Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2010
   
 
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ________________ to ________________

Commission file number 001-34523

interCLICK, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
01-0692341
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
11 West 19th Street, 10th Floor, New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number: (646) 722-6260
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No   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 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No   x

Class
 
Outstanding at August 9, 2010
Common Stock, $0.001 par value per share
 
23,798,585 shares
 
 
 

 
  
TABLE OF CONTENTS
 
 
Page
 
PART I – FINANCIAL INFORMATION
F-1
 
     
Item 1.
Financial Statements:
 
 
       
 
Condensed Consolidated Balance Sheets (unaudited)
F-2
 
       
 
Condensed Consolidated Statements of Operations (unaudited)
F-3
 
       
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
F-4
 
       
 
Condensed Consolidated Statements of Cash Flows (unaudited)
F-5
 
       
 
Notes to Condensed Consolidated  Financial Statements (unaudited)
F-7
 
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
 
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
 
       
Item 4.
Controls and Procedures
30 
 
       
PART II – OTHER INFORMATION
31 
 
     
Item 1.
Legal Proceedings
31 
 
       
Item 1A.
Risk Factors
31 
 
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31 
 
       
Item 3.
Defaults Upon Senior Securities
31 
 
       
Item 4.
(Removed and Reserved)
31
 
       
Item 5.
Other Information
 31
 
       
Item 6.
Exhibits
31
 
       
SIGNATURES
33
 
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
 
INTERCLICK, INC. AND SUBSIDIARY
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
   
Page
Financial Statements
   
     
Condensed Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31, 2009
 
F-2
     
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)
 
F-3
 
   
Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2010 (unaudited)
 
F-4
     
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)
 
F-5
     
Notes to Condensed Consolidated Financial Statements (unaudited)
 
F-7
 
 
F-1

 

INTERCLICK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2010
   
December 31, 2009
 
Assets
 
(Unaudited)
   
(See Note 1)
 
             
Current assets:
           
Cash and cash equivalents
  $ 9,922,770     $ 12,653,958  
Restricted cash
    997,390       -  
Accounts receivable, net of allowance of $210,172 and $383,188, respectively
    21,806,995       21,631,305  
Credit facility reserve
    556,889       1,052,167  
Deferred taxes, current portion
    936,649       955,471  
Income tax receivable
    497,798       -  
Prepaid expenses and other current assets
    321,781       367,183  
Total current assets
    35,040,272       36,660,084  
                 
Restricted cash
    295,570       -  
Property and equipment, net of accumulated depreciation of $917,644 and $597,288, respectively
    1,821,142       988,899  
Intangible assets, net of accumulated amortization of $988,350 and $909,350, respectively
    342,333       421,333  
Goodwill
    7,909,571       7,909,571  
Investment in available-for-sale marketable securities
    225,394       715,608  
Deferred debt issue costs, net of accumulated amortization of $40,000 and $35,028, respectively
    -       4,972  
Deferred taxes, net of current portion
    2,695,009       2,579,568  
Other assets
    207,573       192,179  
                 
Total assets
  $ 48,536,864     $ 49,472,214  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 10,492,210     $ 10,934,236  
Accrued expenses (includes accrued compensation of $1,930,278 and $2,241,731, respectively)
    2,492,005       3,164,044  
Credit facility payable
    2,784,443       5,260,834  
Obligations under capital leases, current portion
    331,909       161,940  
Deferred rent, current portion (includes cease use liability of $108,338 at June 30, 2010)
    118,546       3,508  
Income taxes payable
    -       515,306  
Warrant derivative liability
    -       69,258  
Total current liabilities
    16,219,113       20,109,126  
                 
Obligations under capital leases, net of current portion
    595,886       338,562  
Deferred rent (includes cease use liability of $345,802 at June 30, 2010)
    577,157       83,823  
Total liabilities
    17,392,156       20,531,511  
                 
Commitments and contingencies - See Note 8
               
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized,
               
zero shares issued and outstanding
    -       -  
Common stock, $0.001 par value; 140,000,000 shares authorized,
               
23,798,585 and 23,632,707 issued and outstanding, respectively
    23,799       23,633  
Additional paid-in capital
    44,327,775       42,229,293  
Accumulated other comprehensive loss
    (20,427 )     -  
Accumulated deficit
    (13,186,439 )     (13,312,223 )
Total stockholders’ equity
    31,144,708       28,940,703  
                 
Total liabilities and stockholders’ equity
  $ 48,536,864     $ 49,472,214  

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

 
F-2

 
 
INTERCLICK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Revenues
  $ 21,659,883     $ 10,648,686     $ 35,861,740     $ 19,071,977  
Cost of revenues
    12,034,487       5,882,655       19,853,668       10,356,934  
Gross profit
    9,625,396       4,766,031       16,008,072       8,715,043  
                                 
Operating expenses:
                               
General and administrative
    3,873,745       2,895,717       7,104,273       4,573,382  
Sales and marketing
    3,087,183       1,734,921       5,203,897       3,151,443  
Technology support
    1,419,362       797,552       2,758,940       1,381,883  
Amortization of intangible assets
    39,500       49,760       79,000       99,520  
Total operating expenses
    8,419,790       5,477,950       15,146,110       9,206,228  
                                 
Operating income (loss) from continuing operations
    1,205,606       (711,919 )     861,962       (491,185 )
                                 
Other income (expense):
                               
Interest income
    8,151       -       17,019       12  
Warrant derivative liability income (expense)
    (272 )     (159,294 )     21,413       (232,061 )
Loss on sale of available-for-sale securities
    -       (36,349 )     -       (36,349 )
Other than temporary impairment of available-for-sale securities
    -       -       (458,538 )     -  
Interest expense
    (74,537 )     (126,681 )     (176,946 )     (240,273 )
Total other expense
    (66,658 )     (322,324 )     (597,052 )     (508,671 )
                                 
Income (loss) from continuing operations before income taxes
    1,138,948       (1,034,243 )     264,910       (999,856 )
                                 
Income tax expense
    (1,218,234 )     -       (139,126 )     -  
                                 
Income (loss) from continuing operations
    (79,286 )     (1,034,243 )     125,784       (999,856 )
                                 
Discontinued operations:
                               
Loss on sale of discontinued operations, net of income taxes
    -       -       -       (1,220 )
Loss from discontinued operations
    -       -       -       (1,220 )
                                 
Net income (loss)
    (79,286 )     (1,034,243 )     125,784       (1,001,076 )
                                 
Other comprehensive loss:
                               
Unrealized loss on available-for-sale securities
    (20,427 )     (899,999 )     (478,965 )     (899,999 )
Reclassification adjustments for losses included in net income (loss):
                               
Loss on sale of available-for-sale securities
    -       36,349       -       36,349  
Other than temporary impairment of available-for-sale securities
    -       -       458,538       -  
Total other comprehensive loss
    (20,427 )     (863,650 )     (20,427 )     (863,650 )
                                 
Comprehensive income (loss)
  $ (99,713 )   $ (1,897,893 )   $ 105,357     $ (1,864,726 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ -     $ (0.05 )   $ 0.01     $ (0.05 )
Discontinued operations
    -       -       -       -  
Net income
  $ -     $ (0.05 )   $ 0.01     $ (0.05 )
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ -     $ (0.05 )   $ 0.01     $ (0.05 )
Discontinued operations
    -       -       -       -  
Net income
  $ -     $ (0.05 )   $ 0.01     $ (0.05 )
                                 
Weighted average number of common shares - basic
    23,683,252       19,164,950       23,646,178       19,044,443  
Weighted average number of common shares - diluted
    23,683,252       19,164,950       24,820,111       19,044,443  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-3

 
INTERCLICK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(Unaudited)
 
                 
Additional
     
Accumulated
Other
           
Total
 
   
Common Stock
   
Paid-In
   
Comprehensive
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Loss
   
Deficit
   
Equity
 
Balance, January 1, 2010
    23,632,707     $ 23,633     $ 42,229,293     $ -     $ (13,312,223 )   $ 28,940,703  
Stock-based compensation
    -       -       1,822,070       -       -       1,822,070  
Issuances of restricted shares
    10,100       10       (10 )     -       -       -  
Issuance of common shares for stock options and warrants exercised
    155,778       156       228,576       -       -       228,732  
Reclassification of warrant derivative liability to equity upon expiration of price protection
    -       -       47,846       -       -       47,846  
Unrealized loss on available-for-sale securities
    -       -       -       (478,965 )     -       (478,965 )
Other than temporary impairment on available-for-sale securities
    -       -       -       458,538       -       458,538  
Net income
    -       -       -       -       125,784       125,784  
Balance, June 30, 2010
    23,798,585     $ 23,799     $ 44,327,775     $ (20,427 )   $ (13,186,439 )   $ 31,144,708  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
F-4

 
 
INTERCLICK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 125,784     $ (1,001,076 )
Add back loss from discontinued operations, net
    -       1,220  
Income (loss) from continuing operations
    125,784       (999,856 )
Adjustments to reconcile net  income (loss) from continuing
               
operations to net cash provided by (used in) operating activities:
               
Stock-based compensation
    1,822,070       1,353,743  
Other than temporary impairment of available-for-sale securities
    458,538       -  
Depreciation of property and equipment
    320,356       147,364  
Amortization of intangible assets
    79,000       99,520  
Amortization of debt issue costs
    4,972       21,583  
Changes in deferred tax assets
    (594,417 )     -  
Provision for bad debts
    (140,077 )     (160,392 )
Change in warrant derivative liability
    (21,413 )     232,061  
Loss on available-for-sale securities
    -       36,349  
Amortization of debt discount
    -       500  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (35,613 )     (2,968,432 )
Decrease (increase) in prepaid expenses and other current assets
    45,402       (107,523 )
Increase in other assets
    (15,394 )     -  
(Decrease) increase in accounts payable
    (442,026 )     1,083,434  
(Decrease) increase in accrued expenses
    (672,039 )     426,392  
Increase in deferred rent
    525,302       11,257  
Decrease in income taxes payable
    (515,306 )     -  
Increase in accrued interest
    -       1,346  
Net cash provided by (used in) operating activities
    945,139       (822,654 )
                 
Cash flows from investing activities:
               
Proceeds from sale of available-for-sale securities
    11,250       21,429  
Increase in restricted cash
    (1,292,960 )     -  
Purchases of property and equipment
    (573,929 )     (73,883 )
Net cash used in investing activities
    (1,855,639 )     (52,454 )
                 
Cash flows from financing activities:
               
Procees from common stock and warrants issued for cash
    -       2,257,000  
Proceeds from stock options and warrants exercised
    228,732       -  
(Repayments to) proceeds from credit facility, net
    (1,981,113 )     1,574,859  
Principal payments on notes payable
    -       (100,000 )
Principal payments on capital leases
    (68,307 )     (5,636 )
Net cash (used in) provided by financing activities
    (1,820,688 )     3,726,223  
                 
Cash flows from discontinued operations:
               
Cash flows from investing activities-divestiture
    -       (250,000 )
Net cash used in discontinued operations
    -       (250,000 )
                 
Net (decrease) increase in cash and cash equivalents
    (2,731,188 )     2,601,115  
                 
Cash and cash equivalents at beginning of period
    12,653,958       183,871  
                 
Cash and cash equivalents at end of period
  $ 9,922,770     $ 2,784,986  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-5

 
 
INTERCLICK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
Supplemental disclosure of cash flow information:
           
Interest paid
  $ 203,191     $ 192,267  
Income taxes paid
  $ 1,219,583     $ -  
                 
Non-cash investing and financing activities:
               
Property and equipment acquired through capitalized leases
  $ 495,600     $ -  
Leasehold improvements increased for deferred rent
  $ 83,070     $ -  
Reclassification of warrant derivative liability to equity upon
               
expiration of price protection
  $ 47,846     $ -  
Unrealized loss on available-for-sale securities
  $ 20,427     $ 863,650  
Issuance of common stock to eliminate or modify price protection for warrants
  $ -     $ 508,497  
Issuance of common stock for services to be rendered
  $ -     $ 170,500  
Issuance of common stock to pay accrued interest payable
  $ -     $ 13,266  
Issuance of common stock to extend debt maturity date
  $ -     $ 12,000  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-6

 
 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Note 1. Nature of Operations

Overview 
 
interCLICK, Inc. (the “Company”, or “interCLICK”) was formed in Delaware on March 4, 2002 under the name Outsiders Entertainment, Inc.

On August 28, 2007, the Company closed an Agreement and Plan of Merger and Reorganization (the “CAN Merger Agreement”) and acquired Customer Acquisition Network, Inc. (“CAN”), a privately-held corporation formed in Delaware on June 14, 2007.   In connection with this acquisition, the Company changed its name to Customer Acquisition Network Holdings, Inc.  On June 25, 2008, the Company changed its name to interCLICK, Inc.

On August 31, 2007, the Company closed an Agreement and Plan of Merger (the “Desktop Merger”), wherein the Company acquired Desktop Interactive, Inc. (“Desktop Interactive”), a privately-held Delaware corporation engaged in the Internet advertising business.   Desktop Interactive merged with and into Desktop Acquisition Sub, Inc. (“Desktop”), a wholly-owned subsidiary of the Company.  Desktop was the surviving corporation.  Desktop was formed in Delaware on August 24, 2007.

interCLICK is an audience intelligence and targeting company, developing and executing data-driven campaign strategies for major digital agencies and marketers.  Fueled by its proprietary software and sophisticated approach to managing its supply chain, the Company empowers its clients to reach desirable audiences efficiently, in brand-safe environments, and at tremendous scale.  Virtually all of the Company’s revenues are generated in the United States.

On January 4, 2008, the Company closed an Agreement and Plan of Merger (the “Options Merger”), wherein the Company acquired Options Newsletter, Inc. (“Options Newsletter”).  Options Newsletter merged with and into Options Acquisition Sub, Inc. (“Options Acquisition”), a wholly-owned subsidiary of the Company.  Options Acquisition was the surviving corporation.  On June 23, 2008, Options Acquisition was sold to Options Media Group Holdings, Inc (“OPMG”).

Basis of Presentation

The interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of operations for the three and six months ended June 30, 2010 and 2009, our cash flows for the six months ended June 30, 2010 and 2009 and our financial position as of June 30, 2010, have been made.  The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim consolidated financial statements.  Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the SEC on March 31, 2010.  The December 31, 2009 balance sheet is derived from those statements.

All references to outstanding shares, options, warrants and per share information have been adjusted to give effect to the one-for-two reverse stock split effective October 23, 2009.

The Company is particularly sensitive to seasonality given that the majority of its revenues are tied to CPM (cost-per-thousand) campaigns, which are strongest in the fourth quarter and weakest in the first quarter.  While not necessarily indicative of future seasonality, the Company’s revenue mix in 2009 was as follows: 15.2% in the first quarter, 19.3% in the second quarter, 26.1% in the third quarter, and 39.4% in the fourth quarter.

F-7

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Note 2. Significant Accounting Policies

Use of Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  These accounting principles require us to make certain estimates, judgments and assumptions.  We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made.  These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of our unaudited condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented.  Our unaudited condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.  There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  Significant estimates include the valuation of accounts receivable and allowance for doubtful accounts, estimates of depreciable lives and valuation of property and equipment, valuation and amortization periods of intangible assets and deferred costs, valuation of goodwill, valuation of discounts on debt, valuation of derivatives, valuation of investment in available-for-sale securities, valuation of shares of common stock, options and warrants granted for services or recorded as debt discounts or other non-cash purposes, the valuation allowance on deferred tax assets, and estimates of the tax effects of the sale of a subsidiary.

Principles of Consolidation

The consolidated financial statements include the accounts of interCLICK, Inc. and its wholly-owned subsidiary and Options Newsletter through its sale date.  All significant inter-company balances and transactions have been eliminated in consolidation.  As a result of the Options Divestiture, the results of Options Newsletter are reported as “Discontinued Operations”.

Restricted Cash

Restricted cash represents amounts pledged as security for certain agreements with vendors.  Upon satisfying the payment terms of the agreements, the funds are expected to be released and available for use by the Company.

In January 2010, the Company pledged a $500,000, 3-month certificate of deposit, to a third party in connection with a service agreement.  In April 2010 and July 2010, the certificate of deposit and the pledge were renewed for an additional three months.

In February 2010, the Company acquired $495,600 of computer equipment under a capitalized lease agreement.  In connection with the lease agreement, the Company’s banking institution issued an irrevocable 1-year standby letter of credit for the benefit of the leasing company.  The Company opened a 14-month certificate of deposit, bearing 0.56% interest, maturing April 1, 2011, with its banking institution in the amount of $495,600 and pledged that to the letter of credit.  The Company shall consider the certificate of deposit and accrued interest as restricted cash until such letter of credit expires.

On March 11, 2010, the Company entered into a sub-lease agreement to relocate its New York City headquarters to a larger space, having 16,840 square feet.  In connection with the lease agreement, the Company’s banking institution issued an irrevocable 1-year standby letter of credit for the benefit of the landlord.  The Company opened a 14-month certificate of deposit, bearing 0.70% interest, maturing March 27, 2011, with its banking institution in the amount of $294,700 and pledged that to the letter of credit.  Through the lease term, the Company is required to maintain a standby letter of credit for the benefit of the landlord.  Accordingly, as of June 30, 2010, the Company has classified the certificate of deposit as restricted cash, a non-current asset.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.  Depreciation is provided for on a straight-line basis over the estimated useful lives of the assets per the following table.  Leasehold improvements are amortized over the lesser of their useful life or the lease term.  Expenditures for additions and improvements are capitalized while repairs and maintenance are expensed as incurred.

F-8

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Category
 
Depreciation Term
Computer equipment
 
3-5 years
Software
 
3 years
Furnitur eand fixtures
 
3-5 years
Office equipment
 
3-5 years
Leasehold improvements
 
5 years

Fair Value Measurements

The Company has adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”.  ASC Topic 820 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.  Excluded from the scope of ASC Topic 820 are certain leasing transactions accounted for under ASC Topic 840, “Leases.”  The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of ASC Topic 820.

Reclassifications

Certain amounts in the accompanying 2009 financial statements had been reclassified at December 31, 2009.  In particular, bad debt expense is now included in general and administrative expenses.  Merger, acquisition, and divestiture costs are now included in general and administrative expenses.  Ad serving costs have been reclassified from general and administrative costs to cost of revenues.  Whereas certain compensation costs (including stock-based compensation) had been included in sales and marketing expenses, a portion of these costs have been reclassified to either general and administrative expenses or technology support expenses.  Deferred revenue is now included in accrued expenses.  The following tables show the reclassifications to the condensed consolidated statements of operations for the three and six months ended June 30, 2009.
 
   
For the Three Months Ended June 30, 2009
 
         
Reclassifications
       
   
As Previously Reported
   
Bad Debt
Expense
   
Merger, Acquisition, and Divestiture Costs
   
Ad Serving Costs
   
Compensation
and Employee- Related Costs
   
As
Reclassified
 
Revenues
  $ 10,648,686                             $ 10,648,686  
Cost of Revenue
    5,624,005                 $ 258,650             5,882,655  
Gross profit
    5,024,681                                 4,766,031  
                                           
Operating expenses:
                                         
General and administrative
    2,414,255     $ 47,375     $ 113,156       (258,650 )   $ 579,581       2,895,717  
Sales and marketing
    2,691,096                               (956,175 )     1,734,921  
Technology support
    420,958                               376,594       797,552  
Merger, acquisition and divestiture costs
    113,156               (113,156 )                     -  
Amortization of intangible assets
    49,760                                       49,760  
Baddebt expense
    47,375       (47,375 )                             -  
Total operating expenses
    5,736,600                                       5,477,950  
                                                 
Operating loss from continuing operations
  $ (711,919 )                                   $ (711,919 )
 
 
F-9

 
 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
   
For the Six Months Ended June 30, 2009
 
         
Reclassifications
       
   
As Previously Reported
   
Bad Debt
Expense
   
Merger, Acquisition, and Divestiture Costs
   
Ad
Serving Costs
   
Compensation and Employee-
Related Costs
   
As
Reclassified
 
Revenues
  $ 19,071,977                             $ 19,071,977  
Cost of Revenue
    10,064,603                 $ 292,331             10,356,934  
Gross profit
    9,007,374                                 8,715,043  
                                           
Operating expenses:
                                         
General and administrative
    3,894,487     $ (160,392 )   $ 178,535       (292,331 )   $ 953,083       4,573,382  
Sales and marketing
    4,733,402                               (1,581,959 )     3,151,443  
Technology support
    753,007                               628,876       1,381,883  
Merger, acquisition and divestiture costs
    178,535               (178,535 )                     -  
Amortization of intangible assets
    99,520                                       99,520  
Baddebt expense
    (160,392 )     160,392                               -  
Total operating expenses
    9,498,559                                       9,206,228  
                                                 
Operating loss from continuing operations
  $ (491,185 )                                   $ (491,185 )
 
Discontinued Operations

On June 23, 2008, the Company completed the sale of its Options Acquisition subsidiary pursuant to an Agreement of Merger and Plan of Reorganization.  The amounts associated with the sale of this subsidiary are reported as discontinued operations in the accompanying consolidated financial statements, in accordance with ASC Topic 820.  In addition, certain allocable corporate expenses pertaining to Options Acquisition are also included in discontinued operations.

Accounting for Derivatives

The Company evaluates its options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging”.  The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).  Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at the fair value of the instrument on the reclassification date.

Codification Update

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”.  This update provides amendments to Topic 820 to provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3.  The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated results of operations or financial condition.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”.  This update addresses both the interaction of the requirements of Topic 855, “Subsequent Events”, with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provision related to subsequent events (paragraph 855-10-50-4).  The amendments in this update have the potential to change reporting by both private and public entities, however, the nature of the change may vary depending on facts and circumstances.  The adoption of ASU 2010-09 did not have a material impact on the Company’s consolidated results of operations or financial condition.
 
F-10

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
In April 2010, the FASB issued ASU No. 2010-13, “Compensation – Stock Compensation”.  This update clarified the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This update will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the Company’s consolidated results of operations or financial condition.

Note 3. Property and Equipment

Property and equipment consisted of the following at June 30, 2010 and December 31, 2009:

   
June 30,
2010
   
December 31,
2009
 
Computerequipment
  $ 2,202,725     $ 1,433,461  
Furnitureandfixtures
    195,596       72,711  
Software
    144,258       57,572  
Leaseholdimprovements
    173,764       -  
Officeequipment
    22,443       22,443  
      2,738,786       1,586,187  
Accumulateddepreciation
    (917,644 )     (597,288 )
Propertyandequipment, net
  $ 1,821,142     $ 988,899  

In February 2010, the Company acquired $495,600 of computer equipment under a capitalized lease agreement.  Property and equipment held under capitalized leases of $1,015,965 and $520,365 at June 30, 2010 and December 31, 2009, respectively, are included in computer equipment above.

Depreciation expense for the six months ended June 30, 2010 and 2009 was $320,356 and $147,364, of which $78,976 and $2,936, respectively, pertained to capitalized leases.  Accumulated depreciation amounted to $917,644 and $597,288, of which $96,128 and $17,152 pertained to capitalized leases, as of June 30, 2010 and December 31, 2009, respectively.

Note 4. Intangible Assets
 
Intangible assets, which were all acquired from the Desktop business combination, consisted of the following at June 30, 2010 and December 31, 2009:
 
   
June 30,
2010
   
December 31,
2009
 
Customer relationships
  $ 540,000     $ 540,000  
Developed technology
    790,000       790,000  
Domain name
    683       683  
      1,330,683       1,330,683  
Accumulated amortization
    (988,350 )     (909,350 )
Intangible assets, net
  $ 342,333     $ 421,333  
 
Customer relationships are fully amortized and were amortized based upon the estimated percentage of annual or period projected cash flows generated by such relationships, to the total cash flows generated over the estimated three-year life of the customer relationships.  Accordingly, this resulted in accelerated amortization in which the majority of costs were amortized during the two-year period following the acquisition date of the intangible.

Developed technology is being amortized on a straight-line basis over five years.
 
The domain name is fully amortized and was amortized over its remaining life of six months following the acquisition date of the intangible.

 
F-11

 
 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
The following is a schedule of estimated future amortization expense of intangible assets as of June 30, 2010:
 
Year Ending December 31,
     
2010
  $ 79,000  
2011
    158,000  
2012
    105,333  
Total
  $ 342,333  
 
Note 5.  Investment in Available-For-Sale Marketable Securities

The following represents information about available-for sale securities held at June 30, 2010:

Securities  in loss positions
 
Amortized
   
Aggregate
   
Aggregate
 
more than 12 months
 
Cost Basis
   
Unrealized losses
   
Fair Value
 
 Options Media Group Holdings, Inc. ("OPMG")
  $ 245,821     $ 20,427     $ 225,394  
 
The following represents information about available-for sale securities held at December 31, 2009:

Securities  in loss positions
 
Amortized
   
Aggregate
   
Aggregate
 
more than 12 months
 
Cost Basis
   
Unrealized losses
   
Fair Value
 
 Options Media Group Holdings, Inc. ("OPMG")
  $ 715,608     $ -     $ 715,608  
 
In May 2009, the Company sold 214,285 OPMG shares having a basis of $57,778 for proceeds of $21,429 resulting in a loss of $36,349.
 
As of December 31, 2009, the Company concluded that OPMG’s quoted market price was not a reliable basis to use for fair valuation because OPMG was too thinly traded and its stock price too volatile, and therefore did not reliably occur in an active market.  Furthermore, attempting to sell a significant number of OPMG shares on the open market would not have been worthwhile because it would require interCLICK to trade many small blocks and pay broker commissions for each transaction.  The Company therefore believed that a private transaction was among the most economically feasible ways to sell any portion of interCLICK’s investment in OPMG.  Accordingly, the Company applied Level 2 considerations to determine the market value using the best available evidence.  The Company concluded that recent principal-to-principal (non-distressed) transactions – in November 2009 and January 2010 at $0.10 per share – were appropriate valuation inputs to determine fair value of OPMG shares as of December 31, 2009.

In January 2010, the Company sold 112,500 OPMG shares having a basis of $11,250 for proceeds of $11,250 resulting in no gain or loss.

As of March 31, 2010, the Company determined that its investment in OPMG shares was other than temporarily impaired to $0.0349 per share (from a basis of $0.10 per share) and recognized an other than temporary impairment of $458,538.  This was based primarily on the extent and length of time over which the investment had been in a continuous loss position and the Company’s belief that it is unlikely OPMG’s stock price will increase significantly in the foreseeable future.  Furthermore, the Company has not conducted any private sale transactions and has not received any offers to buy shares at any price.  The Company may also attempt to sell some shares in the open market in the near future.

During the first six months of 2010 and to date, OPMG has traded in an active market.  Sufficient trading volume, the lack of principal-to-principal transactions to support a value higher than current market price, and the near-term potential of the Company selling OPMG shares in the open market support the use of a Level 1 input (market price) for the basis of fair value as of June 30, 2010.   On such date, OPMG’s closing market price was $0.032 per share.
 
F-12

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)

As of June 30, 2010, the Company determined that its investment in OPMG was temporarily impaired due to the relatively short amount of time OPMG has traded under $.0349.  Thus, the Company valued its investment at $225,394 as of June 30, 2010, and an unrealized loss of $20,427 has been recognized in other comprehensive loss for the three and six months ended June 30, 2010.

Note 6. Credit Facility Agreement and Capital Lease Obligations

Credit Facility Agreement

On November 13, 2008, the Company entered into a revolving credit facility, in the form of an Accounts Receivable Financing Agreement (the “Agreement”), with Crestmark Commercial Capital Lending, LLC (“Crestmark”)  to finance certain eligible accounts receivable of the Company, as defined in the Agreement, up to a maximum credit line of $3.5 million (subsequently increased to $4.5 million on February 3, 2009, $5.5 million on April 30, 2009, and to $7.0 million on September 2, 2009), which would represent gross financed accounts receivable less a 20% reserve holdback by Crestmark.  The Crestmark credit facility has an interest rate equal to prime plus 1.0% (overall interest rate of 4.25% at June 30, 2010) and is secured by all of the Company’s assets except property and equipment financed elsewhere and the Company’s investment in OPMG shares.  In addition, the Company pays a monthly fee (initially 0.575% and decreased to 0.375% on September 2, 2009) per 30 days on each financed invoice amount until the invoice is paid.  The Crestmark credit facility was for an initial term of six months expiring May 12, 2009 (extended on March 3, 2009 for one year to May 12, 2010) and effective May 12, 2010, either the Company or Crestmark may terminate the Agreement with 60 days prior written notice to the other party without being subject to any early termination fee.  On July 12, 2010, the Company provided Crestmark with notification of termination of the Agreement effective September 10, 2010.  The Company is in advanced discussions with another lender about establishing a replacement line of credit which would likely be secured by most of the Company’s assets.

The balance due on the credit facility at June 30, 2010 was $2,227,554, which is net of the 20% reserve of $556,889 that is presented as Credit facility reserve, a current asset.  The unused amount under the credit facility available to the Company at June 30, 2010 was $4,772,446.  The average monthly net balance due under the credit facility was $1,813,231 and $3,502,410 for the six months ended June 30, 2010 and 2009, respectively.

The following is a summary of accounts receivable financed as well as credit facility fees incurred for the three and six months ended June 30, 2010 and 2009:

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Accounts receivable financed
  $ 3,403,055     $ 9,134,370     $ 6,430,031     $ 15,708,010  
                                 
Credit facility fees incurred
  $ 56,639     $ 150,625     $ 151,134     $ 247,487  

Capital Lease Obligations

In February 2010, the Company purchased computer equipment for $495,600 through a capital lease agreement, bearing interest of 8.35%, payable in 12 quarterly installments of $47,119.

Capital lease obligations consisted of the following at June 30, 2010 and December 31, 2009:

   
June 30, 2010
   
December 31, 2009
 
Capital lease obligations
  $ 927,795     $ 500,502  
Less: Current maturities
    (331,909 )     (161,940 )
Amount due after one year
  $ 595,886     $ 338,562  
 
F-13

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Note 7. Fair Value of Financial Instruments

The estimated fair value of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements.  Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.  The accounting standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available.  This hierarchy prioritizes the inputs into three broad levels as follows.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.  Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

We classify assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to their fair value measurement.  Assets and liabilities measured at fair value on a recurring basis consisted of the following at June 30, 2010:

   
Total Carrying
   
Fair Value Measurements at
   
Total Carrying
   
Fair Value Measurements at
 
   
Value at
   
June 30, 2010
   
Value at
   
December 31, 2009
 
   
June 30, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
December 31,
2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                                               
Investment in available-for-sale
                                           
  marketable securities
  $ 225,394     $ 225,394     $ -     $ -     $ 715,608     $ -     $ 715,608     $ -  
                                                                 
Liabilities:
                                                               
Warrant derivative liability
  $ -     $ -     $ -     $ -     $ 69,258     $ -     $ 69,258     $ -  
 
Unrealized gains (losses) recognized on the investment in available-for-sale marketable securities are included in other comprehensive income (loss) in the accompanying condensed consolidated statements of operations (See Note 5 for valuation methodology).  Realized gains (losses) recognized on the investment in available-for-sale marketable securities are included in other income (expense) in the accompanying condensed consolidated statements of operations.  Income (expense) recognized on the warrant derivative liability are included in other income (expense) in the accompanying condensed consolidated statements of operations.

The valuation technique of the investment in available-for-sale marketable securities changed during the three months ended March 31, 2010.  At March 31, 2010, the Company began utilizing the closing share price of OPMG’s stock (Level 1) in order to value the Company’s remaining investment in OPMG shares.  Previously, the Company had been utilizing recent sales prices in private transactions (Level 2) to value its investment in OPMG shares as management believed OPMG’s quoted market price was not a reliable basis to use for fair valuation based on the conclusion that OPMG was too thinly traded and therefore did not reliably occur in an active market.

Note 8. Commitments and Contingencies

Operating Leases

In January 2010, the Company entered into a 16-month agreement for its Chicago office space with monthly rent of $2,151 commencing February 1, 2010 with 3.0% escalation effective June 1, 2010.

In February 2010, the lease amendment for the Company’s office space located in Boca Raton, Florida became effective upon completion of the improvements to the expansion premises.  Accordingly, the Company moved into the expansion premises and agreed to (i) lease additional space for a period of 60 months, and (ii) extend the lease term of the original space to terminate the same time as the expanded space.  Upon the expansion premises commencement date, the original premises monthly rent was adjusted to $2,840 with 3.0% annual escalation and the expansion premises monthly rent was $6,923 with 3.0% annual escalation.  The landlord provided an allowance of $83,070 for the improvements to the expansion premises as well as an abatement of rent for the first 14 months of the lease on the expansion premises.  The leasehold improvements were recognized with an $83,070 increase in property and equipment and a corresponding increase in deferred rent, both of which shall be amortized over the lease term.
 
F-14

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
On February 22, 2010, the Company entered into a 5-year agreement, commencing June 1, 2010, for office space in Santa Monica, California bearing monthly rent of $3,827 with an annual 3.0% escalation.

On March 11, 2010, the Company entered into a sub-lease agreement to relocate its New York City headquarters to a larger space, having 16,840 square feet.  The new lease is for a term of 92 months commencing on May 1, 2010, bearing monthly rent of $49,117 with an annual 2.5% escalation.  In connection with the lease agreement, the Company’s banking institution issued an irrevocable 1-year standby letter of credit for the benefit of the landlord.  The Company opened a certificate of deposit with its banking institution in the amount of $294,700 and pledged that to the letter of credit.  Through the lease term, the Company is required to maintain a standby letter of credit for the benefit of the landlord. Accordingly, as of June 30, 2010, the Company has classified the certificate of deposit as restricted cash, a non-current asset.

The Company entered into an agreement to sublease the office space of its former New York City headquarters commencing May 1, 2010 for the remainder of the original lease term with monthly rent of $16,717 with an annual 2.5% escalation.  Accordingly, the Company recognized an early cease use liability of $497,851 pertaining to the prior New York office space.  The charge to operations for the establishment of the liability was offset by $66,350 due to the elimination of deferred rent related to the former office space.  The balance of the early cease use liability was $454,140 at June 30, 2010, of which $345,802 is long-term.

Minimum Fees

The Company is party to multi-year agreements with third parties whereby the Company is obligated to incur minimum fees of $2,154,250 in 2010 and $1,568,000 in 2011.  Under the agreements, the Company has expensed $873,947 in fees during the six months ended June 30, 2010.

Legal Matters

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of June 30, 2010, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

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

Note 9. Stockholders’ Equity
 
Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of preferred stock having a par value of $0.001 per share, of which none was issued and outstanding at June 30, 2010 and December 31, 2009.

Common Stock

The Company is authorized to issue up to 140,000,000 shares of common stock having a par value of $0.001 per share, of which 23,798,585 and 23,632,707 shares were issued and outstanding at June 30, 2010 and December 31, 2009, respectively.
 
During the six months ended June 30, 2010, proceeds of $228,732 were received and an aggregate of 155,778 shares were issued as a result of stock option and warrant exercises.
 
F-15

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Stock Warrants
 
A summary of the Company’s warrant activity during the six months ended June 30, 2010 is presented below:

Warrants
 
Number of Shares
   
Weighted Average Exercise Price
   
Weighted Average
Remaining Contractual Term
   
Aggregate
Intrinsic Value
 
Balance Outstanding, December 31, 2009
    1,286,809     $ 3.51              
Granted
    25,000     $ 4.44              
Exercised
    (213,750 )   $ 2.80              
Forfeited
    (60,000 )   $ 4.24              
Expired
    (5,000 )   $ 11.14              
Balance Outstanding, June 30, 2010
    1,033,059     $ 3.60       2.4     $ 459,224  
                                 
Exercisable, June 30, 2010
    1,014,309     $ 3.58       2.4     $ 459,224  
 
During 2010, 15,494 of the Company’s warrants contained round-down protection (price protection), which caused the warrants to be treated as derivatives (see Note 7).  In May 2010, price protection expired requiring $47,846 of the warrant derivative liability to be reclassified to additional paid-in capital.  Accordingly, the fair value of the warrant derivative liability was $0 as of June 30, 2010 as shown in the accompanying condensed consolidated balance sheet.  The change in fair value (taking into consideration the cumulative effect of the change in accounting principle adopted on January 1, 2009) of the warrant derivative liability of $21,413 and ($232,061) during the six months ended June 30, 2010 and 2009, respectively, has been recorded in the accompanying condensed consolidated statements of operations as warrant derivative liability income (expense).

Stock Incentive Plan and Stock Option Grants to Employees and Directors

In 2007, the Company adopted the 2007 Stock Incentive Plan (the “Plan”) and the 2007 Incentive Stock and Award Plan (the “2007 Award Plan”) that provide for the grant of shares of common stock and/or options to purchase shares of common stock to directors, employees and consultants.  On June 11, 2010, the Company increased the number of shares of common stock eligible for grant under the 2007 Award Plan from 3,112,500 to 4,512,500 shares.

During the six months ended June 30, 2010, the Company granted 529,000 stock options, all of which were under the 2007 Award Plan, at various exercise prices ranging from $3.68 to $5.46 per share.  The options vest pro rata over three to four years; all options expire five years from the grant date.

The total fair value of stock options granted to employees during the six months ended June 30, 2010 was $1,634,023, which is being recognized over the respective vesting periods.  During the six months ended June 30, 2010 and 2009, the Company recorded compensation expense of $1,659,872 and $1,334,630, respectively, in connection with employee stock options.

As of June 30, 2010, 1,437,983 shares were remaining under the 2007 Award Plan for future issuance.

The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of our stock price over the expected term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates.  The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC Topic 718 requirements.  These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants.  The Company recognizes compensation on a straight-line basis over the requisite service period for each award.  The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted during the six months ended June 30, 2010 and 2009:
 
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
 
Assumptions
 
June 30, 2010
   
June 30, 2009
 
Expected life (years)
    3.5 - 3.75       5.0  
Expected volatility
    102.6% - 110.1 %     117.2% - 121.4 %
Weighted-average volatility
    107.4 %     120.5 %
Risk-free interest rate
    2.02% - 2.69 %     1.89% - 2.86 %
Dividend yield
    0.00 %     0.00 %
Expected forfeiture rate
    8.7 %     2.8 %
 
F-16

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
For stock options issued through September 30, 2009, the expected life is based on the contractual term.  Thereafter, the Company utilized the simplified method to estimate the expected life for stock options granted to employees.  The simplified method was used as the Company does not have sufficient historical data regarding stock option exercises.  The expected volatility is based on historical volatility.  The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant.  Dividend yield is based on historical trends.  While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.

A summary of the Company’s stock option activity for employees and directors during the six months ended June 30, 2010 is presented below:


Options
 
Number of Shares
   
Weighted Average
Exercise Price
   
Weighted Average Remaining
Contractual Term
   
Aggregate
Intrinsic Value
 
Balance Outstanding, December 31, 2009
    4,994,167     $ 2.69              
Granted
    529,000     $ 4.42              
Exercised
    (43,333 )   $ 2.05              
Forfeited
    (234,375 )   $ 3.24              
Expired
    -     $ -              
Balance Outstanding, June 30, 2010
    5,245,459     $ 2.85       3.5     $ 5,411,505  
                                 
Expected to vest, June 30, 2010
    5,081,854     $ 2.82       3.4     $ 5,333,440  
                                 
Exercisable, June 30, 2010
    2,202,220     $ 2.18       2.8     $ 3,306,200  
 
The weighted-average grant-date fair value of options granted to employees during the six months ended June 30, 2010 and 2009 was $3.09 and $1.98, respectively.  The total intrinsic value of options exercised by employees during the six months ended June 30, 2010 and 2009 was $136,749 and $0, respectively.

Nonvested Common Stock Grants to Employees

On January 25, 2010, the Company granted an aggregate of 7,600 restricted shares of common stock having a fair value of $39,596 (based on a quoted trading price of $5.21 per share) to employees.  The shares were issued under the 2007 Award Plan and vest annually over a two-year period, subject to continued employment by the Company.
 
F-17

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)

 
During the six months ended June 30, 2010 and 2009, the Company recognized an aggregate amount of $58,327 and $4,931 of stock-based compensation for nonvested shares of common stock issued to employees.

Nonvested Shares
 
Number of
Shares
   
Weighted Average
Grant Date
Fair Value
 
Nonvested at December 31, 2009
    73,594     $ 4.21  
Granted
    7,600     $ 5.21  
Vested
    (13,516 )   $ 3.29  
Forfeited
    -     $ -  
Nonvested at June 30, 2010
    67,678     $ 4.51  
 
The total fair value of shares vested to employees during the six months ended June 30, 2010 was $56,420.

As of June 30, 2010, there was $7,056,996 of total unrecognized compensation costs related to nonvested share-based compensation arrangements.  That cost is expected to be recognized over a weighted-average period of 1.3 years.

Other Stock-Based Awards to Nonemployees

On April 15, 2010, as part of a one-year consulting agreement, the Company granted warrants to purchase an aggregate of 25,000 shares of common stock having a fair value of $72,000 to a consultant for services to be rendered.  The warrants have an exercise price of $4.44 per share, were not part of the 2007 Award Plan, vest in equal increments quarterly over a one-year period commencing June 30, 2010, and expire three years from the grant date.  As these warrants were issued to nonemployees, the fair value was recalculated at June 30, 2010 at $52,750 and, accordingly, $22,945 was recognized as stock-based compensation during the three months ended June 30, 2010.  The warrants shall be revalued and expensed in a similar manner in each subsequent reporting period during the consultant’s one-year service term.

During the six months ended June 30, 2010 and 2009, the Company recognized an aggregate amount of $103,871 and $14,182 of stock-based compensation for stock options, stock warrants and common shares issued to nonemployees.

Note 10. Net Earnings (Loss) per Share

Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period.  Diluted earnings (loss) per share are computed using the weighted average number of common shares and potentially dilutive securities outstanding during the period.  Potentially dilutive securities consist of the incremental shares of common stock issuable upon exercise of stock options and warrants (using the treasury stock method) as well as nonvested shares of common stock and convertible debt.  The options, warrants and nonvested shares are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive.  Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.

F-18

 
Components of basic and diluted earnings per share for the six months ended June 30, 2010 was as follows:
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)

   
For the Six Months Ended June 30, 2010
 
   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Net income
  $ 125,784              
                     
Basic EPS
                   
Income available to common stockholders
  $ 125,784       23,646,178     $ 0.01  
                         
Effect of Dilutive Securities
                       
Stock options
    -       919,708          
Stock warrants
    -       241,817          
Nonvested shares
    -       12,408          
                         
Diluted EPS
                       
Income available to common stockholders
                       
+ assumed conversions
  $ 125,784       24,820,111     $ 0.01  
 
Options to purchase 5,395,459 and 1,781,500 shares of common stock and warrants to purchase 1,033,059 and 198,750 shares of common stock were outstanding during the three and six months ended June 30, 2010, respectively, but were not included in the computation of diluted earnings per share because the effects would have been anti-dilutive.  In addition, 67,678 nonvested shares were not included in the computation of diluted earnings per share for the three months ended June 30, 2010, because the number of shares assumed purchased (calculated using the compensation cost attributed to future services and not yet recognized) under the treasury stock method exceeds the number of shares that would be issued.

Options to purchase 4,053,750 common shares, warrants to purchase 1,126,025 common shares, 24,610 nonvested common shares and $100,000 of convertible debt were outstanding during the three and six months ended June 30, 2009, but were not included in the computation of diluted loss per share because the effects would have been anti-dilutive.  The options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive.

Note 11. Income Taxes

The Company files a consolidated U.S. income tax return that includes its U.S. subsidiary.  The Company also files state income tax returns in California, Florida, Illinois, New York and Texas.  The Company has recorded an income tax provision for the six months ended June 30, 2010 of $139,126.  The tax provision is based on the Company's estimate of the effective tax rate expected to be applicable for the full year.  The effective tax rate of 52.5% for the six months ended June 30, 2010 differs from the statutory rate principally because of state income taxes, a valuation allowance established on capital loss carryforwards and other non deductible expenses.  The effective rate is based on the Company's best estimate of projected income through the end of the year, in which the first quarter is typically seasonally weakest and the fourth quarter is expected to be seasonally strongest (see Note 1).

Note 12. Concentrations
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable.  Cash and cash equivalents are deposited in the local currency in various financial institutions in the United States.  The balance, at any given time, may exceed Federal Deposit Insurance Corporation insurance limits.  As of June 30, 2010 and December 31, 2009, there was approximately $11,175,000 and $13,336,000, respectively, in excess of insurable limits.
 
F-19

 
INTERCLICK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
 
Concentration of Revenues, Accounts Receivable and Publisher Expense

For the three and six months ended June 30, 2010 and 2009, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Customer
    10.9 %     0.0 %     11.1 %     0.0 %
Customer
    0.0 %     0.0 %     11.3 %     0.0 %
Customer
    0.0 %     0.0 %     0.0 %     12.3 %
Totals
    10.9 %     0.0 %     22.4 %     12.3 %
 
At June 30, 2010 and December 31, 2009, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

   
June 30,
2010
   
December 31,
2009
 
Customer
    11.5 %     17.9 %
Customer
    10.5 %     0.0 %
Totals
    22.0 %     17.9 %
 
For the three and six months ended June 30, 2010 and 2009, the Company made significant purchases of advertising impressions from publishers with individual percentage of total publisher expense (included in cost of revenues) equaling 10% or greater as follows:

   
For the Three
   
For the Three
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
 Publisher
    33.9 %     22.5 %     30.5 %     19.0 %
 Totals
    33.9 %     22.5 %     30.5 %     19.0 %
 
F-20

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

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2009.

This following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure, EBITDA. EBITDA represents operating income or loss before interest, taxes, depreciation and amortization, including stock-based compensation.  EBITDA should be viewed as supplemental to, and not as an alternative for, net income or loss, income or loss from operations or any other measure for determining operating performance or liquidity, as determined under GAAP. We have included a reconciliation of our non-GAAP financial measure to net income. See pages 24 and 27 of this report.

EBITDA is used by our management as an additional measure of our performance for purposes of business decision-making, including developing budgets and managing expenditures. Period-to-period comparisons of EBITDA helps our management identify additional trends in our financial results that may not be shown solely by period-to-period comparisons of income or loss, or income or loss from operations. Our management recognizes that EBITDA has inherent limitations because of the excluded items, particularly those items that are recurring in nature.
 
We believe that the presentation of EBITDA is useful to investors in their analysis of our results for reasons similar to the reasons why our management finds it useful and because it helps facilitate investor understanding of decisions made by our management in light of the performance metrics used in making those decisions. In addition, we believe that providing EBITDA, together with a reconciliation to GAAP, helps investors make comparisons between interCLICK and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.

Company Overview

interCLICK, Inc. (the “Company” or “interCLICK”) is an audience intelligence and targeting company, developing and executing data-driven campaign strategies for major digital agencies and marketers.  Fueled by its proprietary Open Segment Manager (OSM) platform and sophisticated approach to managing its supply chain, the Company empowers its clients to reach desirable audiences efficiently, in brand-safe environments, and at tremendous scale.

We generate our revenue through the sale of online display advertising which is placed on third-party publisher websites.  Virtually all of the Company’s revenues are generated in the United States.

interCLICK is particularly sensitive to seasonality given that the majority of its revenues are tied to CPM (cost-per-thousand) campaigns, which are strongest in the fourth quarter and weakest in the first quarter. 

Significant events which affected our results of operations include:

 
·
Revenues for the three months ended June 30, 2010 increased 103% to $21,659,883 from $10,648,686 for the prior year comparable period; revenues for the six months ended June 30, 2010 increased 88% to $35,861,740 from $19,071,977 for the prior year comparable period;
     
 
·
Gross profit margin for the three months ended June 30, 2010 was 44.4% as compared to 44.8% in the prior year comparable period; gross profit margin for the six months ended June 30, 2010 was 44.6% as compared to 45.7% in the prior year comparable period;
     
 
·
Headcount increased to 96 people at June 30, 2010, from 64 people at the end of the prior year comparable period;
     
 
·
EBITDA for the three months ended June 30, 2010 increased to $2,394,988 compared to $189,992 in the prior year comparable period; EBITDA for the six months ended June 30, 2010 increased to $3,083,388 compared to $1,109,442 in the prior year comparable period;
     
 
·
We have achieved positive EBITDA for seven straight quarters beginning with the fourth quarter of 2008;
     
 
·
Net loss for the three months ended June 30, 2010 was ($79,286), or $0.00 per share, compared to ($1,034,243), or ($0.05) per share, in the prior year comparable period; and net income for the six months ended June 30, 2010 was $125,784, or $0.01 per share, compared to a net loss of ($1,001,076), or ($0.05) per share, in the prior year comparable period.  Results for the three months ended June 30, 2010 included an income tax expense of $1,218,234; results for the six months ended June 30, 2010 included an other than temporary impairment of available-for-sale-securities of $458,538.
 
 
21

 
 
Results of Operations

Three Months Ended June 30, 2010 Compared with Three Months Ended June 30, 2009

The following table presents our results of operations for the three months ended June 30, 2010 and 2009. The following discussion of our costs reflects the reclassification of our expense categories we implemented in the third quarter of 2009; all prior periods have been retroactively adjusted. 
 
   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
 
Unaudited
 
June 30, 2010
   
June 30, 2009
 
Revenues
  $ 21,659,883     $ 10,648,686  
Cost of revenues
    12,034,487       5,882,655  
Gross profit
    9,625,396       4,766,031  
Operating expenses:
               
General and administrative
    3,873,745       2,895,717  
Sales and marketing