under the terms of the
amendment, the Master Services Agreement expired on April 30, 2009, and
certain other provisions of the Master Services Agreement have either been
modified or terminated. In connection with the Amendment, the Company has
issued a letter of credit to Perot Systems for approximately $1.0 million for a
portion of the remaining application development costs related to the Companys
new technology platform, which was included in the assets sold as part of the
MIVA Media Sale. As of March 31, 2009, Perot System has drawn
approximately $0.7 million on this letter of credit. It is expected the balance will be drawn in
the quarter ended June 30, 2009.
The Company accounted for the services received under the Master
Services Agreement using the guidance in AICPA Statement of Position 98-1
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
and EITF No. 97-13
Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project That Combines Business Process Reengineering and Information Technology
Transformation
.
NOTE E AMENDMENT OF BANK LOAN AGREEMENT
On March 12, 2009, we entered into a Consent and Amendment to Loan
and Security Agreement (the Amendment) with Bridge Bank, which amends certain
terms and conditions of the Loan Agreement.
Pursuant to the Amendment, MIVA Direct became a borrower under the Loan
Agreement and granted a general security interest in its assets to Bridge
Bank. The Amendment further provided
Bridge Banks consent to the MIVA Media Sale, provided that the Company was
required to repay immediately, out of the proceeds of the MIVA Media Sale, all
outstanding advances plus any accrued interest under the Loan Agreement in the
amount of approximately $4.4 million. In
addition, no further advances under the Loan Agreement will be made until the
parties have agreed upon new terms and conditions for borrowing. The Amendment also provides that the letter
of credit for the benefit of Perot Systems in the remaining amount of $0.7
million issued by Bridge Bank be secured by a cash deposit. Perot Systems had drawn $0.4 million as of March 31,
2009. The cash deposit for the remaining
$0.3 million to be drawn is included in restricted cash in the accompanying
condensed consolidated balance sheet.
NOTE F DEPARTURE OF COMPANY EXECUTIVES
On March 13, 2009, two of our former
executives (Chief Financial Officer and Chief Operations Officer and Senior
Vice President of MIVA Media), left our company to pursue other interests. Pursuant to the terms of their respective
employment agreements aggregate severance compensation was recorded during the
quarter ended March 31, 2009, totaled $1.5 million, including $0.7 million
in accelerated stock compensation expense and $0.8 million in severance
payments. We have recorded approximately
$0.8 million in general and administrative expense from continuing operations
and approximately $0.7 million in loss from discontinued operations in the
accompanying condensed consolidated statement of operations for the quarter
ended March 31, 2009 (see Note G).
NOTE G
RESTRUCTURING AND MASTER SERVICES AGREEMENT
Restructuring March 2009
As described in Note F, Departure
of Company Executives in March 2009.
Approximately $0.4 million in severance payments were accrued as
restructure reserve and are included in loss from discontinued operations
during the quarter ended March 31, 2009.
This amount is expected to be paid by April 2010.
12
Table of Contents
Restructuring August 2008 United
Kingdom, Germany, France, and Spain Operations
On August 21, 2008, the Company initiated a restructuring plan
that further consolidated the MIVA Media EU operations primarily in one
office. The restructuring plan, which evolved to include a workforce
reduction of approximately 40 employees and cash payments totaling
approximately $2.1 million, is expected to be completed by September 2009.
The restructuring plan resulted in the closure of our offices in Germany,
reductions in headcount in our offices in Paris, Madrid and London, and exiting
certain contractual relationships with third party contracts.
Restructuring June 2008
On June 17, 2008, the Company initiated a restructuring plan in
order to maximize efficiencies within the Company, eliminate certain
unprofitable operations, and better position the Company for the future,
including the closure of our MIVA Media Italian operations. Management
developed a formal plan that included the identification of a workforce
reduction totaling 30 employees and cash payments totaling approximately $1.0
million that was completed in February 2009.
Restructuring - February 2008
On February 19, 2008, the Company announced a restructuring plan
aimed at continued reduction of the overall cost structure of the Company,
which was designed to align the cost structures of our U.S. and U.K. operations
with the operational needs of these businesses.
Management developed a formal plan that included the identification of a
workforce reduction totaling 8 employees, all of which involved cash payments
of approximately $0.1 million made in the quarter ended June 30, 2008.
Summary
The following reserve for restructuring is included in accrued expenses
in the accompanying condensed consolidated balance sheet as of March 31,
2009 (in millions):
|
|
Employee
|
|
Other
|
|
|
|
|
|
Severance
|
|
Charges
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2008
|
|
$
|
1.1
|
|
$
|
0.5
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
Restructuring charge - 1st Qtr.
|
|
$
|
0.4
|
|
$
|
|
|
$
|
0.4
|
|
Cash payments - 1st Qtr.
|
|
(0.5
|
)
|
(0.1
|
)
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
Balance - March 31, 2009
|
|
$
|
1.0
|
|
$
|
0.4
|
|
$
|
1.4
|
|
All actions
under the February 19, 2008, restructuring plan were completed by March 31,
2008. All actions under the June 17,
2008, restructuring plan were completed by February 2009. All actions under the August 21, 2008,
restructuring plan are expected to be completed by September 2009. All
actions under the March 12, 2009, restructuring plan are expected to be
complete by April 2010.
13
Table of Contents
NOTE H
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES
In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
, goodwill and other
intangible assets with indefinite lives are tested for impairment annually and
when an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount impairment charges
are required to be recorded. In
performing this assessment, we compare the carrying value of our reporting
units to their fair value. Quoted market
prices in active stock markets are often the best evidence of fair value;
therefore, a significant decrease in our stock price could indicate that an
impairment of goodwill exists.
We have experienced
significant impairment losses in previous years and as of March 31, 2009,
we have no remaining goodwill and other intangible assets.
During the fourth quarter of 2008, in connection with our annual
impairment testing, we performed a step 1 impairment test of our two reporting
units, Searchfeed and Miva Direct, with remaining recorded indefinite lived
intangible assets and goodwill for potential impairment. The fair value
estimates used in the initial impairment test were based on market approaches
and the present value of future cash flows.
As a result of this analysis, we determined that the estimated fair
value of the reporting units exceeded their carrying values and could result in
potential impairment. We then performed
an assessment of the long-lived assets of our Searchfeed and MIVA Direct
divisions and determined these assets were impaired under the provisions of
SFAS No. 144. Accordingly, in the fourth quarter of 2008, we
recorded approximately $2.9 million in non-cash impairment charges to reduce
the carrying value of the remaining long-lived tangible and intangible assets
to their estimated fair values. We then performed a step 2 impairment
test to determine if the remaining carrying values of recorded goodwill and
other indefinite lived intangible assets in these divisions was impaired under
the provisions of SFAS No. 142. The step 2 impairment test resulted in a
non-cash impairment charge of $14.7 million and $1.1 million, respectively, to
reduce the carrying value of goodwill and other indefinite lived intangible
assets to their implied fair value. As a result of these impairment
charges, the carrying value of all of the Companys goodwill and other
indefinite lived intangible assets was reduced to zero as of December 31,
2008.
We will continue to assess the potential of impairment for other
long-lived assets in future periods in accordance with SFAS 144. Should our
business prospects change, and our expectations for acquired business be
further reduced, or other circumstances that affect our business dictate, we
may be required to recognize additional impairment charges
NOTE I
ACCOUNTING FOR SHARE-BASED COMPENSATION
For the three months ended March 31, 2009 and 2008, our
share-based employee compensation expense consisted of stock option expense of
$0.08 million and $0.2 million, respectively, and restricted stock unit (RSU)
expense of $0.9 million and $0.5 million, respectively. The stock option expense and the RSU expense
totals for the three months ended March 31, 2009 include approximately
$0.03 million and $0.6 million, respectively, in accelerated stock-based
compensation expense resulting from the vesting of certain stock options and
RSUs related to two former officers resignations in March 2009.
Stock option activity under the plans during the three months ended March 31,
2009, is summarized below (in thousands, except per share amounts):
14
Table of Contents
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
Price
|
|
|
|
|
|
|
|
Options outstanding at December 31,
2008
|
|
1,576
|
|
$
|
8.94
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
Forfeited
|
|
(54
|
)
|
5.23
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2009
|
|
1,522
|
|
$
|
9.07
|
|
The following table summarizes information as of March 31, 2009,
concerning outstanding and exercisable stock options under the plans (in
thousands, except per share amounts):
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00 - $3.00
|
|
116
|
|
6.5
|
|
$
|
2.75
|
|
65
|
|
$
|
2.62
|
|
$3.01 - $6.00
|
|
978
|
|
6.2
|
|
4.88
|
|
866
|
|
4.88
|
|
$6.01 - $14.00
|
|
42
|
|
5.4
|
|
11.00
|
|
42
|
|
11.02
|
|
$14.01 - $23.14
|
|
386
|
|
5.2
|
|
21.41
|
|
386
|
|
21.41
|
|
|
|
1,522
|
|
5.9
|
|
$
|
9.07
|
|
1,359
|
|
$
|
9.65
|
|
As of March 31, 2009, unrecognized compensation expense related to
stock options totaled approximately $0.14 million, which will be recognized
over a weighted average period of 0.75 years.
The fair value of the stock options is estimated at the date of the
grant using the Black-Scholes option-pricing model. No stock options were granted during the
three month periods ended March 31, 2009 and 2008.
In January 2009, we issued restricted stock units with service
based vesting provisions (4 year vesting in equal increments), and market
condition performance based restricted stock units that vest upon the Companys
common stock reaching, and closing, at a share price at or exceeding $1.00 per
share, for ten consecutive trading days.
In January 2008, we issued restricted stock units with service
based vesting provisions (4 year vesting in equal increments), and market
condition performance based restricted stock units that vest upon the Companys
common stock reaching, and closing, at a share price at or exceeding $4.00 per
share, for ten consecutive trading days.
In January 2007, we issued restricted stock units with service
based vesting provisions (4 year vesting in equal increments), and market
condition performance based restricted stock units that: vest in equal tranches
upon the Companys common stock reaching, and closing, at share prices at or
exceeding $6.00, $8.00, $10.00, and $12.00, respectively, for ten consecutive
trading days. In June 2007, all criteria were satisfied for the
$6.00 tranche level of restricted stock units and accordingly 86,412 shares
attributable to the achievement of the $6.00 performance criteria were issued.
The fair value of our service based restricted stock units is the
quoted market price of the Companys common stock on the date of grant. Further, we utilize a Monte Carlo simulation
model to estimate the fair value and compensation expense related to our market
condition performance based restricted stock units. The Company recognizes stock compensation
expense for options or restricted stock units that have graded vesting on the
graded vesting attribution method.
15
Table of Contents
New stock options granted and new restricted stock units granted with
related expenses for the three months ended March 31, 2009 and 2008, are
summarized below (in thousands):
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Stock options granted - new
|
|
|
|
|
|
Stock option expense - new
|
|
$
|
|
|
$
|
|
|
Restricted stock units - new
|
|
1,339
|
|
1,913
|
|
Restricted stock unit expense - new
|
|
$
|
28
|
|
$
|
236
|
|
For the three months ended March 31, 2009 and 2008, the following
assumptions were used to estimate the fair value and compensation expense of
our performance based restricted stock units with market based conditions:
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Volatility
|
|
111.84
|
%
|
70.5
|
%
|
Expected life
|
|
7.6 yrs
|
|
10 yrs
|
|
Risk-free rate
|
|
2.49
|
%
|
4.03
|
%
|
The restricted stock unit (RSU) activity for the three months ended March 31,
2009, is summarized below (in thousands):
|
|
|
|
|
|
Performance based RSUs
|
|
|
|
Total
|
|
Service Based
|
|
with Market based conditions
|
|
|
|
RSUs
|
|
RSUs
|
|
$1.00
|
|
$4.00
|
|
$8.00
|
|
$10.00
|
|
$12.00
|
|
Balance, December 31, 2008
|
|
2,256
|
|
1,799
|
|
|
|
253
|
|
68
|
|
68
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,339
|
|
1,097
|
|
242
|
|
|
|
|
|
|
|
|
|
Vested
|
|
(583
|
)
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(638
|
)
|
(464
|
)
|
(55
|
)
|
(68
|
)
|
(17
|
)
|
(17
|
)
|
(17
|
)
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
2,374
|
|
1,849
|
|
187
|
|
185
|
|
51
|
|
51
|
|
51
|
|
NOTE J INTANGIBLE ASSETS
As a result of our fourth quarter 2008 impairment of goodwill and other
indefinite lived intangible assets to their implied fair value, all of the
Companys goodwill and other indefinite lived intangible assets were reduced to
zero as of December 31, 2008.
NOTE K EQUITY AND PER SHARE DATA
We incurred a net loss from continuing operations for the three months
ended March 31, 2009. As a result,
potentially dilutive shares are not included in the calculation of Earnings per
Share because to do so would have an anti-dilutive effect on the loss per
share. Had we not recorded a loss,
certain exercisable stock options would have been excluded from the calculation
of Earnings per Share because option prices were greater than average market
prices for the periods presented. The
number of stock options that would have been excluded from the calculations was
1.6 million shares with a range of exercise prices between $1.00 and $23.14 as
of March 31, 2009.
16
Table of Contents
The following is the number of shares used in the basic and diluted
computation of loss per share (in thousands):
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Weighted-average number of common shares
outstanding basic and diluted
|
|
33,197
|
|
32,546
|
|
NOTE L LEGAL PROCEEDINGS
Shareholder Class Action Lawsuits
Beginning on May 6, 2005, five putative
securities fraud class action lawsuits were filed against us and certain of our
former officers and directors in the United States District Court for the
Middle District of Florida. The
complaints allege that we and the individual defendants violated Section 10(b) of
the Securities Exchange Act of 1934 (the Act) and that the individual
defendants also violated Section 20(a) of the Act as control persons
of MIVA. Plaintiffs purport to bring
these claims on behalf of a class of our investors who purchased our stock
between September 3, 2003 and May 4, 2005.
Plaintiffs allege generally that, during the
putative class period, we made certain misleading statements and omitted
material information. Plaintiffs seek unspecified damages and other
relief.
On July 27, 2005, the Court consolidated
all of the outstanding lawsuits under the case style In re MIVA, Inc.
Securities Litigation, selected lead plaintiff and lead counsel for the
consolidated cases, and granted Plaintiffs leave to file a consolidated amended
complaint, which was filed on August 16, 2005. We and the other defendants moved to dismiss
the complaint on September 8, 2005.
On December 28, 2005, the Court granted
Defendants motion to dismiss. The Court
granted Plaintiffs leave to submit a further amended complaint, which was filed
on January 17, 2006. On February 9,
2006, Defendants filed a renewed motion to dismiss. On March 15, 2007, the Court granted in
large part Defendants motion to dismiss.
On March 29, 2007, Defendants filed a motion for amendment to the March 15,
2007, order to include certification for interlocutory appeal or, in the
alternative, for reconsideration of the motion to dismiss. On July 17, 2007, the Court (1) denied
the motion for amendment to the March 15, 2007, order to include
certification for interlocutory appeal and (2) granted the motion for
reconsideration as to the issue of whether Plaintiffs pled a strong inference
of scienter in light of intervening precedent.
The Court requested additional briefing on the scienter issue, and on February 15,
2008, entered an Order dismissing one of the individual defendants from the
lawsuit and limiting the claims that could be brought against another
individual defendant. In addition,
Plaintiffs previously had moved the Court to certify a putative class of
investors, and Defendants had filed briefs in opposition thereto. On March 12, 2008, the Court entered an
Order certifying a class of those investors who purchased the Companys common
stock from February 23, 2005, to May 4, 2005. The Court also dismissed two of the proposed
class representatives for lack of standing.
Plaintiffs have served discovery requests on Defendants, and the
discovery phase of the lawsuit is presently underway.
Regardless of the outcome, this litigation
could have a material adverse impact on our results because of defense costs,
including costs related to our indemnification obligations, diversion of
managements attention and resources, and other factors.
17
Table of Contents
Derivative Stockholder Litigation
On July 25, 2005, a shareholder, Bruce
Verduyn, filed a putative derivative action purportedly on behalf of us in the
United States District Court for the Middle District of Florida, against
certain of our directors and officers.
This action is based on substantially the same facts alleged in the
securities class action litigation described above. The complaint is seeking to recover damages
in an unspecified amount. By agreement
of the parties and by Orders of the Court, the case was stayed pending the
resolution of Defendants motion to dismiss and renewed motion to dismiss in
the securities class action. On July 10,
2007, the parties filed a stipulation to continue the stay of the
litigation. On July 13, 2007, the
Court granted the stipulation to continue the stay and administratively closed
the case pending notification by plaintiffs counsel that the case is due to be
reopened. Regardless of the outcome,
this litigation could have a material adverse impact on our results because of
defense costs, including costs related to our indemnification obligations,
diversion of managements attention and resources, and other factors.
Lanes Gifts and Collectibles Litigation
As previously disclosed we entered into an agreement with the
plaintiffs to settle this case in January 2008 and received court approval
in April 2008. Under the settlement
agreement, all claims against us, including our indemnification obligations to
a co-defendant, were dismissed without presumption or admission of any
liability or wrongdoing. Pursuant to the
agreement, we established a settlement fund of $3,936,812, of which $1,312,270
was accrued as litigation settlement expense as of December 31, 2007 and
paid, in June 2008, for plaintiffs attorneys fees and class
representative incentive awards, and the balance is in advertising credits
relating to the class members advertising spending with us during the class
period. Advertising credits will be
recorded as reductions to revenues in the periods they are redeemed. For the three months ended March 31,
2009, approximately $1,744 in advertising credits were redeemed. Subject to the
terms of the advertising credits, AdKnowledge, the purchaser of the MIVA Media
Division, will redeem the advertising credits on an ongoing basis and, subject
to a threshold, we have agreed to reimburse AdKnowledge for expenses associated
with the advertising credits.
Other Litigation
We are a defendant in various other legal proceedings from time to
time, regarded as normal to our business and, in the opinion of management, the
ultimate outcome of such proceedings are not expected to have a material
adverse effect on our financial position or our results of operations.
No accruals for potential losses for litigation are recorded for the
above referenced items as of March 31, 2009, and although losses are
possible in connection with the above litigation, we are unable to estimate an
amount or range of possible loss, in accordance with SFAS 5, but if
circumstances develop that necessitate a loss contingency being disclosed or
recorded, we will do so. We expense all
legal fees for litigation as incurred.
NOTE M COMMITMENTS AND CONTINGENCIES
Operating Leases
On September 10, 2008, we entered into
an operating lease agreement with an unrelated third party to lease work space
for our London office for the term of 12 months commencing on December 1,
2008. The agreement includes a right to three month renewals. Base rent is approximately $0.3 million per
year. As a result of the MIVA Media Sale
this agreement was assigned to the buyer.
18
Table of Contents
Sublease Income
In March 2009, in conjunction with the
MIVA Media Sale, we licensed one floor in our office located in Fort Myers,
Florida (approximately 10,940 square feet) to the buyer with the intent to
convert into a sublease agreement upon receipt of landlord consent. The term of the license agreement commenced
on March 13, 2009, and it is expected to end on November 30,
2012. The sublease payments are expected
to be received ratably over this term.
In August 2007, we entered into a real
estate sublease agreement with an unrelated party to sublease 20,171 square
feet (approximately 50% of our space) in our office located in Fort Myers,
Florida. The term of the sublease
agreement commenced on August 17, 2007 and ends on November 30, 2012,
unless certain conditions (as defined) are met for earlier termination.
Capital Leases
In September 2008, we entered into non-cancelable leases with
unrelated third parties for software and related maintenance, and hardware, for
our new Transformation Project. The total fair market value of this
software was approximately $1.0 million with a lease term of nineteen months.
The software lease has an imputed interest rate of 9% with quarterly cash
outlays of approximately $0.2 million.
The total fair market value of the hardware was approximately $1.1
million with a lease term of three years. The hardware lease has an
imputed interest rate of 12.0%. As a result of the MIVA Media sale the hardware
lease was assigned to Adknowledge, therefore the related capital lease
obligation of approximately $0.7 million has been removed from condensed
consolidated balance sheet as of March 31, 2009. As of March 31, 2009 the software lease
has not yet been assigned to Adknowledge, however, under the terms of the MIVA
Media sale agreement, Adknowledge will pay 50% of the lease payments under the
software lease until the earlier of the assignment of the lease to Adknowledge
or end of the lease term. Therefore, the
net book value of the capitalized software of approximately $0.8 million, net
of the $0.3 million portion of remaining payments that Adknowledge is required
to pay, has been included in the assets sold and liabilities assumed in the
MIVA Media Sale as disclosed in Note C above.
Guaranteed Royalty Payments
As a part of our Media Division
operations, we have minimum contractual payments on a royalty bearing non-exclusive
license to certain Yahoo! patents payable quarterly through August 2010. Our rights and minimum payment obligations
under this agreement were not assigned to or assumed by Adknowledge as part of
the MIVA Media Sale. Therefore, since we are no longer operating the MIVA Media
business, the remaining minimum payments of approximately $1.0 million due by
us under the agreement have been accrued as of March 31, 2009, and are
included in loss from discontinued operations for the three months ended March 31,
2009.
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Summary
The amounts of the above commitments as of March 31,
2009, are as follows (in thousands):
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
beyond
|
|
Total
|
|
Operating Leases
|
|
1,410
|
|
1,556
|
|
1,464
|
|
1,411
|
|
517
|
|
1,130
|
|
7,488
|
|
Sublease Income
|
|
(813
|
)
|
(800
|
)
|
(721
|
)
|
(669
|
)
|
|
|
|
|
(3,003
|
)
|
Capital Leases
|
|
450
|
|
128
|
|
|
|
|
|
|
|
|
|
578
|
|
Guaranteed Royalty Payments
|
|
600
|
|
400
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Distribution Partner Payments
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
NOTE N
SEGMENT INFORMATION
Historically, our
two operating divisions have been MIVA Media and MIVA Direct, which aggregated
into one reportable segment, performance marketing. Further, as described in Note C Sale of
MIVA Media and Discontinued Operations, we divested our Media business
resulting in MIVA Direct becoming our only operating division. Revenues and
long-lived assets of MIVA Direct are all within the United States. Therefore, no separate segment disclosures
are presented as of and for the three months ended March 31, 2009 and
2008.
NOTE O INCOME TAXES
Income Tax Expense
The income tax expense for the three months
ended March 31, 2009 and 2008 of $0.014 million and $0.013 million,
respectively are primarily due to the FIN48 interest expense, which is reported
as a discrete item.
The effective tax rate is impacted by a
variety of estimates, including the amount of income expected during the
remainder of the fiscal year, the combination of that income between foreign
and domestic sources, and expected utilization of tax losses that have a full
valuation allowance.
NOTE P TREASURY STOCK
During the three months ended March 31,
2009, the Companys shares held in treasury increased by a total of 7,252
shares or approximately $1.0 thousand.
This increase in treasury shares resulted from shares withheld to pay
the withholding taxes upon the vesting of restricted stock units during the
period.
Item
2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Managements Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking
statements, the accuracy of which involves risks and uncertainties. We use words such as anticipates,
believes, plans, expects, future, intends, estimates, projects,
and similar expressions to identify forward-looking statements. This managements discussion and analysis of
financial condition and results of operations also contains forward-looking
statements attributed to certain third-parties relating to their estimates
regarding the growth of the Internet, Internet advertising, and online commerce
markets and spending.
20
Table of Contents
Readers should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
under the section entitled Risk Factors included within this report.
MIVA, Inc., together with its wholly-owned subsidiaries,
collectively, the Company, we, us or MIVA, is an online advertising
network company.
MIVA Direct
We offer a
range of products and services through our MIVA Direct division. MIVA Direct offers home page, desktop application
and Internet browser toolbar products under the ALOT brand. Our customizable
ALOT Home Page, ALOT Desktop and ALOT Toolbar are designed to make the Internet
easy for consumers by providing direct access to affinity content and search
results. These products generate over 2 million Internet searches per day.
MIVA Media
On March 12, 2009, we sold certain assets relating to our MIVA
Media division. Following the sale, we
no longer operate the MIVA Media business (see NOTE C Sale of MIVA Media
Division), and as a result these operations are presented as discontinued for
all periods presented. Our MIVA Media
division was an auction based pay-per-click advertising and publishing network
that operated across North America and Europe.
Recent Developments
Asset Sale MIVA Media Business
On March 12, 2009, we
completed the MIVA Media Sale. The MIVA Media Sale further streamlined our
operations and is another step in our overall strategy of developing and
expanding our high margin, consumer-oriented toolbar, homepage and desktop
search-related products. As a result of
the transaction, we have reduced our total headcount from 129 on December 31,
2008, to approximately 50 at March 31, 2009. This includes transferring approximately 75
MIVA Media and certain corporate staff to the buyer. Our remaining employees will work
predominantly out of the Companys New York offices, with a small number of our
employees based in our Fort Myers, Florida office.
We incurred approximately $1.2
million legal and financial advisory fees in connection with the sale of the
MIVA Media business.
Perot
Master Services Agreement
On February 1, 2009, we
entered into an amendment (Amendment) to the Perot Master Services Agreement
with Perot Systems, pursuant to which we had outsourced certain of its
information technology infrastructure services, application development, and
customer services functions.
Under the terms of the
amendment, the Master Services Agreement will expire on April 30, 2009,
and certain other provisions of the Master Services Agreement have either been
modified or terminated. The Amendment was entered as part of our ongoing cost
reduction measures and to facilitate the streamlining of our MIVA Media
operations and the anticipated operational efficiencies resulting from our new
technology platform.
21
Table of Contents
We expect Perot Systems to
continue to provide application development services for our new technology
platform and to work with us and the buyer of our MIVA Media assets on the
transition of services related to the expiration of the Master Services
Agreement. It is also expected that
Perot Systems will continue to provide certain network operations monitoring
and after-hours support services to us and the buyer of the MIVA Media assets
on an ad hoc basis.
In connection with the
Amendment, the Company has issued a letter of credit to Perot Systems for
approximately $1.0 million for a portion of the remaining application
development costs related to the Companys new technology platform, which was
included in the assets sold as part of the MIVA Media Sale. As of March 31,
2009, Perot Systems has drawn approximately $0.7 million on this letter of
credit. It is expected the balance will
be drawn in the quarter ended June 30, 2009.
Bridge Bank Loan and Security Agreement
On March 12, 2009, we entered into a Consent and Amendment to Loan
and Security Agreement (the Amendment) with Bridge Bank, which amends certain
terms and conditions of the Loan Agreement.
Pursuant to the Amendment, MIVA Direct became a borrower under the Loan
Agreement and granted a general security interest in its assets to Bridge
Bank. The Amendment further provides
Bridge Banks consent to the MIVA Media Sale, provided that the Company was
required to repay immediately, out of the proceeds of the MIVA Media Sale, all
outstanding advances plus any accrued interest under the Loan Agreement in the
amount of approximately $4.4 million. In
addition, no further advances will be made under the Loan Agreement until the
parties have agreed upon new terms and conditions for borrowing. The Amendment also provides that the letter
of credit for the benefit of Perot Systems in the remaining amount of $0.7
million issued by Bridge Bank be secured by a cash deposit. Perot Systems had drawn $0.4 million as of March 31,
2009. The cash deposit for the remaining
$0.3 million to be drawn is included in restricted cash in the accompanying
condensed consolidated balance sheet.
Organization of Information
Managements discussion and analysis of
financial condition and results of operations provides a narrative on our
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It
includes the following sections:
·
Results
of operations
·
Liquidity
and capital resources
·
Use
of estimates and critical accounting policies
·
Special
note regarding forward-looking statements
RESULTS OF OPERATIONS
Revenue
During the three months ended March 31,
2009, we recorded revenue of $6.2 million, a decrease of approximately 48.8%
from the $12.1 million recorded in the same period in 2008. The decrease
in our revenue is due to a combination of a decline in our active installed
product base and a decrease in revenue rates per user. We believe the
decline in our total active installed base is due primarily to a lower active
installed base at the beginning of the quarter, 7.1 million at December 31,
2007 compared to 4.6 million at December 31, 2008, a 35% decrease, coupled
with reduction in advertising spend from approximately $7.6 million in the
first three months of 2008 to approximately $4.3 million in the same period in
2009, a 43.4% decrease. We believe our
decline in revenue rates per user is due to the following reasons: (i) reductions
in revenue sharing rates and available services from certain advertising
partners; (ii) reductions in the number of revenue generating events on
our installed product base; (iii) reductions in search volume triggering
lower revenue sharing rates in a tiered rate structure; and (iv) general
adverse economic conditions broadly affecting the value of search
advertising. We believe the foregoing factors will have a dampening
effect on the level of MIVA Directs revenue in 2009.
22
Table of Contents
Distribution of our new ALOT branded products
during the three months ended March 31, 2009, was at a rate sufficient to
grow our active ALOT live user count from 3.1 million on December 31,
2008, to 3.3 million as of March 31, 2009; at March 31, 2008, the
active A LOT live user count was 2.1 million. This growth, however, was
offset by decreased revenue per user performance metrics for all products. Live
user count for our legacy brands declined from 1.6 million at December 31,
2008, to 1.1 million at March 31, 2009, and revenue rates per user
declined, leading to an overall decline in revenue contributed by legacy
branded products; at March 31, 2008, the active legacy brand user count
was 4.4 million. During the quarter ended March 31, 2009, the decline in
the installed base from legacy brands outpaced the growth rate of ALOT branded
products, leading to a net decline in total MIVA Direct users.
We are actively seeking to stop the decline
in our active product installed base. We are focusing on cost effective
distribution of our ALOT branded products and limited distribution of our
legacy brand because ALOT branded products deliver an approximately 100% higher
revenue per user rate than our legacy brands. Examples of on-going
initiatives to expand distribution of ALOT products include: (i) diversifying
our product line to include new platforms like Desktop, (ii) adding widget
content to our products to expand the number of marketable verticals, (iii) optimizing
landing pages for our advertisements, and (iv) seeking new
distribution relationships. If our efforts to improve our active toolbars
installed base is not successful, it will have a material adverse impact on our
business, financial condition, and results of operations.
For the three months ended March 31,
2009 and 2008, one customer of our MIVA Direct division, Google, accounted for
approximately 92.6% and 92.1% of our consolidated revenue, respectively.
We have been named in certain
litigation, the outcome of which could directly or indirectly impact the
results of our operations. For
additional information regarding pending litigation, refer to Note J Legal
Proceedings above.
We plan to continue our efforts
to invest in our business and seek additional revenue through branded toolbars
and other initiatives. We cannot assure
you that any of these efforts will be successful.
Cost of
Services
Cost of services consists of revenue sharing
or other arrangements with our MIVA Direct distribution partners, costs
associated with designing and maintaining the technical infrastructure that
supports our various services, cost of third-party providers of algorithmic
search results, and fees paid to telecommunications carriers for Internet
connectivity. Costs associated with our technical infrastructure, which
supports our various services, include salaries of related technical personnel,
depreciation of related computer equipment, co-location charges for our network
equipment, and software license fees.
Cost of services decreased to
$0.5 million for the three months ended March 31, 2009, compared with $0.7
million in the same periods in the previous year. This decrease is primarily
related to a reduction in the depreciation charge between the two periods
relating to the impairment charge in the quarter ended December 31, 2008. Cost
of services for the three month period ended March 31, 2009, compared to the
same period in 2008, increased as a percentage of revenue from 6.2% to 7.3%.
This increase in cost of services as a percentage of revenue is primarily
attributed to a decrease in revenue.
23
Table of Contents
Operating
Expenses
Operating expenses for the
three months ended March 31, 2009 and 2008, were as follows (in millions):
|
|
For the Three Months
|
|
2009
|
|
|
|
Ended March 31,
|
|
vs.
|
|
|
|
2009
|
|
2008
|
|
2008
|
|
Marketing, sales, and service
|
|
$
|
4.7
|
|
$
|
8.2
|
|
(3.5
|
)
|
General and administrative
|
|
3.1
|
|
4.2
|
|
(1.1
|
)
|
Product development
|
|
0.7
|
|
0.8
|
|
(0.1
|
)
|
Subtotal
|
|
8.5
|
|
13.2
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
0.5
|
|
(0.5
|
)
|
Total
|
|
$
|
8.5
|
|
$
|
13.7
|
|
$
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, as a percent of revenue,
for the three months ended March 31, 2009 and 2008, were as follows:
|
|
For the Three Months
|
|
2009
|
|
|
|
Ended
March 31,
|
|
vs.
|
|
|
|
2009
|
|
2008
|
|
2008
|
|
Marketing, sales, and service
|
|
75.4
|
%
|
67.7
|
%
|
7.7
|
%
|
General and administrative
|
|
49.4
|
%
|
34.8
|
%
|
14.6
|
%
|
Product development
|
|
11.2
|
%
|
7.0
|
%
|
4.2
|
%
|
Subtotal
|
|
136.0
|
%
|
109.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Amortization
|
|
0.0
|
%
|
4.1
|
%
|
-4.1
|
%
|
Total
|
|
136.0
|
%
|
113.6
|
%
|
22.4
|
%
|
Marketing, Sales, and Service
Marketing, sales, and service expense consists primarily of advertising
spend for toolbar acquisitions and also includes payroll expense and benefits
related to individuals within this category.
Marketing, sales, and service
expense decreased approximately $3.5 million for the three months ended March 31,
2009, to $4.7 million compared to $8.2 million for the same period in
2008. Advertising spend used primarily
to attract users of our alot.com brand decreased approximately $3.3 million to
$4.3 million in the three months ended March 31, 2009, compared to $7.6
for the same period in the prior year.
The decrease in advertising spend was implemented primarily to conserve
cash and cash equivalents. Additionally,
salaries and benefits expense decreased $0.1 million.
General and Administrative
General and administrative expense consists primarily of: payroll and
related expenses for executive and administrative personnel; fees for
professional services; costs related to leasing, maintaining, and operating our
facilities; travel costs for administrative personnel; insurance; depreciation
of property and equipment not related to search serving or product development
activities; expenses and fees associated with the reporting and other
obligations of a public company; bad debts; and other general and administrative
services. Fees for professional services
include amounts due to lawyers, auditors, tax advisors, and other professionals
in connection with operating our business, litigation, and evaluating and
pursuing new opportunities.
24
Table
of Contents
General and administrative expenses decreased by $1.1 million in the
three months ended March 31, 2009, to $3.1 million compared to $4.2 million for
the same period in the previous year. Decreases contributing to this variance
include: rent and office related expense ($0.1 million); consulting services
($0.5 million); finance expenses ($0.1 million); salaries, benefits, and other
employee expenses including share-based compensation ($0.4 million). Included
in salaries expense $(0.4) million and share-based compensation expense $(0.4)
million were amounts related to severance expenses of a former executive upon
termination.
Product
development
Product development expense consists primarily of: payroll and related
expenses for personnel responsible for the development and maintenance of
features, enhancements, and functionality for our proprietary services; and
depreciation for related equipment used in product development.
Product development costs
decreased $0.1 million for the three months ended March 31, 2009, as
compared to the same period in the previous year. The primary reason for this decrease was a
reduction in the following category: salaries, benefits and other employee
expenses, including share-based compensation expense ($0.1 million) associated
with the 2008 employee restructuring initiatives.
Amortization
Amortization expense recorded for the three months ended March 31,
2009, was $0.0 million compared to $0.5 million in the same period in the prior
year. This decrease was attributed to an
overall reduction in our intangible asset base eligible for amortization,
primarily as a result of the recorded impairment losses in prior periods.
Interest
Income (expense), net
We had net interest expense of
approximately $(0.1) million for the three months ended March 31, 2009
compared to net interest income of approximately $0.1 million in the same
period in the prior year. The current year net expense relates to interest
incurred related to our capital lease obligations and interest expense incurred
through our secured line of credit arrangement with Bridge Bank. In the prior year we earned net interest
income through our cash and cash equivalent balances, and as of March 31,
2008, had not yet entered our capital lease obligations or secured line of
credit with Bridge Bank.
Gain on Sale of Discontinued Operations
On March 12, 2009, we sold the assets, net of liabilities assumed,
of our MIVA Media business for cash consideration of approximately $11.6
million, and subject to certain retained assets and liabilities, including
assets and liabilities of the MIVA Media division in France, and post-closing
adjustments, estimated at approximately $0.7 million, which resulted in a gain
on sale of approximately $6.9 million during the quarter ended March 31,
2009. We incurred approximately $1.2 million of legal and financial advisory
fees in connection with the sale of the MIVA Media division, which are included
in the net gain on sale. Our decision to
divest our MIVA Media business was due primarily to inconsistencies between the
divisions products and services and the Companys current and future strategic
plan.
25
Table
of Contents
Loss from these discontinued operations was
$(5.2) million and $(2.8) million, respectively for the three months ended March 31,
2009 and 2008. Included in the loss from
discontinued operations for the three months ended March 31, 2009, is
approximately $0.7 million of stock compensation and severance expense
resulting from the termination of our Senior Vice President of MIVA Media, and
approximately $1.0 million of minimum royalty payment expense accrued as result
of the MIVA Media Sale, as described in Notes F and M to our condensed
consolidated financial statements as of and for the three months ended March 31,
2009.
There is an estimated corresponding
consolidated tax loss on this transaction, the difference in the book gain and
tax loss is estimated to be approximately $10.7 million and is predominately
related to basis differences in goodwill, which was impaired at December 31,
2008, for book purposes, other intangible assets also impaired at December 31,
2008, and fixed assets, all of which the Company had tax basis in excess of
book basis.
Income Taxes
The income tax expense for the three months
ended March 31, 2009 and 2008, of $0.014 million and $0.013 million,
respectively are primarily due to the FIN48 interest expense, which is reported
as a discrete item.
The effective tax rate is impacted by a
variety of estimates, including the amount of income expected during the
remainder of the fiscal year, the combination of that income between foreign
and domestic sources, and expected utilization of tax losses that have a full
valuation allowance.
Net Loss
from Continuing Operations
As a result of the factors described above, we generated a net loss
from continuing operations of $(2.8) million and $(2.3) million for the three
months ended March 31, 2009 and 2008, respectively, which represents: a
loss per weighted average outstanding share of $(0.08) and $(0.07),
respectively.
Weighted average common shares
used in the earnings per share computation increased 0.6 million shares from
32.6 million shares for the year ended December 31, 2008 to approximately
33.2 million shares for the three months ended March 31, 2009. This increase is attributable to shares
issued upon the vesting of restricted stock units.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, the
Company had a total cash and cash equivalents of $11.6 million. This represents a $4.9 million or 73.2%
increase from the total cash and cash equivalents of $6.7 million at December 31,
2008. The increase in cash was primarily
due to the sale of the Media business on March 12, 2009, and offset by:
payouts related to the June and August 2008 restructuring
initiatives; expenses associated with Perot, our outsourcing partner; and
repayment to Bridge Bank related to our outstanding line of credit.
Operating Activities
Net cash used in operations totaled $2.2 million in the three months
ended March 31, 2009. Cash flow
from operations can be understood by starting with the amount of net income or
loss and adjusting that amount for non-cash items and variations in the timing
between revenue recorded and revenue collected and between expenses recorded
and expenses paid. The net income from
operations ($1.1 million) included non-cash items of a provision for doubtful
accounts ($1.5 million), depreciation and amortization ($0.3 million), and
compensation expense based on equity grants rather than cash ($1.0 million).
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Thus, the cash used in operations before the effect of timing
differences was $1.7 million. With
respect to revenue, the accounts receivable decreased $(7.1) million, but was
offset by the net decrease in our deferred revenue of approximately $(1.2)
million. With respect to expenses, the
amount paid was more than the amount recorded by $2.7 million. Payments and other decreases associated with
our accounts payable, accrued expenses and other liabilities were higher than
the related amount of expenses ($3.3) million, but were offset by the decrease
in prepaid expenses and other items $(0.6) million.
With respect to the net income from operations, while we had a gain on
sale of approximately $6.9 million related to the sale of the Media business,
the related net proceeds of $10.4 million are classified as cash flow from
investing activities.
Net cash used in operations totaled $7.3 million in the three months
ended March 31, 2008. The net loss
from operations ($5.1 million) included non-cash items including: a provision
for doubtful accounts ($0.04 million), depreciation and amortization ($1.4
million), and compensation expense based on equity grants rather than cash
($0.7 million). Thus, the cash used in
operations before the effect of timing differences was $3.0 million. With respect to revenue, the amount collected
was approximately equal to the amount recorded; the amount collected was less
than the amount recorded ($0.1 million increase in accounts receivable) but
offset by a increase in the revenue collected but deferred to the future ($0.1
million increase in deferred revenue).
With respect to expenses, the amount paid was more than the amount
recorded by $4.3 million. Payments on
accounts payable, accrued expenses and other liabilities were higher than the
related amount of expenses ($4.1 million), as were the payments on prepaid expenses
and other items ($0.2 million).
Investing Activities
Net cash provided by investing
activities totaled approximately $12.0 million during the three months ended March 31,
2009. Cash was provided by: the net
proceeds from the sale of the MIVA Media business ($11.6 million), less legal and
financial advisory costs paid for the sale of approximately $1.2 million; and
cash released from restriction ($2.0 million) as collateral for the secured
line of credit agreement with Bridge Bank.
Offsetting these two sources was cash used to purchase and develop
capital assets, including internally developed software ($0.1 million), and
$0.3 million of cash restricted under a cash account securing a letter of
credit.
Net cash used in investing activities totaled
approximately $0.9 million during the three months ended March 31,
2008. This use of cash was for the
purchase of capital assets and the development of internally developed software
Financing Activities
Net cash used in financing activities totaled
approximately $5.2 million during the three months ended March 31,
2009. This use of cash consisted of a
one-time payment to satisfy the obligation associated with paying off the
secured line of credit agreement with Bridge Bank ($4.4 million) and cash used
to pay the quarterly payments on the capital lease obligations ($0.8 million).
In the three months ended March 31, 2008
we did not have any financing activities.
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Liquidity
We currently anticipate that our working capital of approximately $3.4
million, including cash and cash equivalents of approximately $11.6 million as
of March 31, 2009, along with cash flows from operations, will be
sufficient to meet our liquidity needs for working capital and capital
expenditures over at least the next 12 months.
In the ordinary course of
business, we may provide indemnifications of varying scope and terms to
advertisers, advertising agencies, distribution partners, vendors, lessors,
business partners, and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach of such
agreements, including our recently executed MIVA Media Sale, services to be
provided by us, or from intellectual property infringement claims made by third
parties. In addition, we have entered
into indemnification agreements with our directors and certain of our officers
that will require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors or
officers. We also have agreed to
indemnify certain former officers, directors, and employees of acquired
companies in connection with the acquisition of such companies. We maintain director and officer insurance,
which may cover certain liabilities arising from our obligation to indemnify
our directors and officers and former directors, officers, and employees of
acquired companies, in certain circumstances.
We evaluate estimated losses
for such indemnifications under SFAS No. 5, Accounting for Contingencies,
as interpreted by FIN 45. At this time,
it is not possible to determine any potential liability under these
indemnification agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular
agreement. Such indemnification
agreements may not be subject to maximum loss clauses. Historically, we have not incurred material
costs as a result of obligations under these agreements and we have not accrued
any liabilities related to such indemnification obligations in our financial
statements. If a need arises to fund any
of these indemnifications, it could have an adverse effect on our liquidity.
Our forecast of the period of
time through which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and uncertainties
and actual results could vary materially as a result of the factors described above
and in the section included in Part I, Item 1A, titled Risk Factors, in
our Form 10-K filed with the Securities and Exchange Commission on March 31,
2009, subject to those material changes appearing in Part II, Item 1A of
this Form 10-Q.
RESTRUCTURING
Restructuring March 2009
As described in Note F, Departure of Company Executives in March 2009. Approximately $0.4 million in severance
payments were accrued as restructure reserve and are included in loss from
discontinued operations during the quarter ended March 31, 2009. This amount is expected to be paid by April 2010.
Restructuring August 2008 United
Kingdom, Germany, France, and Spain Operations
On August 21, 2008, the Company initiated a restructuring plan
that further consolidated the MIVA Media EU operations primarily in one
office. The restructuring plan, which evolved to include a workforce
reduction of approximately 40 employees and cash payments totaling
approximately $2.1 million, is expected to be completed by September 2009.
The restructuring plan resulted in the closure of our offices in Germany,
reductions in headcount in our offices in Paris, Madrid and London, and exiting
certain contractual relationships with third party contracts.
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Restructuring
June 2008
On June 17,
2008, the Company initiated a restructuring plan in order to maximize
efficiencies within the Company, eliminate certain unprofitable operations, and
better position the Company for the future, including the closure of our MIVA
Media Italian operations. Management developed a formal plan that included the
identification of a workforce reduction totaling 30 employees and cash payments
totaling approximately $1.0 million that was completed in February 2009.
Restructuring
- February 2008
On
February 19, 2008, the Company announced a restructuring plan aimed at
continued reduction of the overall cost structure of the Company, which was
designed to align the cost structures of our U.S. and U.K. operations with the
operational needs of these businesses.
Management developed a formal plan that included the identification of a
workforce reduction totaling 8 employees, all of which involved cash payments
of approximately $0.1 million made in the quarter ended June 30, 2008.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported
therein. The most significant of these
areas involving difficult or complex judgments made by management with respect
to the preparation of our consolidated financial statements in fiscal 2009
include:
·
Revenue
·
Allowance for Doubtful Accounts
·
Income Taxes
·
Purchase Accounting
·
Share-Based Compensation
·
Legal Contingencies
In each situation, management is required to make
estimates about the effects of matters or future events that are inherently
uncertain.
During the three months ended March 31, 2009,
there have been no changes to the items that we disclosed as our critical
accounting policies and estimates in our managements discussion and analysis
of financial condition and results of operations included in our Annual Report
on Form 10-K and Form 10-K/A for the year ended December 31,
2008, filed by us with the SEC on March 31, 2009 and April 7, 2009,
respectively.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as will, should, intend, expect, plan,
anticipate, believe, estimate, predict, potential, or continue, or
the negative of such terms or other comparable terminology. This report includes, among others,
statements regarding our:
·
revenue;
·
primary
operating costs and expenses;
·
capital
expenditures;
·
operating
lease arrangements;
·
evaluation
of possible acquisitions of, or investments in business, products and
technologies;
·
sufficiency
of existing cash and investments to meet operating requirements; and
·
expected
future annualized operating expense reductions from our restructuring.
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These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industrys past
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such factors include, among others, those
listed in Part I, Item 1A, titled Risk Factors in our Form 10-K
filed with the Securities and Exchange Commission on March 31, 2009,
subject to those material changes appearing in Part II, Item 1A of this
Form 10-Q. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, events, levels of activity, performance, or
achievements. We do not assume
responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update
any of the forward-looking statements after the date of this report to conform
them to actual results.
Item
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Foreign
Currency Risk
As a result of the sale of the Media business we do
not have material international revenues generated from continuing operations
for the three months ended March 31, 2009 and 2008. However, historically
we have had international revenues and the corresponding foreign exchange rate
fluctuations were recorded and these foreign exchange rate fluctuations were
recorded within the assets and liabilities of our foreign operations in their
respective local currencies and then translated into U.S. dollars in preparing
our condensed consolidated balance sheet.
This exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which costs incurred in the United States or the
United Kingdom are charged to our subsidiaries.
There was no significant portion of the foreign currency translation
adjustment related to the assets sold in the MIVA Media Sale. However, in the
future, should the Company liquidate or partially liquidate its foreign
subsidiaries currency translation gain (or loss) relating to assets and
liabilities included in the liquidation, including any related to intercompany accounts,
would be released from Other Comprehensive Income to earnings. These intercompany
accounts are typically denominated in the functional currency of the foreign
subsidiary. Additionally, foreign
exchange rate fluctuations may significantly impact our consolidated results
from operations as exchange rate fluctuations on transactions denominated in
currencies other than the functional currencies of our parent company or
different subsidiaries result in gains and losses that are reflected in our
condensed consolidated statements of operations. The effect of foreign exchange rate
fluctuations on our consolidated financial position for the three months ended
March 31, 2009, was a net translation adjustment of approximately $0.5
million. This net translation adjustment is recognized within stockholders
equity through accumulated other comprehensive income.
Item
4(T). CONTROLS AND PROCEDURES
Our management, under the
supervision of and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered by this Quarterly Report
on Form 10-Q. Based on such evaluation and because of the material
weakness identified below, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were not
effective as of the end of March 31, 2009.
We identified a material
weakness in our internal control over financial reporting. As defined by the Public Company Accounting
Oversight Board (PCAOB) in Auditing Standard No. 5, a material weakness
is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a
material misstatement of the companys annual or interim financial statements
will not be prevented or detected on a timely basis.
Based on information we have
received to date, we do not believe that the material weakness impacted the
quality of the financial information for prior periods. Accordingly, we currently do not expect that
we will be required to restate our financial statements for any prior reported
periods.
The sale of the Media
Division on March 12, 2009, required that we shut down and relocate
certain computer equipment used to store electronic accounting
information. During this move, we
discovered that during the quarter ended March 31, 2009, a backup routine
had not been verified in accordance with our procedures and that data for a two
week period had been lost. While we were
able to reconstruct the data, this reconstruction and material adjustments
occurring late in the financial statement close process for the quarter ended March 31,
2009, resulted in having to rely on an extension of time for filing our first
quarter 2009 Form 10-Q.
The Company is in the process
of converting its accounting system to one that will be more effective and
efficient in handling the accounting information needed for the Companys
continuing operations and realigning responsibilities for operation of the
system. Backup verification procedures
will be made an integral part of the system.
Except as described above, we
have made no change to our internal control over financial reporting in
connection with our first quarter 2009 evaluation that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II
OTHER INFORMATION
Item
1. Legal Proceedings
Shareholder
Class Action Lawsuits
Beginning on May 6, 2005, five putative
securities fraud class action lawsuits were filed against us and certain of our
former officers and directors in the United States District Court for the
Middle District of Florida. The
complaints allege that we and the individual defendants violated Section 10(b) of
the Securities Exchange Act of 1934 (the Act) and that the individual
defendants also violated Section 20(a) of the Act as control
persons of MIVA. Plaintiffs purport to
bring these claims on behalf of a class of our investors who purchased our
stock between September 3, 2003 and May 4, 2005.
Plaintiffs allege generally that, during the putative
class period, we made certain misleading statements and omitted material
information. Plaintiffs seek unspecified damages and other relief.
On July 27, 2005, the Court consolidated all of
the outstanding lawsuits under the case style In re MIVA, Inc. Securities
Litigation, selected lead plaintiff and lead counsel for the consolidated
cases, and granted Plaintiffs leave to file a consolidated amended complaint,
which was filed on August 16, 2005.
We and the other defendants moved to dismiss the complaint on
September 8, 2005.
On December 28, 2005, the Court granted
Defendants motion to dismiss. The Court
granted Plaintiffs leave to submit a further amended complaint, which was filed
on January 17, 2006. On
February 9, 2006, Defendants filed a renewed motion to dismiss. On March 15, 2007, the Court granted in
large part Defendants motion to dismiss.
On March 29, 2007, Defendants filed a motion for amendment to the
March 15, 2007, order to include certification for interlocutory appeal
or, in the alternative, for reconsideration of the motion to dismiss. On July 17, 2007, the Court (1) denied
the motion for amendment to the March 15, 2007, order to include
certification for interlocutory appeal and (2) granted the motion for
reconsideration as to the issue of whether Plaintiffs pled a strong inference
of scienter in light of intervening precedent.
The Court requested additional briefing on the scienter issue, and on
February 15, 2008, entered an Order dismissing one of the individual
defendants from the lawsuit and limiting the claims that could be brought
against another individual defendant. In
addition, Plaintiffs previously had moved the Court to certify a putative class
of investors, and Defendants had filed briefs in opposition thereto. On March 12, 2008, the Court entered an
Order certifying a class of those investors who purchased the Companys common
stock from February 23, 2005, to May 4, 2005. The Court also dismissed two of the proposed
class representatives for lack of standing.
Plaintiffs have served discovery requests on Defendants, and the discovery
phase of the lawsuit is presently underway.
Regardless of the outcome, this litigation could have
a material adverse impact on our results because of defense costs, including
costs related to our indemnification obligations, diversion of managements
attention and resources, and other factors.
Derivative
Stockholder Litigation
On July 25, 2005, a shareholder, Bruce Verduyn,
filed a putative derivative action purportedly on behalf of us in the United
States District Court for the Middle District of Florida, against certain of
our directors and officers. This action
is based on substantially the same facts alleged in the securities class action
litigation described above. The
complaint is seeking to recover damages in an unspecified amount. By agreement of the parties and by Orders of
the Court, the case was stayed pending the resolution of Defendants motion to
dismiss and renewed motion to dismiss in the securities class action. On July 10, 2007, the parties filed a
stipulation to continue the stay of the litigation. On July 13, 2007, the Court granted the
stipulation to continue the stay and administratively closed the case pending
notification by plaintiffs counsel that the case is due to be reopened. Regardless of the outcome, this litigation
could have a material adverse impact on our results because of defense costs,
including costs related to our indemnification obligations, diversion of
managements attention and resources, and other factors.
31
Table
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Lanes
Gifts and Collectibles Litigation
As previously disclosed
we entered into an agreement with the plaintiffs to settle this case in
January 2008 and received court approval in April 2008. Under the settlement agreement, all claims against
us, including our indemnification obligations to a co-defendant, were dismissed
without presumption or admission of any liability or wrongdoing. Pursuant to the agreement, we established a
settlement fund of $3,936,812, of which $1,312,270 was accrued as litigation
settlement expense as of December 31, 2007 and paid, in June 2008,
for plaintiffs attorneys fees and class representative incentive awards, and
the balance is in advertising credits relating to the class members advertising
spending with us during the class period.
Advertising credits will be recorded as reductions to revenues in the
periods they are redeemed. For the three
months ended March 31, 2009, approximately $1,744 in advertising credits
were redeemed. Subject to the terms of
the advertising credits, AdKnowledge, the purchaser of the MIVA Media Division,
will redeem the advertising credits on an ongoing basis and, subject to a
threshold, we have agreed to reimburse AdKnowledge for expenses associated with
the advertising credits.
Other
Litigation
We are a defendant in
various other legal proceedings from time to time, regarded as normal to our
business and, in the opinion of management, the ultimate outcome of such
proceedings are not expected to have a material adverse effect on our financial
position or our results of operations.
No accruals for potential
losses for litigation are recorded for the above referenced items as of
March 31, 2009, and although losses are possible in connection with the
above litigation, we are unable to estimate an amount or range of possible
loss, in accordance with SFAS 5, but if circumstances develop that necessitate
a loss contingency being disclosed or recorded, we will do so. We expense all legal fees for litigation as
incurred.
Item
1A. Risk Factors
We desire to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Accordingly, we incorporate by reference the risk factors
disclosed in Part I, Item 1A of our Form 10-K/A filed with the
Securities and Exchange Commission on April 2, 2009, subject to the new or
modified risk factors appearing below that should be read in conjunction with
the risk factors disclosed in our Form 10-K.
Risks
Relating to Our Business
One
paid listings provider, which is a competitor of ours, accounts for a
significant portion of our consolidated revenue and any adverse change in that
relationship would likely result in a significant decline in our revenue and
our business operations could be significantly harmed.
In December 2006, we
entered into an agreement with Google pursuant to which we agreed to utilize
Googles paid listings and algorithmic search services for approved MIVA Direct
websites and applications. We renewed our agreement with Google in November 2008
for a two year term beginning on January 1, 2009. We receive a share
of the revenue generated by the paid listing services supplied to us from
Google. The amount of revenue we receive from Google depends upon a number of
factors outside of our control, including the amount Google charges for
advertisements, the depth of advertisements available from Google, and the
ability of Googles system to display relevant ads in response to our end-user
queries. For the quarter ended March 31, 2009, Google
accounted for approximately 92.6% of our consolidated revenue from continuing
operations. Our agreement with Google contains broad termination rights.
Google also competes with our MIVA Direct business. If (i) we fail
to have websites and applications approved by Google; (ii) Googles
performance deteriorates, (iii) we violate Googles guidelines, or (iv) Google
exercises its termination rights, we likely will experience a significant
decline in revenue and our business operations could be significantly harmed.
If any of these circumstances were to occur, we may not be able to find another
suitable alternate paid listings provider or otherwise replace the lost
revenues.
Risks
Relating to an Investment in Our Common Stock
Significant dilution will occur if
outstanding options are exercised or restricted stock unit grants vest
.
As of March 31,
2009, we had stock options outstanding to purchase a total of approximately 1.5
million shares at a weighted average price of $9.07 per share under our stock
incentive plans.
Also, as of
March 31, 2009, we had 2.4 million restricted stock units outstanding
including approximately 0.5 million in restricted stock units that would vest
upon the Companys common stock reaching, and closing, at share prices ranging
from $1.00 to $12.00 for ten consecutive trading days. The remaining approximate 1.9 million
restricted stock units will vest in equal increments on January 2
nd
in years 2010, 2011, 2012 and 2013. If outstanding stock options are exercised or
restricted stock units vest, significant dilution will occur to our
stockholders.
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Our stock price may result in our
failure to maintain NASDAQ Marketplace Rules related to minimum stock
price requirements, which could result in NASDAQ delisting our common stock.
NASDAQ Marketplace
Rules require us to have a minimum closing bid price of $1.00 per share
for our common stock. In the event that
our common stock closing bid price falls below $1.00 per share for 30
consecutive business days we would likely receive notice from NASDAQ that we
are not in compliance with Marketplace Rules, which could ultimately lead to
the delisting of our common stock from the NASDAQ Global Market if we were
unable to maintain the requisite minimum stock price during the subsequent
probationary period. On October 16, 2008, we received notice from NASDAQ
immediately suspending the enforcement of the rules requiring the minimum
$1.00 closing bid price. In addition,
NASDAQ also suspended the enforcement of the rules requiring a minimum
market value of publicly held shares.
The suspension of the minimum bid price and market value will remain in
effect through April 30, 2009, at which time these rules are expected
to be reinstated unless they are further extended.
Recently our stock price
has traded below $1.00 and even though we received a temporary reprieve from
this notice, if our stock continues to trade below $1.00 once the
rules are reinstated we would likely receive notice from NASDAQ that
ultimately could lead to the delisting of our stock. In the event that we were delisted from the
NASDAQ Global Market, our common stock would become significantly less liquid,
which would likely adversely affect its value.
Although our common stock would likely be traded over-the-counter or on
pink sheets, these types of listings involve more risk and trade less
frequently and in smaller volumes than securities traded on the NASDAQ Global
Market.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months
ended March 31, 2009, we purchased shares in connection with vesting of
restricted stock units as described in the table below.
|
|
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number
|
|
|
|
|
|
|
|
(c) Total Number of
|
|
(or Approximate Dollar
|
|
|
|
(a) Total
|
|
|
|
Shares (or Units)
|
|
Value) of Shares (or Units)
|
|
|
|
Number of
|
|
(b) Average
|
|
Purchased as Part of
|
|
that May Yet Be
|
|
|
|
Shares
|
|
Price Paid
|
|
Publicly Announced
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
per Share
|
|
Plans or Programs
|
|
Plans or Programs
|
|
Jan. 1, 2009 through
Jan. 31, 2009
|
|
7,252
|
|
$
|
0.18
|
|
n/a
|
|
n/a
|
|
Feb. 1, 2009 through
Feb. 28, 2009
|
|
|
|
|
|
n/a
|
|
n/a
|
|
Mar. 1, 2009 through
Mar. 31, 2009
|
|
|
|
|
|
n/a
|
|
n/a
|
|
Total
|
|
7,252
|
(1)
|
$
|
0.18
|
|
|
|
|
|
(1) Represents shares withheld by us upon the
vesting of restricted stock units to satisfy withholding taxes.
33
Table
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Item 6.
Exhibits
See Index of Exhibits.
Signatures
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
MIVA, Inc.
|
|
|
|
|
Date: May 20, 2009
|
By: /s/ Michael Cutler
|
|
|
Michael Cutler
|
|
|
Chief Financial Officer
|
|
|
|
(Duly Authorized Officer and Principal
|
|
|
Financial Officer)
|
|
|
|
|
|
34
Table of Contents
The following exhibits are filed as part of and
incorporated by reference into this report:
Exhibit No.
|
|
Footnote
|
|
Description
|
|
|
|
|
|
2.2
|
|
a*
|
|
Asset Purchase
Agreement dated March 12, 2009 among MIVA, Inc., B & B
Advertising, Inc., MIVA (UK) Limited, U.S. Acquisition Sub, Inc.,
Ajax Media Ltd., and Adknowledge, Inc.
|
|
|
|
|
|
10.1
|
|
b*
|
|
Amendment No. 2 to
the Agreement and Work Order No. 3 dated February 1, 2009 between
MIVA, Inc. and Perot Systems Corporation.
|
|
|
|
|
|
10.2
|
|
b
|
|
Consent and Amendment
to Loan and Security Agreement dated March 12, 2009 among
MIVA, Inc., MIVA Direct, Inc. and Bridge Bank, National
Association.
|
|
|
|
|
|
31.1
|
|
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2
|
|
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
|
|
|
|
Certification of Chief Executive Officer of Periodic
Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350.
|
|
|
|
|
|
32.2
|
|
|
|
Certification of Chief Financial Officer of Periodic
Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350.
|
Footnote References:
(a)
Incorporated
by reference to the exhibit previously filed on March 18, 2009 with MIVAs
Form 8-K.
(b)
Incorporated by reference to the exhibit previously
filed on March 31, 2009 with MIVAs Form 10-K.
*
Portions of this exhibit have been omitted pursuant to
a request for confidential treatment filed with the Commission under
Rule 24b-2. The omitted confidential material has been filed separately
with the Commission. The location of the omitted confidential information is
indicated in the exhibit with asterisks (***).
The Agreements that
have been filed or incorporated herein by reference (the Agreements) are
included to provide investors and security holders with information regarding
their terms. They are not intended to provide any other financial information
about the Company or its subsidiaries and affiliates. The representations,
warranties and covenants contained in each of the Agreements were made only for
purposes of the Agreements and as of specific dates; were solely for the
benefit of the parties to the Agreements; may be subject to limitations agreed
upon by the parties, including being qualified by confidential disclosures made
for the purposes of allocating contractual risk between the parties to the
Agreement instead of establishing these matters as facts; and may be subject to
standards of materiality applicable to the contracting parties that differ from
those applicable to investors. Investors should not rely on the
representations, warranties and covenants or any description thereof as
characterizations of the actual state of facts or condition of the Company or
any of its subsidiaries or affiliates. Moreover, information concerning the
subject matter of the representations, warranties and covenants may change
after the date of the Agreements, which subsequent information may or may not
be fully reflected in public disclosures by the Company.
35
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