10-Q 1 f10q0609_adex.htm QUARTERLY REPORT f10q0609_adex.htm


 
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, 2009

OR
 
¨
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: 000-53733
 
ADEX MEDIA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-8755674
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S Employer Identification No.)
     
883 N. Shoreline Blvd. Suite A-200, Mountain View, CA 94043
(Address of principal executive offices)

(650) 967-3040
(Registrant’s telephone number, including area code)

 
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    ¨    No   x
 
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    ¨    No   ¨
 
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
 
¨
  
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨  (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   ¨     No   x
 
At August 10, 2009, 31,720,747 shares of Common Stock, par value $0.0001, of the registrant were outstanding.


EXPLANATORY NOTE

 
The Company filed a Registration Statement on Form 8-A with the Securities and Exchange Commission on July 20, 2009 (“Registration Statement”). As a result, the Company became subject to the reporting requirements under the Securities Exchange Act of 1934 on July 20, 2009.  Prior to the filing of the Registration Statement, the Company was a voluntary filer that had 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 as if it was a “subject” to such requirement.  Accordingly, the Company 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 but has not been subject to such filing requirements for the past 90 days.





ADEX MEDIA, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009

 

     
Page
Part I.     Financial Information
 
Item 1.
 
 
3
 
4
 
5
 
6
Item 2.
28
Item 3.
39
Item 4T.
39
   
Part II.     Other Information
 
Item 1.
40
Item 1A.
40
Item 2.
54
Item 3.
54
Item 4.
54
Item 5.
54
Item 6.
55
 
56



 
PART I.
FINANCIAL INFORMATION
   
FINANCIAL STATEMENTS

ADEX MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
   
June 30,
   
December 31,
 
   
2009
   
2008
 
             
ASSETS
           
             
  Current assets:
           
    Cash and cash equivalents
  $ 2,567,287     $ 683,576  
    Restricted cash
    100,000       -  
    Short-term investments
    569,280       2,502,670  
    Accounts receivable, net of allowance for doubtful accounts of $90,430 and $19,737
    1,179,546       521,004  
    Credit card processor holdbacks, net of reserves of $595,640 and $167,363
    604,771       300,493  
    Inventory
    231,892       57,087  
    Prepaid expenses and other current assets
    340,863       97,878  
  Total current assets
    5,593,639       4,162,708  
                 
  Property and equipment, net
    114,758       43,606  
  Intangible assets, net
    232,222       1,367,330  
  Goodwill
    8,448,789       8,448,789  
                 
  Total assets
  $ 14,389,408     $ 14,022,433  
                 
LIABILITITIES AND STOCKHOLDERS' EQUITY
               
                 
  Current liabilities:
               
    Accounts payable
  $ 2,027,999     $ 929,807  
    Accrued liabilities
    1,171,007       593,907  
    Warrant  liability
    186,353       -  
    Deferred revenue
    119,641       25,709  
    Promissory notes
    253,778       401,806  
    Total current liabilities
    3,758,778       1,951,229  
                 
  Promissory notes
    -       150,000  
  Deferred tax liability
    5,053       404,817  
                 
  Total liabilities
    3,763,831       2,506,046  
                 
Commitments and Contingencies (Note 15)
               
                 
  Stockholders' Equity:
               
    Preferred stock; $0.0001 par value; 10,000,000 shares authorized;
    195       -  
       1,951,337 shares issued and outstanding at June 30, 2009 for
               
       series A preferred stock and zero at December 31, 2008
               
    Common stock, $0.0001 par value; 150,000,000 shares authorized, 31,756,245
    3,166       3,120  
      and 31,202,347 shares issued and outstanding at June 30, 2009 and
               
      December 31, 2008, respectively
               
  Additional paid-in capital
    17,282,774       13,808,966  
  Accumulated deficit
    (6,660,558 )     (2,295,699 )
  Total stockholders' equity
    10,625,577       11,516,387  
                 
  Total liabilities and stockholders' equity
  $ 14,389,408     $ 14,022,433  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
ADEX MEDIA, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
 
   
For The Three Months Ended
   
For The Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues:
                       
                         
Marketing platform services - external offers
  $ 2,825,000     $ 718,776     $ 5,337,500     $ 1,409,329  
Marketing platform services - internal offers
    5,334,289       -       6,315,685       -  
Total revenues
    8,159,289       718,776       11,653,185       1,409,329  
                                 
Cost of revenues:
                               
Marketing platform services - external offers
    2,216,407       536,244       4,320,300       1,079,904  
Marketing platform services - internal offers
    1,506,669       -       1,907,325       -  
Amortization of acquired product licenses
    23,333       -       58,333       -  
Total cost of revenues
    3,746,409       536,244       6,285,958       1,079,904  
                                 
Gross profit
    4,412,880       182,532       5,367,227       329,425  
                                 
Operating expenses:
                               
Product development
    -       35,250       -       35,250  
Sales and marketing
    4,726,346       295,982       6,712,082       328,473  
 General and administrative
    697,400       542,713       1,376,537       551,208  
 Amortization of intangible assets
    39,892       -       86,941       -  
  Impairment charges on intangible assets
    989,834       -       989,834       -  
                                 
Total operating expenses
    6,453,472       873,945       9,165,394       914,931  
                                 
Operating loss
    (2,040,592 )     (691,413 )     (3,798,167 )     (585,506 )
                                 
Other income and expense:
                               
Interest and other (expense) income, net
    (14,576 )     29,536       432       32,093  
Mark-to-market loss on warrant liability
    (18,538 )     -       (18,538 )     -  
                                 
Loss before (benefit) provision for income taxes
    (2,073,706 )     (661,877 )     (3,816,273 )     (553,413 )
                                 
(Benefit) provision for income tax
    (381,278 )     -       (399,764 )     800  
                                 
Net loss
  $ (1,692,428 )   $ (661,877 )   $ (3,416,509 )   $ (554,213 )
                                 
Deemed dividend to series A preferred stockholders
    (948,350 )     -       (948,350 )     -  
                                 
Net loss attributable to common stockholders
  $ (2,640,778 )   $ (661,877 )   $ (4,364,859 )   $ (554,213 )
                                 
Loss per common share, basic and diluted
  $ (0.08 )   $ (0.04 )   $ (0.14 )   $ (0.07 )
                                 
Weighted average common shares used in computing
                               
basic and diluted loss per common share
    31,640,212       15,212,600       31,534,267       7,689,967  

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

 

ADEX MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
   
For The Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss
  $ (3,416,509 )   $ (554,213 )
Reconciliation of net loss to net cash used in operating activities:
               
Depreciation
    23,074       2,863  
Amortization of intangibles
    145,274       555  
Share-based compensation
    496,410       56,053  
Mark-to-market loss on warrant  liability
    18,538       -  
Impairment charges on intangible assets
    989,834       -  
Interest from accretion of promissory notes
    (528 )     -  
Deferred income tax adjustment
    (399,764 )     -  
Inventory provision for obsolescence
    21,479       -  
Bad debt expense
    70,693       -  
Allowance for charge backs
    428,277       -  
Changes in current assets and liabilities:
               
Accounts receivable
    (729,235 )     30,078  
Other receivables
    -       (209,186 )
Inventory
    (196,284 )     -  
Prepaid expenses and other current assets
    (242,985 )     (89,065 )
Credit card processor holdbacks
    (732,555 )     -  
Accounts payable
    1,098,192       293,061  
Accrued liabilities
    577,100       185,519  
Deferred revenue
    93,932       -  
Net cash used in operating activities
    (1,755,057 )     (284,335 )
                 
Cash flows from investing activities:
               
Purchase of short-term investments
    (1,964,777 )     (4,137,205 )
Proceeds from sale of short-term investments
    3,898,167       -  
Change in restricted cash
    (100,000 )     -  
Purchase of intangible assets
    -       (10,000 )
Purchase of property, plant and equipment
    (94,226 )     (24,793 )
Net cash provided by (used in) investing activities
    1,739,164       (4,171,998 )
                 
Cash flows from financing activities:
               
Gross proceeds from private placement of common stock
    -       5,758,148  
Costs of private placement of common stock
    -       (104,920 )
Gross proceeds from private placement of series A preferred stock
    2,341,604       -  
Costs of private placement of Series A preferred stock
    (144,500 )     -  
Cash dividend paid
    -       (491,431 )
Repayment of promissory notes
    (297,500 )     -  
Net cash provided by financing activities
    1,899,604       5,161,797  
                 
Net increase in cash and cash equivalents
    1,883,711       705,464  
                 
Cash and cash equivalents at beginning of period
    683,576       5,379  
                 
Cash and cash equivalents at end of period
  $ 2,567,287     $ 710,843  
                 
Non-cash financing transactions:
               
Deemed dividend to series A preferred stockholders
  $ 948,350     $ -  
                 


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
ADEX MEDIA, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1.        ORGANIZATION AND BASIS OF PRESENTATION
 
Description of Business  

Adex Media, Inc. (“we”, “us”, “our”, the “Company” or “Adex”) is the parent company of Abundantad, Inc. (“Abundantad”).  Adex was incorporated under the laws of Delaware in April 2008.  It was formed as a subsidiary of SupportSpan, Inc., a public reporting Nevada corporation (“SupportSpan”). On April 25, 2008, SupportSpan was consolidated into Adex for the purposes of changing its name to Adex and its place of incorporation to Delaware (the “Merger”).

Abundantad was formed on February 4, 2008 for the purpose of creating, operating and/or acquiring publishers of Internet content whose properties are deemed desirable to generate paid-for dissemination of internal or third-party direct advertising and revenues derived from agency and advertising network-directed advertising on the Internet. Abundantad creates, acquires, owns and operates content websites which may include promotions, sweepstakes, mobile offers, and other Internet websites in furtherance of its purposes. On May 14, 2008, Abundantad acquired substantially all the assets and liabilities of Kim and Lim, LLC, d/b/a Pieces Media (“Pieces”). Also on May 14, 2008, Abundantad, via a reverse merger, became a wholly-owned subsidiary of Adex.

Adex is an early-stage integrated internet marketing publisher with a focus on offering third party advertising customers and promoting its own offers through a multi-channel internet advertising platform. Adex’s marketing platform provides a range of services including (i) search and contextual based marketing; (ii) display marketing; (iii) lead generation; and (iv) affiliate marketing. Adex currently actively markets the following of its own internal offers: (i) EasyWhite Labs – a teeth whitening kit; (ii) Acai Alive – a dietary supplement; (iii) RezQ – a dietary supplement; and (iv) TriCleanse – a digestive cleansing system.
 
Basis of Presentation and Use of Management Estimates

As stated above, Adex acquired Abundantad and Abundantad simultaneously purchased the assets and liabilities of Pieces, Pieces was deemed the acquirer for accounting purposes and Adex is deemed the acquired company.  Accordingly, Pieces’ historical financial statements for periods prior to the acquisition become those of Adex retroactively restated for, and giving effect to, the number of shares received in the merger with Abundantad.  The historical retained earnings of Pieces are carried forward after the acquisition.

The December 31, 2008 condensed consolidated balance sheet was derived from the audited financial statements at that date, but does not include all disclosures required by GAAP. Earnings per share prior to the merger with Abundantad are restated to reflect the equivalent number of shares received by Pieces. The results of operations presented for the period ended June 30, 2008 included three and six month results of operations for Pieces, Abundantad and Adex. The results of operations presented for the period ended June 30, 2009 included the three and six month results of Pieces, Abundantad, Adex and Digital Instructor. The condensed consolidated financial statements include the accounts as described above as well as the Company’s additional subsidiaries, all of which are wholly owned. All significant inter-company balances and transactions have been eliminated in consolidation.

The financial statements include management’s estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates, and material effects on operating results and financial position may result. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, 2008 included in our Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, Amendment No. 2 on Form 10-K/A, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, each as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for any future period.

Certain amounts in prior period’s financial statements have been reclassified to conform to the current period’s presentation.
 
NOTE 2.        SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company’s revenues consist of services to promote both third party offers as well as its own internal offers. The Company evaluates revenue recognition using the following basic criteria and recognizes revenue when all four criteria are met:
 
 
 

 
(i)
Evidence of an arrangement: Evidence of an arrangement with the customer that reflects the terms and conditions for delivery of services must be present in order to recognize revenue;
(ii)
Delivery: Delivery is considered to occur when the service is performed and the risk of loss and reward has been transferred to the customer;
(iii)
Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable; and
(iv)
Collection is deemed probable: We conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

The Company’s marketing platform service revenue –external offers to third parties consists mostly of revenue derived world-wide from direct advertisers, affiliate networks, ad networks, and list managers. The Company’s marketing platform service – internal offers consists mostly of revenue derived from on-line consumers in the United States and Canada.
 
The Company’s marketing platform service revenue to third parties is mostly derived on a cost-per-action (“CPA”) basis, also known as pay-per-action (“PPA”) basis. Under this pricing model, advertisers, affiliate networks, ad networks, and list managers pay the Company when a specified action (a purchase, a form submission, or other action linked to the advertisement) has been completed.

The Company markets its internal offers on a free trial subscription basis. Title to all internal product offers shipped pass to the consumer upon receipt by the consumer. Upon receipt by the consumer, the Company records non-refundable shipping and handling revenue. The consumer has 7 to 11 days from when the internal product offer was received during which they can notify the company of their intent to return the product shipped in which case the consumer’s credit card will not be billed for the product sales price. If the customer chooses to keep the product beyond the free trial period, the customer’s credit card will be billed and the customer’s subscription will begin automatically once the free trial period has expired. Accordingly, the Company does not record revenue until acceptance occurs which is deemed to be after the free trial period has expired without notification of rejection of the product.

The Company’s revenues are subject to material seasonal fluctuations. In particular, revenues in the fourth fiscal quarter will ordinarily be significantly higher than other fiscal quarters. Revenues recorded in the current quarter are not necessarily indicative of what reported revenues will be for an entire fiscal year.

Classification of Affiliates Cost

Payments made or accrued to our sales and marketing affiliates or payments made for direct media buys that relate to promoting our internal product offers are recorded as sales and marketing expenses. Payments made or accrued to our sales and marketing affiliates of direct media buys that relate to services performed for third-party offers are recorded as cost of revenues.
 
NOTE 3.        RESTRICTED CASH

During the second quarter of 2009, we classified $100,000 of cash as restricted cash. This cash is collateralized as part of securing commercial card accounts with one major credit card company. The collateral is held in a ninety-day certificate of deposit (“CD”) at which time it matures. The CD will automatically renew for subsequent ninety-day terms unless terminated. The credit card company has security interest in the CD and the company is prohibited from pledging or assigning the CD.
 
NOTE 4.        FAIR VALUE MEASUREMENT
 
The fair-value hierarchy established by the Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“FAS 157”) prioritizes the inputs used in valuation techniques into three levels as follows:
 
 
Level-1
Observable inputs – quoted prices in active markets for identical assets and liabilities;
 
 
Level-2
Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;
 
Level-3
Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
 
 

 
The Company used Level 1 inputs in measuring the fair value of its short-term investments at June 30, 2009. The Company’s Level 3 liability consists of the convertible preferred stock warrants held by the preferred shareholders.  The fair value of the warrant liability was estimated using the Black-Scholes option pricing model with internal observable and unobservable market input assumptions (see Note 16). The following table summaries the assets and the liabilities that are measured at the fair value on June 30, 2009.

   
Quoted Prices
in Active
Markets for
Identical
Instruments
Level 1
   
Significant
Other
Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
   
Total
 
                         
Assets
                       
    Short-term investments
  $ 569,280     $ -     $ -     $ 569,280  
Liabilities
                               
    Warrant liability
  $ -     $ -     $ 186,353     $ 186,353  
                                 
 
The reconciliation of beginning and ending balances for warrant liability measured at fair value using significant unobservable inputs (Level 3) are as follows:

   
Warrant Liability
 
       
Fair value at issuance date on June 12, 2009
  $ 167,815  
Mark-to-market loss
    18,538  
         
Warrant liability at fair value on June 30, 2009
  $ 186,353  
         
 
The fair value of cash and cash equivalents, accounts receivable and accounts payable for all periods presented approximates their respective carrying amounts because of the short maturity of these financial instruments.
 
NOTE 5.        CREDIT CARD PROCESSOR HOLDBACKS

Credit card processor holdbacks are reserves maintained by the credit card processors or independent sales organizations that we contract through for any potential charge-backs or fines levied by the card associations related to the Company’s on-line sales of its internal product offers.  As of June 30, 2009 and December 31, 2008, the balance of credit card processor holdbacks, net of reserves, was $604,771 and $300,493, respectively.  The Company maintains a separate accrual for credit card processor charge-backs and customer return refunds which are both netted against the balance in credit card processor holdbacks.  The balance of this accrual at June 30, 2009 and December 31, 2008 was $572,317 and $144,040, respectively. The Company also maintains an allowance for uncollectible credit card processor holdbacks.  The balance for this accrual at both June 30, 2009 and December 31, 2008 was $23,323.
 
NOTE 6.        INVENTORY

Inventories consist of finished goods purchased from third parties and freight-in. Inventories are stated at the lower of cost or market, using the first-in, first-out method.  The Company performs periodic assessments to determine the existence of obsolete, slow moving and non-saleable inventories, and records necessary provisions to reduce such inventories to net realizable value.  At June 30, 2009 and December 31, 2008, the balance in the provision for obsolete slow moving and non-saleable inventory was $45,833 and $24,354, respectively. All inventories are produced by third-party manufacturers, and all inventories are located at the Company’s facility in Boulder, Colorado.
 
 
 

 

NOTE 7.        PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist primarily of prepaid insurance premiums, prepaid media buys and leads, and prepaid deposits on the Company’s inventory and operating leases. At June 30, 2009 and December 31, 2008, the balance was $340,863 and $97,878, respectively.
 
NOTE 8.        PROPERTY AND EQUIPMENT, NET

Property and equipment as of June 30, 2009 and December 31, 2008 are comprised of the following:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
             
Computers and other office equipment
  $ 115,216     $ 75,721  
Office furniture
    49,666       44,544  
Software licences
    52,139       2,530  
Total property and equipment, net
    217,021       122,795  
Accumulated depreciaton
    (102,263 )     (79,189 )
Property and equipment, net
  $ 114,758     $ 43,606  
                 
 
The Company depreciates its property and equipment using the straight line method over useful lives ranging from two to five years. For software developed for internal use, we follow American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. During the second quarter of 2009, we capitalized $49,609 of such costs.

For the three months and six months ended June 30, 2009, we recorded $11,907 and $23,074, respectively, in depreciation expense, and recorded $2,517 and $2,863, respectively, in depreciation expense for the three and six months ended June 30, 2008.
 
NOTE 9.        ACQUISITIONS
 
Acquisition of the Assets of Vibrantads, LLC

On July 21, 2008, the Company entered into an Asset Purchase Agreement, pursuant to which the Company acquired substantially all the assets of Vibrantads, LLC (“Vibrantads”), and a California limited liability company. Vibrantads was engaged in on-line promotions and affiliate network marketing.
 
The aggregate purchase price was $706,805 which included the following:
 
   
Amounts
 
Cash paid at closing
  $ 70,000  
Promissory note issued net of discount on closing date 1
    55,844  
Restricted shares of common stock issued
    531,563  
Cash paid for closing costs
    27,398  
Accrued closing costs
    22,000  
    Total
  $ 706,805  
         
(1) The principal amount of the promissory note is $60,000. The discount is being accreted over a period of twelve months.
 
 
 
 

 

The allocation of the purchase price was based upon management’s estimates and assumptions:
 
   
Amounts
 
Intangible assets
  $ 310,000  
Goodwill
    396,805  
     Total assets acquired
  $ 706,805  
 
During the year ended December 31, 2008, the Company determined that the intangible assets acquired from Vibrantads were impaired and had no remaining terminal value to the Company. Accordingly, an impairment charge of $310,000 was taken on these intangible assets.
 
The following pro forma financial information was based on the respective historical financial statements of Adex and Vibrantads. The pro forma financial information reflected the consolidated results of operations as if the merger of Vibrantads occurred at the beginning of the period and included the amortization of the resulting identifiable acquired intangible assets and share-based compensation expenses. The pro forma financial data is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had Adex and Vibrantads been a consolidated entity during the period presented:
 
   
For Three Months Ended
   
For Six Months Ended
 
   
June 30, 2008
   
June 30, 2008
 
             
Pro forma revenues
  $ 857,934     $ 1,687,646  
Pro forma net loss
  $ (687,531 )   $ (596,582 )
Pro forma loss  per share, basic and diluted
  $ (0.05 )   $ (0.08 )
 
Acquisition of Digital Instructor, LLC

On August 12, 2008, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) with the members of Digital Instructor, LLC (“Digital Instructor”), pursuant to which the Company purchased all outstanding membership interests of Digital Instructor.
   
Pursuant to the MIPA, the Company issued the following payments as part of the Purchase Price:

(i)  
$1,000,000 in cash at the closing;
   
 (ii)  
a Senior Secured Promissory Note (the “Note”) in the principal amount of $500,000 payable to Digital Equity Partners, LLC, a Colorado limited liability company wholly owned by the selling members of Digital Instructor and formed for the purpose of holding the Note (“DEP”), on February 12, 2009 (subsequently amended to March 9, 2009); and
 (iii)  
1,200,000 restricted shares of the Company’s common stock.
 

In addition, the Company agreed to pay an additional amount up to $500,000 payable within a certain period of time following August 12, 2009, subject to Digital Instructor achieving certain gross revenue performance milestones (the “Earn Out”) as part of the Purchase Price.

On March 6, 2009, the Company, DEP and the former members of Digital Instructor entered into an Agreement (the “Agreement”) pursuant to which:

(i)  
DEP surrendered the Note and the Company issued to DEP in exchange for the Note (a) a new note payable to DEP in the principal amount of $255,000 (the “New Note”) and (b) a cash payment of $245,000 on the Effective Date (the “Cash Payment”) of the Agreement;
(ii)  
the Security Agreement under the Note was amended to reflect DEP’s amended security interest in the principal amount of $255,000 under the New Note; and
(iii)  
certain provisions of the MIPA including without limitation, the Earn Out and the Earn Out Period, were amended by the Company and the former Members.

 
 
 
Pursuant to the New Note, the Company has agreed to pay DEP the following amounts on the following dates:

(i)  
$52,500 on the earlier of (i) ninety days from February 12, 2009 and (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event;
(ii)  
$52,500 on the earlier of (i) one hundred eighty days from February 12, 2009 and (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event; and
(iii)  
$150,000 on the earlier of (i) February 12, 2010, (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event and (iii) when such amount is declared due and payable by holder upon or after the occurrence of the Company’s termination of the managing member’s employment other than for Cause (as defined in the Agreement) prior to February 12, 2010.

The New Note contains customary events of default that entitle the holder thereof to accelerate the maturity date of the unpaid principal amount.

The Security Agreement, which was entered into for the purposes of collateralizing the Note and gave DEP a first priority security interest in the Membership Interests purchased by the Company was amended to reflect DEP’s amended security interest in the principal amount of $255,000 under the New Note.

Under the Agreement, the Company, DEP and the former Members agreed to a mutual release of claims arising out of the MIPA prior to the Effective Date of the Agreement.

Under the MIPA, the Earn Out provision was amended with respect to one of the Members’ pro rata portion of the Earn Out, which is equal to an amount up to $150,000.  Such amendment extends the Earn Out Period to include the period commencing on February 12, 2009 and ending on February 12, 2010.
 
The aggregate purchase price was $7,746,990 which included the following:
 
   
Amounts
 
Cash paid at closing
  $ 1,000,000  
Promissory note issued net of discount issued at closing date (1)
    482,372  
Restricted shares of common stock issued to selling members
    5,616,000  
Cash paid for closing costs and finders’ fees
    139,614  
Restricted shares issued as finders’ fees
    27,004  
Accrued closing costs
    40,000  
Deferred tax liability
    442,000  
Total
  $ 7,746,990  
         
(1) The principal amount of the promissory note is $500,000.
 



 

The allocation of the purchase price was based upon management’s estimates and assumptions:
 
   
Amounts
 
       
Current assets
  $ 451,652  
Property plant and equipment, net
    27,049  
Intangible assets
    1,150,000  
Goodwill
    6,503,423  
     Total assets acquired
    8,132,124  
         
Current liabilities
    385,134  
     Total liabilities assumed
    385,134  
         
Net assets acquired
  $ 7,746,990  
         
 
During the second quarter of 2009, we recorded an impairment charge of approximately $1.0 million, of which $587,968 in product license agreements, $251,986 in product trade names and $58,661 in customer database were related to Digital Instructor’s intangible assets (see Note 10).
 
The following pro forma financial information was based on the respective historical financial statements of Adex and Digital Instructor. The pro forma financial information reflected the consolidated results of operations as if the merger of Digital Instructor occurred at the beginning of the period and included the amortization of the resulting identifiable acquired intangible assets and share-based compensation expenses. The pro forma financial data is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had Adex and Digital Instructor been a consolidated entity during the period presented:

   
For Three Months Ended
   
For Six Months Ended
 
   
June 30, 2008
   
June 30, 2008
 
             
Pro forma revenues
  $ 1,685,754     $ 3,346,666  
Pro forma net loss
  $ (749,433 )   $ (631,421 )
Pro forma loss  per share, basic and diluted
  $ (0.05 )   $ (0.08 )
 
Acquisition of Bay Harbor Marketing, LLC

On August 29, 2008, the Company entered into an asset purchase agreement, pursuant to which the Company acquired substantially all the assets of Bay Harbor Marketing, LLC (“Bay Harbor”), a California limited liability company. The asset purchase was completed on August 29, 2008. Bay Harbor is engaged in providing marketing solutions, focusing exclusively on the financial services market.
 


 
The aggregate purchase price was $1,878,562 which included the following:
 
   
Amounts
 
Cash paid at closing
  $ 50,000  
Restricted shares of common stock issued to seller
    239,850  
Restricted shares of common stock issued to managing member of seller
    729,868  
Restricted shares of common stock issued to creditor of seller
    706,469  
Restricted shares issued as finders’ fees
    47,943  
Cash paid for closing costs
    36,432  
Accrued closing costs
    68,000  
Total
  $ 1,878,562  
         
 
The following table summarizes the estimated fair values of the assets acquired. The allocation of the purchase price was based upon management’s estimates and assumptions:
 
   
Amounts
 
Intangible assets
  $ 330,000  
Goodwill
    1,548,562  
     Total assets acquired
  $ 1,878,562  
 
The acquisition of the assets was accounted for as a business combination and the operations of Bay Harbor were included in the Company’s results of operations beginning on August 29, 2008, the acquisition date. The factors resulting in goodwill were Bay Harbor’s name, reputation, and established key personnel. The full amount of the aforementioned goodwill is deductible for tax purposes over a period of 15 years.

During the second quarter of 2009, we recorded an impairment charge of approximately $1.0 million, of which $80,640 in trade name and $10,579 to marketing collateral were related to Bay Harbor’s intangible assets (see Note 10).
 
The following pro forma financial information was based on the respective historical financial statements of Adex and Bay Harbor. The pro forma financial information reflected the consolidated results of operations as if the merger of Bay Harbor occurred at the beginning of the period and included the amortization of the resulting identifiable acquired intangible assets and share-based compensation expenses. The pro forma financial data is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had Adex and Bay Harbor been a consolidated entity during the period presented:
 
   
For Three Months Ended
   
For Six Months Ended
 
   
June 30, 2008
   
June 30, 2008
 
             
Pro forma revenues
  $ 840,471     $ 1,598,857  
Pro forma net loss
  $ (693,883 )   $ (710,062 )
Pro forma loss  per share, basic and diluted
  $ (0.05 )   $ (0.09 )
 
Consolidated Pro Forma
 
The following pro forma financial information was based on the respective historical financial statements of Adex, Vibrantads, Digital Instructor and Bay Harbor. The pro forma financial information reflected the consolidated results of operations as if the merger of Vibrantads, Digital Instructor and Bay Harbor occurred at the beginning of the period and included the amortization of the resulting identifiable acquired intangible assets and share-based compensation expenses. The pro forma financial data is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had Adex, Vibrantads, Digital Instructor and Bay Harbor been a consolidated entity during the period presented:
  

 
 

 
   
For Three Months Ended
   
For Six Months Ended
 
   
June 30, 2008
   
June 30, 2008
 
             
Pro forma revenues
  $ 1,946,607     $ 3,814,511  
Pro forma net loss
  $ (807,093 )   $ (829,640 )
Pro forma loss  per share, basic and diluted
  $ (0.05 )   $ (0.11 )
 
NOTE 10.      GOODWILL AND INTANGIBLE ASSETS
 
Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We follow the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“FAS 142”), under which we evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income approach that uses discounted cash flows and the market approach that utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have two reporting units under SFAS 131, Disclosure about Segments about an Enterprises and Related Information (“FAS 131”), the impairment test is performed at the reporting unit.

In connection with the impairment test of our intangible assets during the second quarter of 2009, we performed an interim impairment test on our goodwill balances. The test performed compared the implied fair value of goodwill to the carrying amount of goodwill on our balance sheet. Our estimate of the implied fair value of the goodwill was based on the quoted market price of our common stock and shares outstanding on June 1, 2009. Accordingly, each reporting unit was assigned an implied fair value by using an income based approach. Our goodwill impairment test indicated that no goodwill impairment was required reflecting the implied fair value of each of our reporting units exceeded the carrying amount. A second step to measure the amount of impairment loss was accordingly not required.

As of June 30, 2009, the balance in goodwill was $8,448,789, of which $1,945,366 is attributable to the marketing platform services – external offering segment and $6,503,423 is attributable to the marketing platform services – internal offering segment.



 
Intangible Assets
 
Our purchased intangible assets as of June 30, 2009 and December 31, 2008 are summarized as follows:
 
   
June 30, 2009
   
December 31, 2008
 
   
New
               
Net
   
Gross
               
Net
 
   
Carrying
   
Accumulated
   
Impairment
   
Carrying
   
Carrying
   
Accumulated
   
Impairment
   
Carrying
 
   
Amount*
   
Amortization
   
Charges
   
Amount
   
Amount
   
Amortization
   
Charges
   
Amount
 
                                                 
Domain Names
  $ 10,000     $ (3,889 )   $ -     $ 6,111     $ 10,000     $ (2,222 )   $ -     $ 7,778  
Product License Agreements
    700,000       (112,032 )     (587,968 )     -       700,000       (53,699 )     -       646,301  
Product Trade Names
    300,000       (48,014 )     (251,986 )     -       300,000       (23,014 )     -       276,986  
Customer Database
    130,000       (42,263 )     (58,661 )     29,076       280,000       (18,652 )     (150,000 )     111,348  
Internal Use Software
    200,000       (34,131 )     -       165,869       200,000       (14,131 )     -       185,869  
Company Trade Name
    100,000       (15,694 )     (80,640 )     3,666       200,000       (6,740 )     (100,000 )     93,260  
Marketing Collateral
    50,000       (11,921 )     (10,579 )     27,500       50,000       (4,212 )     -       45,788  
Affiliate  and Incentive Platform
    -       -       -       -       60,000       -       (60,000 )     -  
Total
  $ 1,490,000     $ (267,944 )   $ (989,834 )   $ 232,222     $ 1,800,000     $ (122,670 )   $ (310,000 )   $ 1,367,330  
                                                                 
* The new carrying amount is net of intangible asset impairment charges of $310,000 taken during the fourth quarter of 2008.
   
 
Our long-lived assets include equipment, furniture and fixtures and intangible assets. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate the recoverability of our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). We compare the carrying value of long-lived assets to our projection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the asset’s fair value.

During the second quarter of 2009, the Company made certain changes to the Bay Harbor business model whereby the company has discontinued its lead generation services for financial advisors. The Company has redeployed the underlying technology engine which was previously being used in the Bay Harbor business for marketing its internal product offers to consumers. Management has forecasted reduced revenues and cash flows from the Bay Harbor business services to financial advisors in the future.

During the second quarter of 2009, the Company shifted its focus and deployment of capital away from the acquired educational product offers that were being marketed through Digital Instructor in place of new health and beauty based internal offers. The Company believes health and beauty based internal offers will provide the Company with a longer lifetime value per consumer and higher profit margins.
 
Given the impairment indicators of the acquired intangible assets discussed above, we performed a test of purchased intangible assets for recoverability. The assessment of recoverability is based upon the assumptions and future usefulness of the assets.
 
The analysis determined that the carrying amount of the intangible assets exceeded the implied fair value under the test for impairment per FAS 144 and the difference was allocated to the intangible assets of the impacted asset group on a pro-rata basis using the relative carrying amounts of the assets. We recorded an impairment charge of approximately $1.0 million, of which $587,968 related to product licensing agreements (Digital Instructor), $251,986 to product trade names (Digital Instructor), $58,661 to customer database (Digital Instructor), $80,640 to company trade name (Bay Harbor) and $10,579 to marketing collateral (Bay Harbor). In addition, the remaining lives of marketing collateral and company trade names were shortened from 38 months to 12 months and from 48 months to 12 months, respectively.
 
If our assumptions regarding projected revenue or gross margin rates are not achieved, we may be required to record additional intangible asset impairment charges in future periods, if any such change or other factor constitutes a triggering event. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.



 
The aggregate amortization expenses for our purchased intangible assets are summarized for the periods presented below:

   
Weighted
   
Three Months Ended
   
Six Months Ended
 
   
Average Lives
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
in Months*
   
2009
   
2008
   
2009
   
2008
 
                               
Domain Names
   
36
    $ 833     $ -     $ 1,667     $ -  
Product License Agreements
   
60
      23,333       -       58,333       -  
Product Trade Names
   
60
      10,000       -       25,000       -  
Customer Database
   
24
      10,694       -       23,612       -  
Internal Use Software
   
60
      10,000       -       20,000       -  
Company Trade Name
   
60
      3,782       -       8,954       -  
Marketing Collateral
   
48
      4,583       -       7,708       -  
Total
          $ 63,225     $ -     $ 145,274     $ -  
                                         
Note: The weighted average lives were calculated according to the lives of the intangible assets before the impairment
 
charges were taken in the second quarter of 2009.
   
 
The estimated future amortization expenses for our purchased intangible assets are summarized below:
 
   
Amortization Expense
 
   
(by fiscal year)
 
Remainder of 2009
  $ 51,168  
2010
    74,075  
2011
    41,111  
2012
    40,000  
2013
    25,868  
Total
  $ 232,222  
 
NOTE 11.      ACCRUED LIABILITIES
 
Accrued liabilities as of June 30, 2009 and December 31, 2008 are comprised of as follows:
 
   
June 30,
   
Deember 31,
 
   
2009
   
2008
 
             
Accrued accounts payable
  $ 201,229     $ -  
Accrued payroll and payroll  related expenses
    302,906       259,358  
Accrued professional fees
    162,001       130,001  
Accrued dividends to Pieces Media 1
    100,000       100,000  
Accrued payment to affiliates
    86,211       -  
Accrued credit card charge-back fees
    134,036       57,280  
Accrued bonus payment to Pieces Media 1
    100,000       -  
Other
    84,624       47,268  
    Total
  $ 1,171,007     $ 593,907  
                 
(1) Payments due to former members of Pieces Media.
         
 
 
 
 
NOTE 12.     PROMISSORY NOTES

Our promissory notes as of June 30, 2009 and December 31, 2008 are comprised of the following:
 
   
June 30,
   
December 31,
 
   
2009
      2008 1  
               
$60,000 promissory note; non-interest bearing, due July 21, 2009; shown net of imputed interest of
      $335 and $2,388, respectively 2
  $ 59,665     $ 57,612  
                 
$255,000 promissory note; non-interest bearing, $52,500 due May 12, 2009; $52,500 due August 12, 2009;
    $150,000 due February 12, 2010; shown net of imputed interest of $8,387 and $5,806, respectively 3
    194,113       494,194  
                 
            Total promissory notes
  $ 253,778     $ 551,806  
                 
(1) At June 30, 2009, both promissory notes were classified as short-term liabilities; At December 31, 2008,
 
$401,806 was classified as short-term liabilities and $150,000 was classified as long-term liabilities.
 
                 
(2) The principal amount of $60,000 was fully paid on July 21, 2009;
         
                 
(3) Of the total promissory note, $52,500 was paid on May 12, 2009.
         
 
In connection with the Company’s acquisition of the assets of Vibrantads, LLC, on July 21, 2008, the Company entered into a promissory note with the sole selling member of Vibrantads in the principal amount of $60,000. The principal amount of the promissory note bears no interest and it contains customary events of default that entitle the holder to accelerate the due date of the unpaid principal amount of the promissory note. The present value of the promissory note at June 30 2009 and December 31, 2008 was $59,665 and $57,612, respectively. The promissory note was accreted to the value of its principal amount over a period of twelve months. The promissory note was paid in full balance on July 21, 2009.

In connection with the Company’s acquisition of the membership interests of Digital Instructor, LLC, on August 12, 2008, the Company issued a senior secured promissory note in the principal amount of five hundred thousand dollars ($500,000) which was payable on February 12, 2009 (subsequently amended as set forth below). The note was issued to Digital Equity Partners, LLC, a Colorado limited liability company and wholly-owned by the selling members of Digital Instructor, which was formed for the purpose of holding the promissory note. The principal amount of the promissory note bears no interest and contains customary events of default that entitle the holder thereof to accelerate the maturity date of the unpaid principal amount. As part of the transaction, the Company entered into a security agreement with Digital Equity Partners, LLC for purposes of collateralizing the note. Under the security agreement, Digital Equity Partners, LLC was given a first priority security interest in the membership interests purchased by the Company.

On March 6, 2009, the Company, Digital Equity Partners, and the Members entered into an Agreement (the “Agreement”) pursuant to which:
  
(i)  
Digital Equity Partners surrendered the $500,000 note and the Company issued to Digital Equity Partners in exchange for such note (a) a new note payable to Digital Equity Partners in the principal amount of $255,000 (the “New Note”) and (b) a cash payment of $245,000 on the Effective Date (the “Cash Payment”) of the Agreement; and
(ii)  
the Security Agreement under the $500,000 note was amended to reflect Digital Equity Partners’ amended security interest in the principal amount of $255,000 under the New Note.

Pursuant to the New Note, the Company agreed to pay Digital Equity Partners the following amounts on the following dates:
 
 
 

 
(i)  
$52,500 on the earlier of (i) ninety days from February 12, 2009 and (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event (as defined in the New Note);
(ii)  
$52,500 on the earlier of (i) one hundred eighty days from February 12, 2009 and (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event (as defined in the New Note); and
(iii)  
$150,000 on the earlier of (i) February 12, 2010, (ii) when such amount is declared due and payable by the holder upon or after the occurrence of an Acceleration Event and (iii) when such amount is declared due and payable by holder upon or after the occurrence of the Company’s termination of the managing member of Digital Instructor’s employment other than for Cause (as defined in the Agreement) prior to February 12, 2010.
 
During the second quarter of 2009, the Company made $52,500 principal payment to the note holder. The present value of the promissory note at June 30, 2009 and December 31, 2008 was $194,113 and $494,194, respectively. The promissory note is being accreted to the value of its principal amount over a period of three to twelve months

During the three and six months ended June 30 2009, we recorded $4,285 in interest expense related the accretion of the promissory notes and recovered a net of $4,813 of imputed interest expense due to the amendment on the payment term of the promissory note, respectively. We had no such interest expense in the three and six months ended June 30, 2008.
 
NOTE 13.      EARNING (LOSS) PER SHARE
 
Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the periods in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Diluted earnings per share (“EPS”) reflects the potential dilution that would occur if outstanding stock options or warrants to issue common stock, or preferred stocks, were exercised or converted for common stock, and the common stock underlying restricted stock were issued by using the treasury stock method. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
 
 The following tables summarize the weighted average shares outstanding and earnings (loss) per common share for the three and six months ended June 30, 2009 and 2008:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net loss
  $ (1,692,428 )   $ (661,877 )   $ (3,416,509 )   $ (554,213 )
Deemed dividend to series A preferred stockholders
    (948,350 )     -       (948,350 )     -  
Net loss attributable to common stockholders
  $ (2,640,778 )   $ (661,877 )   $ (4,364,859 )   $ (554,213 )
Shares used in computation:
                               
Weighted average shares of common stock outstanding used in computation of basis loss per share
    31,640,212       15,212,600       31,534,267       7,689,967  
Dilutive effect of stock options and restricted stocks
    -       -       -       -  
Shares used in computation of diluted loss per common share
    31,640,212       15,212,600       31,534,267       7,689,967  
                                 
Loss per common share, basic and diluted
  $ (0.08 )   $ (0.04 )   $ (0.14 )   $ (0.07 )
 
During the three and six months ended June 30, 2009, as the Company incurred a net loss, the weighted average number of common shares outstanding equaled the weighted average number of common shares and share equivalent assuming dilution. During the three and six months ended June 30, 2008, the Company had no potentially dilutive common shares equivalents assuming dilution, as such, the basic and diluted weighted average shares were the same.
 
At June 30, 2009, options to purchase 4,625,313 shares of common stock, respectively, at exercise prices ranging from $0.75 to $5.55, were outstanding but were not included in the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. Warrants to purchase approximately 75,000 shares of common stock with an exercise price of $2.0 to $3.0 were also excluded from the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. Unvested RSUs corresponding to approximately 127,938 shares of our common stock with a grant date fair value from $1.75 to $5.80 were outstanding at June 30, 2009 and were not included in the computation of diluted net loss per share because they were anti-dilutive under the treasury stock method.
 
 

 
During the second quarter of 2009, we issued $1,951,337 shares of series A convertible preferred stocks and 975,668 warrants to purchase common stocks at exercise price of $1.56. Accordingly, the company recorded $948,350 deemed dividend to the preferred stockholders at the issuance date (see Note 16). The deemed dividend was included in the calculation of loss per common share. The preferred stocks and warrants were not included in the computation of diluted net loss per share because they were anti-dilutive under the treasury stock method.

In connection with the Company’s acquisitions of the assets of Pieces and Vibrantads, and the membership interests of Digital Instructor, under share reset provisions in each of the respective acquisition agreements, a potential maximum number of shares issuable to each of the above are 250,000, 262,500, and 1,400,000, respectively. On July 21, 2009, the Company issued 63,298 shares of common stocks, respectively to Vibrantads as a result of the reset provisions (See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds). Under the reset provision, no shares were issued to Pieces.

In connection with the Company’s acquisition of the assets of Bay Harbor, 150,000 shares are currently held in escrow and are subject to release based upon Bay Harbor’s achieving of certain revenue and profit milestones during the earn-out period from August 30, 2008 to August 29, 2009.
 
NOTE 14.      COMPREHENSIVE (LOSS) INCOME

We report comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive Income (“FAS 130”), which established the standard for reporting and displaying other comprehensive (loss) income and its components within financial statements. For the three and six months ended June 30, 2009 and 2008, the Company’s comprehensive loss was the same as net loss.
 
NOTE 15.      COMMITMENT AND CONTINGENCIES

Lease Commitments

The Company leases 2,825 square feet for its corporate office headquarters in Mountain View, California under an 18-month lease agreement. This lease expires on October 31, 2009 with a monthly base rental of $6,780 per month through April 2009 and then increasing to $7,119 until the end of the lease term.

In connection with the acquisition of Digital Instructor, LLC on August 12, 2008, the Company assumed an additional two leases representing an aggregate of 7,746 square feet expiring on June 30, 2012 in Boulder, Colorado. Monthly aggregate base rentals of these two leases are $6,397 to June 2009, increasing to $6,623 to June 2010, increasing to $6,855 to June 2011, and increasing to $7,101 to June 2012.

During the second quarter of 2009, we entered into a six-month lease for a small office in New Jersey. The monthly lease payment is $1,250 and ends December 31, 2009.

Total rent expense for the three and six months ended June 30, 2009 was $41,137 and $81,024, respectively; and was $22,600 for both the three and six months ended June 30, 2008.
 
We believe that if we lost any of the foregoing leases, we could promptly relocate within ten miles of each lease on similar terms.
 
Approximate future minimum lease payments under non-cancelable office lease agreements are as follows:
 
Years
 
Amount
 
       
Remainder of 2009
  $ 76,546  
2010
    80,967  
2011
    83,838  
2012
    42,603  
Total
  $ 283,954  

Contingencies

From time to time, we might be involved in various claims, legal actions and complaints arising in the normal course of business. As of June 30, 2009, there are no material pending legal proceedings involving the Company or its property

 
 

 
NOTE 16.      CONVERTIBLE PREFERRED STOCKS AND WARRANTS
 
Terms and Conditions

On June 12, 2009, the Company entered into a Series A Convertible Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”), with a limited number of accredited investors (the “Purchasers”). The Company closed the sale to the Purchasers of 1,951,337 shares of the Company’s Series A Preferred Stock, $0.0001 par value (the “preferred stock”), at a price per share equal to $1.20 (the “Original Issue Price”) and warrants (the “warrants”) to purchase up to 975,668 shares of the Company’s common stock, par value $0.0001 (the “common stock”), at an exercise price of $1.56 per share (the “Warrant Exercise Price”). The Company has raised aggregate proceeds of $2,341,604 in the financing transaction (the “Financing”). The purchase price for the preferred stock and warrants was payable in cash.

At the option of the holder at any time, shares of the preferred stock are convertible into shares of the Company’s common stock at a conversion price equal to $1.20 per share (the “conversion price”). The conversion price is subject to adjustment for stock splits, stock dividends and recapitalizations. In addition, for so long as any shares of preferred stock remain outstanding and the shares of common stock underlying such shares of preferred stock are not eligible to be sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if the Company issues any securities, other than certain permitted issuances, at a per share price (or equivalent for convertible securities) which is less than the then current conversion price, the Company shall reduce the conversion price according to a weighted-average-anti-dilution formula (the “preferred stock down-round provision”). The Company analyzed the conversion provision and determined it did not meet the criteria bifurcation.

The warrant exercise period ends five years after the date of issuance of the warrants. The holder of the warrants may exercise the Warrants at any time (subject to the restrictions on exercise and conversion) before the expiration of the warrants.  At the option of the Company, all warrants shall automatically be deemed to have been exercised fifteen trading days after delivery to the Purchasers of written notice of such deemed exercise, provided that the volume-weighted average closing price of the Company’s common stock over the ten trading days immediately preceding the date of such notice is at least $2.50 per share. The exercise price of the warrants and the number of shares of common stock issuable upon exercise of the warrants are subject to adjustment for stock splits, stock dividends and recapitalizations. In addition, if at any time during the period beginning on the date of issuance of the warrants and ending six months thereafter, the Company issues securities, other than certain permitted issuances, at a per share price (or equivalent for convertible securities) which is less than the then current exercise price of the warrants, the Company shall reduce the exercise price and the number of shares issuable upon exercise of the warrants according to a weighted-average anti-dilution formula (the “warrant down-round provision”).

Valuation of Convertible Preferred Stocks, Warrants and Embedded Conversion Feature
 
On January 1, 2009, the Company adopted Emergency Issues Task Force (“EITF”) 07-5, Determining Whether an Instrument (or embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”), issued by the Financial Accounting Standards Board (“FASB”) in June 2008. EITF 07-5 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of SFAS No. 133 (“FAS 133”), Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market.

Under EITF 07-5, the warrants we issued, as described above, were not considered to be indexed to our stock and have fixed settlement amount based on the terms of the down-round provision. Accordingly, the warrants do not meet the criteria for equity classification and are therefore classified as derivative liabilities and carried at fair value.

A Black-Scholes option-pricing model was used to obtain the fair value of the warrants using the assumptions on June 12, 2009, the date we issued the preferred stocks and warrants:

Stock price:                            $1.60
Exercise price:                        $1.56
Risk free interest rate:           2.81%
Volatility:                                100%
Expected term:                        2.5 years
Dividends:                              none
 
 

 
The effect of the forced exercise provision reduced the value of the warrants by an amount equal to the Black-Scholes value of an option with an exercise price of $2.50 (with all other inputs the same as described above). The fair value of the warrants down-round provisions was valued using a probability weighted outcome model.  Based on the sum of the individual components, the fair value of the warrants was estimated to be $167,815 at inception. This warrant liability will be marked to market through current earnings and once the down-round provisions expire, this instrument will be reclassified as components of stockholders’ equity.
 
After the $167,815 allocation of proceeds to the warrants, the remaining gross proceeds of $2,173,594 were used to compute the effective conversion price and beneficial conversion feature.  The calculated fair value of the embedded conversion feature was the intrinsic value of the computed effective conversion price and the stock price of the common shares on the issuance date. As a result,  $948,350 as a deemed dividend to the preferred stockholders.

The closing costs of $144,500 that were related to the preferred shares issued have been recorded as a reduction to additional paid-in-capital.
 
Marking-to-Market

FAS 133 requires that the fair value of the aforementioned liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

On June 30, 2009, as a result of the mark-to-market of the warrant liability, we recorded an $18,538 loss which was recorded in Other income and Expense line item in our condensed consolidated statement of operations
 
NOTE 17.      STOCK OPTIONS, RESTRICTED STOCK, WARRANTS AND SHARE-BASED COMPENSATION EXPENSES

We currently have one equity compensation plan, the Adex Media, Inc. Employee Stock Option Plan (the “Plan”), as amended in June 2009, which permits the Board of Directors to grant to officers, directors, employees and third parties incentive stock options (“ISOs”), non-qualified stock options, and restricted stocks.

Under the Plan, as emended, options for 10,000,000 shares of common stock are reserved for issuance.  At June 30, 2009, 5,320,000 options were available for grant.  


 

Stock Options

Option activity under the Plan was as follows for the six months ended June 30, 2009:
 
         
Weighted
   
Weighted
       
         
Average
   
Average
       
         
Exercise
   
Remaining
   
Aggregate
 
         
Price per
   
Contractual
   
Intrinsic
 
   
Outstanding
   
Share
   
Life (in Years)
   
Value
 
                         
Outstanding at December 31, 2008
    4,680,000     $ 1.62       9.41     $ 5,159,900  
Forfeited or expired
    (54,687 )     0.75       -       -  
Outstanding at June 30, 2009
    4,625,313     $ 1.63       8.92     $ 3,868,510  
Vested and exercisable at June 30, 2009
    1,019,688     $ 0.75       8.64     $ 1,171,366  
                                 
 
The aggregate intrinsic value in the table above represented the total pre-tax intrinsic value, which was based on the closing price of our common stock at the end of the periods. These were the value which would have been received by option holders if all option holders exercised their options on that date.

The fair value of options granted is recognized as an expense over the requisite service period.  As of June 30, 2009, the fair value of options issued by the Company was $4,069,726 of which $17,623 has been forfeited. The unamortized cost of stock options issued remaining at June 30, 2009 was $3,054,115 with a weighted average expected term for recognition of 2.89 years. At the time of grant, the estimated fair values per option were from $0.24 to $4.46.

During the first quarter of 2009, an aggregate of 500,000 options to purchase common stocks held by two employees were repriced. The repricing of the underwater options was accounted for under SFAS No. 123 (revised 2004), Share-Based Payment (“FAS 123R”) as modification. The modification resulted in an incremental compensation cost of $88,033, of which, $6,398 and $7,945, respectively, were recognized in the three and six months ended June 30, 2009. The remaining unrecognized incremental cost will be recognized over the remaining service period.
 
Restricted Stock

The fair value of restricted stock granted is recognized as an expense over the requisite service period.  As of June 30, 2009, the fair value of restricted stock issued by the Company was $312,209. The unamortized cost of restricted stock issued remaining at June 30, 2009 was $208,463 with a weighted average expected term for recognition of 3.06 years. At the time of grant, the fair values per share were from $1.75 to $5.80. Total outstanding restricted stocks were 153,000 shares at June 30, 2009, of which 127,938 was unvested.

We accounted for non-employee shares of restricted stocks in accordance with EITF Abstract No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”).  Under the provisions of EITF 96-18, because none of our agreements has a disincentive for nonperformance, we record a charge for the fair value of the portion of the restrict stocks earned from the point in time when vesting of the restricted stock becomes probable. Final determination of fair value of the restricted stock occurs upon actual vesting. As such, non-employees’ shares were revalued and marked-to-market at the stock price on June 30, 2009.

During the first quarter of 2009, we modified one terminated employee’s original grant. Of the 50,000 shares of restricted stock that such employee was originally granted, 40,000 shares were canceled and the remaining 10,000 shares were accelerated as part of the separation agreement. Under FAS 123R, the change in the vesting term of the restricted stock is considered as modification. As such, we reversed $22,134 compensation expense related to the original grant and recorded $16,000 compensation expense based on the fair value of the 10,000 shares on the modification date.
 
Warrants

We accounted for warrants issued to third-party service providers in accordance to EITF 96-18, because none of our agreements has a disincentive for nonperformance, we record a charge for the fair value of the portion of the warrants earned from the point in time when vesting of the warrants becomes probable. Final determination of fair value of the warrants occurs upon actual vesting. As such, the warrants were revalued and marked-to-market at June 30, 2009. During the first six months ended June 30, 2009, there was no issuance or cancellation of warrants. We recorded $16,513 and $34,823, respectively, in warrants expense for the three and six months ended June 30, 2009.
 
 
 
 
Warrants have been issued with exercise prices of between $2.00 and $3.00 per share as follows:

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Life (in Years)
   
Value
 
                         
Outstanding at December 31, 2008
    75,000     $ 2.50     $ 5.00     $ 6,250  
Granted
    -                       -  
Exercised
    -                       -  
Forfeited or expired
    -                       -  
Outstanding at June 30, 2009
    75,000     $ 2.50       4.51     $ -  
Exercisable at June 30, 2009
    32,837     $ 2.64       4.51     $ -  
                                 

Share-based Compensation Expenses

We recognize our share-based payment compensation cost under FAS 123R for employees' shares and under EITF 96-18 for non-employees' shares. The following table sets forth the total share-based compensation expense for the periods indicated:
 
   
For The Three Months Ended
   
For The Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Sales and marketing - stock options to employees
  $ 145,323     $ 21,345     $ 227,236     $ 21,345  
Sales and marketing - restricted stocks to employees
    3,622       -       5,469       -  
General and administration - stock options to employees
    114,733       34,708       177,034       34,708  
General and administration - restricted stocks to employees
    1,344       -       (9,011 )     -  
General and administration - restricted stocks to non-employees
    36,519       -       60,859       -  
General and administration - warrants to non-employees
    16,513               34,823          
        Total share-based compensation expense
  $ 318,054     $ 56,053     $ 496,410     $ 56,053  
 
NOTE 18.    SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS