FINDWHAT COM INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004

		OR

		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________

Commission file number: 0-30428

FindWhat.com
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)

88-0348835
(I.R.S. Employer
Identification No.)

5220 Summerlin Commons Boulevard, Suite 500, Fort Myers, Florida 33907
(Address of principal executive offices, including zip code)

(239) 561-7229
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES NO

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 30,113,098 shares of Common Stock, $.001 par value, were outstanding at July 31, 2004.

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FORM 10-Q

FindWhat.com

Table of Contents

			Page No.
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements.
		Condensed Consolidated Balance Sheets	3
		December 31, 2003 and June 30, 2004 (Unaudited)
		Unaudited Condensed Consolidated Statements of Income	4
		For the Three and Six Months Ended June 30, 2003 and 2004
		Unaudited Condensed Consolidated Statements of Cash Flows	5
		For the Six Months Ended June 30, 2003 and 2004
		Notes to Interim Condensed Consolidated Unaudited	6
		Financial Statements For the Three and Six Months Ended
		June 30, 2003 and 2004
	Item 2.	Management’s Discussion and Analysis of Financial	17
		Condition and Results of Operations.
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	N/A
	Item 4.	Controls and Procedures.	39
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings.	40
	Item 2.	Changes in Securities and Use of Proceeds.	40
	Item 3.	Defaults Upon Senior Securities.	N/A
	Item 4.	Submission of Matters to a Vote of Security Holders.	40
	Item 5.	Other Information.	N/A
	Item 6.	Exhibits and Reports on Form 8-K.	41
	Signature		44

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Item 1. Financial Statements

FindWhat.com
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)

ASSETS	June 30, 2004			December 31, 2003

	(unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	53,739		$	59,210
Accounts receivable, less allowance for doubtful accounts of $307
and $223 at June 30, 2004 and December 31, 2003, respectively		7,679			5,051
Deferred tax assets		—			180
Note receivable		2,106			2,054
Income taxes receivable		2,989			—
Prepaid expenses and other current assets		4,095			3,312

Total current assets		70,608			69,807

EQUIPMENT AND FURNITURE – NET		5,803			4,695
INTANGIBLE ASSETS – NET		29,281			—
DEFERRED TAX ASSETS		6,515			—
OTHER ASSETS		738			156

Total assets	$	112,945		$	74,658

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	8,307		$	7,770
Notes payable – current		4,524			—
Deferred revenue		2,029			1,866
Current portion of long-term debt		141			—
Deferred income tax liabilities		985			—
Rent-related liabilities – current		754			—

Total current liabilities		16,740			9,636

DEFERRED INCOME TAXES		—			600
LONG-TERM DEBT		122			—
RENT-RELATED LIABILITIES		1,525			115

Total liabilities		18,387			10,351

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value; authorized, 500 shares; none issued and outstanding		—			—
Common stock, $.001 par value; authorized, 200,000 shares; issued 23,141 and 21,428, respectively; outstanding 23,098 and 21,421, respectively		23			21
Additional paid-in capital		76,416			52,884
Treasury stock; 43 and 7 shares at cost, respectively		(804	)		(82	)
Retained earnings		18,923			11,484

Total stockholders’ equity		94,558			64,307

Total liabilities and stockholders’ equity	$	112,945		$	74,658

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003

Revenues	$	27,765	$	17,511	$	52,451	$	33,361

Operating expenses
Search serving		1,149		722		1,993		1,332
Marketing, sales and service		14,175		10,091		27,715		19,060
General and administrative		4,194		2,044		7,653		3,798
Product development		1,296		380		1,896		678
Amortization		1,085		—		1,274		—

Total operating expenses		21,899		13,237		40,531		24,868

Income from operations		5,866		4,274		11,920		8,493
Interest income, net		94		84		274		210

Income before provision for income taxes		5,960		4,358		12,194		8,703

Income tax expense		2,323		1,651		4,755		3,301

Net income	$	3,637	$	2,707	$	7,439	$	5,402

Net income per share
Basic	$	0.16	$	0.14	$	0.33	$	0.29

Diluted	$	0.15	$	0.12	$	0.30	$	0.25

Weighted-average number of common shares outstanding
Basic		22,948		19,071		22,423		18,812

Diluted		25,022		21,818		24,532		21,452

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

	Six months ended June 30,
	2004			2003

Cash Flows from Operating Activities
Net income	$	7,439		$	5,402
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for doubtful accounts		151			61
Depreciation and amortization		2,549			785
Tax benefit of stock option exercises		3,606			—
Deferred income tax expense		224			446
Loss on sale of assets		—			11
Changes in operating assets and liabilities
Accounts receivable		(713	)		(605	)
Prepaid expenses and other current assets		(1,298	)		(1,084	)
Income taxes receivable		(2,231	)		85
Other assets		(338	)		20
Deferred revenue		(99	)		(201	)
Accounts payable, accrued expenses and other liabilities		(1,884	)		2,140

Net Cash Provided by Operating Activities		7,406			7,060

Cash Flows from Investing Activities
Advances under note receivable		—			(2,003	)
Proceeds from the sale of assets		—			9
Proceeds from short-term investments		—			3,157
Purchase of businesses, net of cash acquired		(10,880	)		—
Purchase of equipment and furniture		(2,027	)		(1,684	)

Net Cash Used in Investing Activities		(12,907	)		(521	)

Cash Flows from Financing Activities

Payments made on capital leases and notes payable		(1,334	)		(4	)
Proceeds received from exercise of stock options and warrants		1,364			5,052

Net Cash Provided by Financing Activities		30			5,048

(Decrease) Increase in Cash and Cash Equivalents		(5,471	)		11,587

Cash and Cash Equivalents, Beginning of Period		59,210			17,982

Cash and Cash Equivalents at End of Period	$	53,739		$	29,569

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	32		$	3
Income taxes paid	$	3,155		$	2,414

Supplemental Schedule of Noncash Investing and Financing Activities:
Treasury stock received to satisfy accrued liabilities	$	722		$	—

See Notes to Unaudited Condensed Consolidated Financial Statements.

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FindWhat.com
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)

NOTE A – NATURE OF BUSINESS

FindWhat.com was organized under the laws of the State of Nevada. FindWhat.com and its wholly-owned subsidiaries, BeFirst Internet Corporation, Miva Corporation (“Miva”), Comet Systems, Inc. (“Comet”) and B&B Advertising, Inc. (“B&B”) are collectively referred to as the Company. Intercompany accounts and transactions have been eliminated in consolidation. The Company creates and offers proprietary performance-based marketing and commerce enabling services that help businesses of all sizes throughout the business cycle in reaching prospects, converting prospects to customers and then retaining those customers. As of June 30, 2004, the Company provided three related, proprietary services:

•

FindWhat.com Network™/Private Label. The FindWhat.com Network is a performance-based, keyword-targeted advertisement service that distributes advertisements throughout the Internet each day, primarily in the United States. The Company’s Private Label service offers large companies the opportunity to brand and sell their own performance-based, keyword-targeted advertising service using the Company’s turn-key operation, or parts thereof;


	•	Primary Traffic. Through Comet, the Company offers services such as connected desktop consumer software, which allow the Company to establish a direct relationship with Internet users. These offered services create a direct source of traffic for the Company’s advertisers and enable the Company to obtain additional information about maximizing paid listings opportunities on the Internet; and


	•	Merchant Services. The Company offers commerce-enabling products and services that help online businesses capitalize on opportunities unique to transacting business on the Internet. Merchant services include Miva Merchant™, a leading e-commerce development system that allows a merchant to create a complete online store within an existing website or when creating a new website.

As of June 30, 2004, the Company operated principally in the United States.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


1.	Basis of Presentation

The consolidated financial statements include the accounts and operations of FindWhat.com and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities in which the Company can exercise significant influence, but is not the primary beneficiary, are accounted for under the equity method and are included in other assets on the balance sheet.

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal and recurring items, which in the opinion of management, are necessary for a fair presentation of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period.


	These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.


2.	Cash and Cash Equivalents


	Cash equivalents consist of highly liquid investments with original maturities of three months or less.

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NOTE B (continued)


3.	Accounts Receivable

Accounts receivable are recorded at face value, less an allowance for doubtful accounts. The Company does not require collateral. The allowance for doubtful accounts is an estimate calculated based on an analysis of current business and economic risks, customer credit-worthiness, specific identifiable risks such as bankruptcies, terminations or discontinued customers, or other factors that may indicate a potential loss. The allowance is reviewed on a monthly basis to ensure that it adequately provides for all reasonably expected losses in the receivable balances. An account may be determined to be uncollectable if all collection efforts have been exhausted, the customer has filed for bankruptcy and all recourse against the account is exhausted, or disputes are unresolved and negotiations to settle are exhausted. This uncollectable amount is written off against the allowance.


4.	Prepaid Expenses and Other Current Assets


	As of June 30, 2004, the Company had incurred and capitalized approximately $2.8 million in legal, advisory and transaction costs associated with the merger with Espotting Media Inc., which was completed on July 1, 2004. These and any additional transaction costs will be considered part of the purchase price for accounting purposes upon recording the acquisition.


5.	Equipment and Furniture

Equipment and furniture are stated at cost and depreciated using the straight-line method over the estimated useful lives for the respective assets, which range from three to five years. Depreciation expense consists of depreciation of computer equipment and furniture. Improvements to leased premises are capitalized and amortized over the shorter of the related lease term or the useful lives of the improvements.


6.	Capitalized Software

Product development costs are expensed as incurred or capitalized into property and equipment in accordance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. Capitalized costs are amortized over the estimated useful lives.


7.	Revenues

Revenues are generated primarily through click-throughs on the Company’s managed advertisers’ paid listings. When an Internet user clicks on a sponsored advertisement in the FindWhat.com Network, revenues are recognized in the amount of the advertiser’s bid price. Revenues are also generated from the Company’s private label service and are recognized in accordance with the contractual revenue share payment agreement as the services are rendered and the click-throughs performed. In accordance with the guidance of Emerging Issue Task Force No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” the Company records FindWhat.com Network click-through revenues gross, and private label revenues net.

Revenue for software licenses is generally recognized as products are shipped. Revenue from support arrangements is recognized ratably over the contract period of the invoice. When a Comet user clicks on a sponsored advertisement on a partner’s network revenues are recognized in the amount of the partner’s fee due to Comet. Non click-through-related revenue from Comet is recognized when earned under the terms of the contractual arrangement with the advertiser or advertising agency, provided that collection is probable.


8.	Deferred Revenue

Deferred revenue represents advance deposits made by the Company’s advertisers for future click-throughs for keyword advertisements on the FindWhat.com Network and the unearned portion of support revenues.

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NOTE B (continued)


9.	Fair Value of Financial Instruments


	At June 30, 2004, the Company’s financial instruments included cash, cash equivalents, accounts receivable, note receivable, accounts payable, note payable and long-term debt.


	The fair values of these financial instruments approximated their carrying values because of the short-term nature of these instruments.


10.	Business Segments


	The Company operates in one primary business segment – Performance-based, keyword-targeted advertising, which includes the Company’s FindWhat.com Network/Private Label and Primary Traffic divisions. Due to the immateriality of the Company’s Merchant Services division, separate segment reporting is not required.


11.	Accounting for Stock-Based Compensation


	The Co