Quarterly Report

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o		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

MIVA, Inc.

(Exact name of registrant as specified in its charter)

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 þ     No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

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

There were 33,882,372 shares of the Registrant’s Common Stock outstanding on October 31, 2007.

 

 

FORM 10-Q

MIVA, Inc.

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets September 30, 2007 (Unaudited), and December 31, 2006		3
Unaudited Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2007 and 2006		4
Unaudited Condensed Consolidated Statements of Cash Flows For the nine Months Ended September 30, 2007 and 2006		5
Notes to Unaudited Interim Condensed Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2007 and 2006		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		24
Item 3. Quantitative and Qualitative Disclosures about Market Risk.		38
Item 4. Controls and Procedures.		39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.		40
Item 1A. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 6. Exhibits.		47
Signatures		48
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

MIVA, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

		September 30,				December 31,
		2007				2006
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	24,832			$	29,588
Accounts receivable, less allowances for doubtful accounts of $691 and $1,299, respectively			16,820				20,654
Deferred tax assets			60				60
Income tax receivable			—				1,471
Prepaid expenses and other current assets			2,832				1,634
Total current assets		$	44,544			$	53,407
PROPERTY AND EQUIPMENT, NET			8,890				15,446
INTANGIBLE ASSETS
Goodwill			14,743				28,566
Vendor agreements, net			1,415				1,704
Other intangible assets, net			4,553				6,098
OTHER ASSETS			1,120				1,081
Total assets		$	75,265			$	106,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	7,243			$	14,829
Accrued expenses			13,539				15,599
Deferred revenue			3,218				3,210
Current portion of long-term debt			349				1,360
Total current liabilities		$	24,349			$	34,998
OTHER LONG-TERM LIABILITIES			1,209				395
Total liabilities		$	25,558			$	35,393
STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value; authorized, 500 shares; none issued and outstanding			—				—
Common stock, $.001 par value; authorized, 200,000 shares; issued 33,947 and 32,805, respectively; outstanding 32,234 and 31,512, respectively			34				33
Additional paid-in capital			265,635				259,353
Treasury stock, 1,713 and 1,293 shares at cost, respectively			(6,655	)			(4,744	)
Accumulated other comprehensive income			5,746				5,548
Deficit			(215,053	)			(189,281	)
Total stockholders’ equity			49,707				70,909
Total liabilities and stockholders’ equity		$	75,265			$	106,302

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

MIVA, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Revenues		$	36,370			$	42,796			$	118,231			$	127,731
Cost of services			17,150				22,999				56,242				65,812
Gross profit			19,220				19,797				61,989				61,919
Operating expenses
Marketing, sales, and service			11,300				11,467				36,970				36,481
General and administrative			7,937				8,809				24,180				31,040
Product development			1,396				2,134				4,691				6,225
Amortization			1,196				1,450				3,657				5,900
Impairment loss on goodwill and other assets			1,444				—				15,450				63,680
Restructuring Charges			—				—				3,038				—
Total operating expenses			23,273				23,860				87,986				143,326
Loss from operations			(4,053	)			(4,063	)			(25,997	)			(81,407	)
Interest income, net			170				200				381				573
Exchange rate gain (loss)			265				(16	)			513				74
Loss before provision for income taxes			(3,618	)			(3,879	)			(25,103	)			(80,760	)
Income tax expense (benefit)			85				448				233				(1,340	)
Net loss from continuing operations			(3,703	)			(4,327	)			(25,336	)			(79,420	)
Income (loss) from discontinued operations			387				(260	)			261				(1,968	)
Net loss		$	(3,316	)		$	(4,587	)		$	(25,075	)		$	(81,388	)
Basic Earnings (loss) per share
Continuing operations		$	(0.11	)		$	(0.14	)		$	(0.80	)		$	(2.53	)
Discontinued operations		$	0.01			$	(0.01	)		$	0.01			$	(0.06	)
Diluted Earnings (loss) per share
Continuing operations		$	(0.11	)		$	(0.14	)		$	(0.80	)		$	(2.53	)
Discontinued operations		$	0.01			$	(0.01	)		$	0.01			$	(0.06	)
Weighted-average number of common shares outstanding
Basic			32,219				31,585				31,832				31,434
Diluted			32,219				31,585				31,832				31,434

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

MIVA, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		For the Nine Months
		Ended September 30,
		2007				2006
Cash Flows from Operating Activities
Net loss		$	(25,075	)		$	(81,388	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Provision for (recoveries of) doubtful accounts			(161	)			(701	)
Depreciation and amortization			7,346				9,996
Impairment loss on goodwill and other assets			15,450				63,680
Equity based compensation			4,066				6,039
European business tax reimbursements			—				(784	)
Gain on disposal of capital items			(59	)			—
Gain on disposal of discontinued operations			(160	)			—
Deferred income tax expense			—				(293	)
Changes in operating assets and liabilities
Accounts receivable			4,549				2,173
Income taxes receivable			1,706				5,898
Prepaid and other current assets			(1,162	)			(347	)
Deferred revenue			(113	)			(330	)
Accounts payable, accrued expenses and other liabilities			(10,004	)			(2,126	)
Net Cash (Used in) provided by Operating Activities			(3,617	)			1,817
Cash Flows from Investing Activities
Proceeds from sale of property and equipment			120				—
Proceeds from sale of discontinued operations			200				—
Purchase of short-term investments			—				(78,580	)
Proceeds from sale of short-term investments			—				78,580
Purchase of businesses, net of cash acquired			—				(2,795	)
Purchase of capital items including internally developed software			(371	)			(6,439	)
Net Cash Used in Investing Activities			(51	)			(9,234	)
Cash Flows from Financing Activities
Payments made on software license obligation			(1,050	)			(1,050	)
Purchase of treasury stock			—				(887	)
Proceeds received from exercise of stock options and warrants			462				1,908
Net Cash Used in Financing Activities			(588	)			(29	)
Effect of Foreign Currency Exchange Rates			(500	)			1,682
Decrease in Cash and Cash Equivalents			(4,756	)			(5,764	)
Cash and Cash Equivalents, Beginning of Period			29,588				38,436
Cash and Cash Equivalents, End of Period		$	24,832			$	32,672

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

MIVA, Inc .

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

NOTE A — NATURE OF BUSINESS

MIVA, Inc., together with its wholly-owned subsidiaries, collectively, the “Company”, “we”, “us” or “MIVA”, is a leading online media and advertising network company. We provide targeted and measurable online advertising campaigns for our advertiser and agency clients, generating qualified consumer leads and sales. The audiences for our advertisers’ campaigns are comprised of our multi-tiered ad network of third-party website publishers and our growing portfolio of MIVA-owned consumer entertainment properties. Our high traffic consumer destination websites organize audiences into marketable vertical categories and facilitate the distribution of our toolbar products. Our toolbars are designed to enhance consumers’ online experience by providing direct access to relevant content and search results. Our active toolbar installed base currently enables direct marketing relationships with approximately 7 million consumers worldwide.

We offer a range of products and services through the following divisions:

MIVA Media

MIVA Media is a leading auction based pay-per-click advertising and publishing network that operates across North America and Europe. MIVA Media connects millions of buyers and sellers online by displaying relevant and timely text ads in response to consumer search or browsing activity on select Internet properties. Such interactions between online buyers and sellers result in highly targeted, cost-effective leads for MIVA’s advertisers and a source of recurring revenue for MIVA’s publisher partners.

MIVA Direct

MIVA Direct operates a growing portfolio of MIVA-owned consumer destination websites as well as a range of consumer-oriented interactive products including toolbars, customized cursors, and screensavers. Our high traffic consumer destination websites organize audiences into marketable vertical categories and facilitate the distribution of our toolbar products. Our toolbars are designed to enhance consumers’ online experience by providing direct access to relevant content and search results. Our active toolbar installed base currently enables direct marketing relationships with approximately 7 million consumers worldwide.

For MIVA Media, which comprises a majority of our overall revenue, we derive our revenue primarily from online advertising by delivering relevant contextual and search ad listings to our third-party ad network and our MIVA-owned consumer audiences on a performance basis. Marketers only pay for advertising when a predetermined action occurs, such as when an Internet user clicks on an ad.

The majority of MIVA Direct’s revenue is generated through toolbar products. MIVA Direct’s toolbar products offer consumers direct links to what we believe is relevant content and provide search functionality, utilizing ad listings serviced primarily through our contractual relationship with Google, our third-party ad provider.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation of results for the interim periods have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire year.

The unaudited consolidated financial statements include the accounts and operations of MIVA, Inc. and all of our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: future cash flows; asset impairment evaluations; income taxes; tax valuation reserves; restructuring reserve; loss contingencies; allowances for doubtful accounts; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.

Cash and Cash Equivalents and Short-Term Investments

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

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based on its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect our customers’ ability to pay to determine the level of allowance required.

Comprehensive Loss

Total comprehensive loss is comprised of net loss and net foreign currency translation adjustments. Total comprehensive loss for the three and nine months ended September 30, 2007, was $3.1 million and $24.8 million, respectively. Comprehensive loss for the three and nine months ended September 30, 2006, was $4.0 million and $75.5 million, respectively. The difference between comprehensive loss and net loss is the direct result of foreign currency translation adjustments.

Cost of Services

The Company’s cost of services consists of revenue-sharing or other payments to our MIVA Media distribution partners and other directly related expenses associated with the production and usage of MIVA Media that includes our third party patent license royalty payments.

Advertising Costs

Advertising costs are expensed as incurred, and are included in Marketing, Sales and Service expense. We incurred advertising costs for the three and nine months ended September 30, 2007, of $8.2 million and $25.8 million, respectively.

Advertising costs for the three and nine months ended September 30, 2006, was $6.8 million and $20.6 million, respectively.

Income Taxes

Income taxes are accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” Under SFAS 109, deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities, loss carry-forwards, and tax credit carry-forwards for which income tax benefits are expected to be realized in future years. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.

New Accounting Pronouncements

In February 2007, the Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”) were issued. Under SFAS 159, entities may elect to measure eligible items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. We will adopt SFAS 159 in 2008. The Company has not yet determined the impact of SFAS 159 on its financial condition and results of operations.

In September 2006, SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) was issued. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company has not yet determined the impact of SFAS 157 on its financial condition and results of operations.

NOTE C – DISCONTINUED OPERATIONS

On August 1, 2007, we sold the assets, net of liabilities assumed, of our MIVA Small Business division for $0.2 million. Our decision to divest our MIVA Small Business division was due primarily to inconsistencies between the division’s products and services and the Company’s current and future strategic plan. A gain of approximately $0.16 million was recorded as a result of the sale.

In accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”) the financial data for MIVA Small Business has been accounted for as discontinued operations and, accordingly, its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations in all periods presented. The results of operations of MIVA Small Business operations for both the three and nine month periods ending September 30, 2007 and 2006, are as follows:

NOTE D – IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

In accordance with SFAS No. 142, “ Goodwill and Other Intangible Assets ,” goodwill and other intangible assets with indefinite lives are tested for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In performing this assessment, we compare the carrying value of our reporting units to their fair value. Quoted market prices in active stock markets are often the best evidence of fair value; therefore a significant decrease in our stock price could indicate that an impairment of goodwill exists.

In the second quarter of 2007, as is done each quarter, our revenue and earnings forecasts were updated for each of our divisions to reflect events that occurred during the quarter that changed our expected business prospects. Our MIVA Media Europe division’s forecasts were particularly negatively affected by the continuation of reduced traffic generated by our distribution partners; slower than anticipated deployment of new services; and other factors. As a result of these indicators, we performed a test to determine if the carrying amount of goodwill and other long-lived assets at MIVA Media Europe were impaired.

The fair value estimates used in the initial impairment test were based on market approaches and the present value of future cash flows. These tests indicated that the carrying amount of MIVA Media Europe exceeded its fair value, and led us to conclude that goodwill could be impaired. We then performed a preliminary impairment test of long-lived assets, and with the assistance of an independent third-party appraiser, a preliminary second step of the impairment analysis. As part of the two step analysis required, the implied fair value of goodwill was determined through the allocation of preliminary estimates of the fair value to the underlying assets and

liabilities, and an estimated non-cash impairment charge of $14.0 million was recorded to adjust the carrying value of goodwill to its estimated fair value. This non-cash charge was recorded at MIVA Media Europe and after this impairment charge, MIVA Media Europe has no remaining goodwill.

At the time of the filing of our June 30, 2007 Form 10-Q, the second step of the analysis had not been finalized, therefore, as discussed above, we recorded our best estimate of the impairment, at the time, $14.0 million. The finalization of the impairment test of long-lived assets, and the second step of the impairment analysis was completed in the third quarter of 2007, resulting in an additional impairment charge of $1.4 million related to our long-lived assets in our MIVA Media Europe division. At September 30, 2007, the total remaining carrying value of the Company’s goodwill and other intangible assets of $20.7 million are those of our U.S. operations.

In the second quarter of 2006, our revenue and earnings forecasts were updated for each of our divisions to reflect events that occurred during the quarter that changed our expected business prospects. Our MIVA Media Europe division’s forecast was negatively affected by reduced traffic generated by our distribution partners, slower than anticipated deployment of new services, legal issues impacting one of our partners, and other factors. In addition, during the second quarter of 2006, our stock price declined significantly after updated second quarter revenue guidance reflecting the above factors was released publicly. This resulted in our market capitalization falling below the amount of our recorded equity. As a result of these indicators, we performed impairment tests to determine if MIVA Media Europe’s long-lived assets and other amortizable intangible assets were impaired under the provisions of SFAS 144, and whether goodwill was impaired under the provisions of SFAS 142 and it was determined that an impairment existed.

The fair value estimate used in the initial goodwill impairment test was based on market approaches and the present value of future cash flows. These tests indicated that the carrying amount of MIVA Media Europe exceeded its fair value, and led us to conclude that goodwill could be impaired. We then performed, with the assistance of an independent third-party appraiser, an impairment test of long-lived assets including indefinite lived intangible assets, and the second step of the impairment analysis. As a result we recorded an estimated non-cash impairment charge of $63.7 million to reduce the carrying value of other definite lived intangible assets and goodwill to their fair value. As part of the two step analysis required, the implied fair value of goodwill and other intangible assets was determined through the allocation of the fair value to the underlying assets and liabilities, and a non-cash impairment charge of $51.7 million was recorded to adjust the carrying value of goodwill, after adjusting the carrying value of other definite lived intangible assets by $12.0 million to their fair value. After this impairment charge, MIVA Media Europe had a goodwill carrying value of approximately $13.6 million, and no remaining recorded value of other intangible assets.

The fair value of the reporting unit under step one and individual assets under step two were determined with the assistance of an independent third-party appraiser using methodologies that include both a market and an income approach. The market approach includes analysis of publicly traded companies comparable in terms of functions performed, financial strengths, and markets served, along with a survey of transactions involving similar public and non-public companies. The income approach was based on the economic benefit stream of discounted future cash flows.

We will continue to assess the potential of impairment for goodwill, intangibles assets, and other long-lived assets in future periods in accordance with SFAS 142 and 144. Should our business prospects change, and our expectations for acquired business be further reduced, or other circumstances that affect our business dictate, we may be required to recognize additional impairment charges.

NOTE E – ACCOUNTING FOR SHARE-BASED COMPENSATION

In 2007, the Company granted share-based compensation in the form of restricted stock units (“RSUs”) to selected individuals within the management team, as compared to prior year stock option grants. For the three and nine months ended September 30, 2007, our total share-based employee expense consisted of existing stock option expense of $0.4 million and $1.6 million, and restricted stock unit expense, net of adjustment, of $0.6 million and $2.4 million, respectively. Included within the year-to-date totals is a net $0.3 million in restricted stock unit expense and $0.2 million in stock option expense that is recorded in our restructuring expense since it relates to terminated employees. For the comparable periods in 2006, the stock option expense was $0.8 million and $2.9 million, respectively. Additionally, we recorded restricted stock unit expense of $0.3 million and $3.2 million for the three and nine month periods ended September 30, 2006.

As a result of adopting SFAS 123R on January 1, 2006, our loss before income taxes and net loss for the three and nine months ended September 30, 2007, was $0.4 million and $1.6 million higher, respectively, than if we had continued to account for share-based compensation under Opinion 25. Basic and diluted loss per share from continuing operations would have been $0.10 and $0.75 for the three and nine months ended September 30, 2007, if we had not adopted SFAS 123R, compared to reported basic and diluted loss per share from continuing operations of $0.11 and $0.80, respectively.

As a result of adopting SFAS 123R on January 1, 2006, our loss before income taxes and net loss for the three and nine months ended September 30, 2006, was $0.8 million and $2.9 million higher, respectively, than if we had continued to account for share-based compensation under Opinion 25. Basic and diluted loss per share from continuing operations would have been $0.11 and $2.43 for the three and nine months ended September 30, 2006, if we had not adopted SFAS 123R, compared to reported basic and diluted loss per share from continuing operations of $0.14 and $2.53, respectively.

Stock option activity under the plans during the three and nine months ended September 30, 2007, is summarized below (in thousands, except per share amounts):

The following table summarizes information as of September 30, 2007, concerning outstanding and exercisable stock options under the plans (in thousands, except per share amounts):

As of September 30, 2007, unrecognized compensation expense related to stock options totaled approximately $1.8 million, which will be recognized over a weighted average period of 2.20 years.

The new share-based activity for the three and nine months ended September 30, 2007 and 2006 is summarized below (in thousands):

The Company did not grant stock options during the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2006, for purposes of establishing the amount of expense to be recorded, the fair value of the stock options was estimated at the date of grant using the Black-Scholes option-pricing model as follows:

The restricted stock unit activity for the three and nine months ended September 30, 2007, is summarized below (in thousands):

NOTE F – RESTRUCTURING

May 2007 Restructuring

On May 11, 2007, the Company entered into a master services agreement with Perot Systems Corporation (the “Perot Master Services Agreement”), pursuant to which the Company outsources certain of its information technology infrastructure services, application development and maintenance, MIVA Media US support services, and transactional accounting functions.

The Master Services Agreement has a term of 84 calendar months commencing June 1, 2007, unless earlier terminated or extended pursuant to its terms. Aggregate fees payable by the Company to Perot Systems under the Master Services Agreement are expected to be approximately $41.8 million. As of September 30, 2007, the Company incurred approximately $2.7 million of operating expenses for services received under the agreement.

As a result of the Master Services Agreement, the Company’s active employee base declined by approximately 50 employees and the full workforce reduction was completed in September 2007. Approximately 29 Company employees transitioned to become employees of Perot Systems as a result of this agreement.

With respect to the workforce reductions, the Company incurred total restructuring charges related to one-time employee severance ($0.2 million) and related costs ($0.3 million) of approximately $0.5 million in the quarter ended June 30, 2007. These related costs were attributed to legal fees incurred as part of both the February and May restructuring plans.

February 2007 Restructuring

On February 8, 2007, the Company announced a restructuring plan aimed at reducing the overall cost structure of the Company. The Company initially recorded $3.1 million (adjusted to $2.8 million in the quarter ended June 30, 2007) in restructuring charges related to this action, which was designed to align the cost structures of our U.S. and U.K. operations with the operational needs of these businesses. Management developed a formal plan that included the identification of a workforce reduction totaling 56 employees, all of which involved cash payments of approximately $0.5 million made in April 2007 and approximately $0.5 million to be paid by the end of April 2008.

The following table summarizes the activity with respect to the May 11, and February 8, 2007, restructuring charges (in thousands):

All actions under the February 8, 2007, restructuring plan, other than cash payments, were completed by May 31, 2007. The cash payments in connection with this plan will be completed by April 2008. The $0.3 million restructuring charge reserve is included in accrued expenses in the accompanying condensed consolidated balance sheet as of September 30, 2007.

The balance in intangible assets as of December 31, 2006, consisted of the following (in thousands, except years):

Changes in the carrying amount of intangible assets for the three and nine months ended September 30, 2007, are as follows (in thousands):

During 2004, we acquired several businesses and recorded substantial amounts of intangible assets and goodwill in our purchase accounting. In the second quarter of 2005, events occurred that reduced our expectations of the businesses acquired in 2004, primarily as the result of reduced traffic generated by our distribution partners at MIVA Media and a lower-than-expected profitability at our MIVA Direct and MIVA Small Business divisions. Therefore, indicators of goodwill and other intangible asset impairment existed, and we performed the impairment tests as prescribed by SFAS 142 and 144. As a result, the Company recorded an impairment charge of $118.9 million in the quarter ended June 30, 2005.

As more fully described in Note D, we performed similar impairment tests in the quarters ended June 30, 2007 and 2006, and recorded an impairment charge of $14.0 million and $63.7 million, respectively. The most recent impairment charge removed all recorded goodwill within our MIVA Media Europe division.

Should operating results for the remainder of 2007 or future periods fall short of the updated projections, further impairments of the remaining domestic based goodwill and other intangible assets could be required.

As of September 30, 2007, expected future intangible asset amortization is as follows (in thousands):

NOTE H – EQUITY AND PER SHARE DATA

We incurred a loss for the nine months ended September 30, 2007. As a result, potentially dilutive shares are not included in the calculation of Earnings per Share because to do so would have an anti-dilutive effect on the loss per share. Had we not recorded a loss, certain exercisable stock options would have been excluded from the calculation of Earnings per Share because option prices were greater than average market prices for the periods presented. The number of stock options that would have been excluded from the calculations was 1.8 million shares with a range of exercise prices between $4.52 and $23.14 for the nine months ended September 30, 2007.

The following is a reconciliation of the number of shares used in the basic and diluted computation of income per share (in thousands):

NOTE I – LITIGATION

Cisneros Litigation

On August 3, 2004, a putative class action lawsuit was filed in the Superior Court of the State of California, County of San Francisco, against MIVA and others in its sector, by two individuals, Mario Cisneros and Michael Voight, “on behalf of themselves, all other similarly situated, and/or for the general public.” The complaint alleges that acceptance of advertising for Internet gambling violates several California laws and constitutes an unfair business practice. The complaint seeks unspecified amounts of restitution and disgorgement as well as an injunction preventing us from accepting paid advertising for online gambling. On May 9, 2005, Judge Kramer struck three of the restitution claims asserted by Plaintiffs for money lost by licensed gambling operators, such as Indian tribes, as well as the purported claims on behalf of the State of California for taxes and other state revenues allegedly lost by the

State of California as result of online gambling. On October 11, 2005, Judge Kramer held a bifurcated trial on the issue of whether California public policy and the doctrine of in pari delicto are defenses to Plaintiffs’ claims for restitution for the gambling losses Internet gamblers purportedly incurred on Internet gambling sites, and Judge Kramer ruled that California public policy barred Plaintiffs’ claim for restitution. On April 13, 2007, the Court ruled that Plaintiffs cannot obtain disgorgement of revenues earned from ads for online gaming. The remaining issue is whether the Court should issue an injunction barring companies in MIVA’s industry from displaying ads for online gaming. The Court has scheduled a trial beginning on February 14, 2008, to resolve the issue of whether such an injunction should be issued. In addition, three of MIVA’s industry partners, each of which is a codefendant in the lawsuit, have asserted indemnification claims against MIVA for costs incurred as a result of such claims arising from transactions with MIVA, and MIVA entered into an agreement with one of these industry partners to resolve such claims. Subsequently the partner with which MIVA entered into an agreement was dismissed from the litigation, as well as several additional of MIVA’s co-defendants. In addition, Plaintiff Cisneros has been voluntarily dismissed from the case, but two plaintiffs remain. Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.

Lane’s Gifts and Collectibles Litigation

On February 17, 2005, a putative class action was filed in Miller County Circuit Court, Arkansas, against MIVA and others in our sector by Lane’s Gifts and Collectibles, LLC, U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4 Merchants, Inc. and Max Caulfield d/b/a Caulfield Investigations, on behalf of themselves and all others similarly situated. The Complaint names eleven search engines, web publishers, or performance marketing companies as defendants, including us, and alleges breach of contract, unjust enrichment, and civil conspiracy. All of the plaintiffs’ claims are predicated on the allegation that the plaintiffs have been charged for clicks on their advertisements that were not made by bona fide customers. The lawsuit is brought on behalf of a putative class of individuals who allegedly “were overcharged for [pay per click] advertising,” and seeks monetary damages, restitution, prejudgment interest, attorneys’ fees, and other remedies.

Two plaintiffs — Savings 4 Merchants and U.S. Citizens for Fair Credit Card Terms, Inc. - voluntarily dismissed themselves from the case, without prejudice, on April 4, 2005. We believe we have no contractual or other relationship with either of the remaining plaintiffs. On October 7, 2005, we filed a motion to dismiss the complaint pursuant to Ark. R. Civ. Proc. 12(b)(6) for failure to state claims upon which relief may be granted. On October 14, 2005, we timely filed a motion to dismiss pursuant to Ark. R. Civ. Proc. 12(b)(2) for lack of personal jurisdiction. The court has not yet ruled on these motions. Google, Yahoo, and certain other co-defendants in the case who were customers of Google and Yahoo have reached settlement terms with the plaintiffs that have been approved by the Court. The court has stayed the case as to the remaining defendants, including MIVA, to allow them to continue settlement discussions with the plaintiffs, which are ongoing. The Court has ordered the parties to submit a mediation plan by November 1, 2007 if the case has not settled by that date, and the Court has ordered the parties to complete mediation by November 30, 2007. If the case does not settle, the Court will hold a hearing on MIVA’s 12(b)(6) motion on December 3, 2007, and a hearing on MIVA’s 12(b)(2) motion on January 7, 2008.

We believe we have strong defenses to the plaintiffs’ claims and that our motions to dismiss are well founded. We have not assessed the amount of potential damages involved in plaintiffs’ claims and would be unable to do so unless and until a class is certified by the court. We intend to defend the claims vigorously. An industry participant is a codefendant in the lawsuit and has asserted an indemnification claim against us arising as a result of a contract between the companies. We have agreed to defend and indemnify the codefendant in accordance with the terms of our contract with them. Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.

Shareholder Class Action Lawsuits

Beginning on May 6, 2005, five putative securities fraud class action lawsuits were filed against us and certain of our former officers and directors in the United States District Court for the Middle District of Florida. The complaints allege that we and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual defendants also violated Section 20(a) of the Act as “control persons” of MIVA. Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between September 3, 2003 and May 4, 2005.

Plaintiffs allege generally that, during the putative class period, we made misleading statements and omitted material information regarding (1) the goodwill associated with a recent acquisition, (2) certain material weaknesses in our internal controls, and (3) the Internet traffic generated by and business relationships with certain distribution partners. Plaintiffs assert that we and the individual defendants made these misstatements and omissions in order to keep our stock price high to allow certain individual defendants to sell stock at an artificially inflated price. Plaintiffs seek unspecified damages and other relief.

On July 27, 2005, the Court consolidated all of the outstanding lawsuits under the case style In re MIVA, Inc. Securities Litigation, selected lead plaintiff and lead counsel for the consolidated cases, and granted Plaintiffs leave to file a consolidated amended complaint, which was filed on August 16, 2005. We and the other defendants moved to dismiss the complaint on September 8, 2005.

On December 28, 2005, the Court granted Defendants’ motion to dismiss. The Court granted Plaintiffs leave to submit a further amended complaint, which was filed on January 17, 2006. On February 9, 2006, Defendants filed a renewed motion to dismiss. On March 15, 2007, the Court granted in large part Defendants’ motion to dismiss. The Court denied Defendants’ motion to dismiss as to certain statements relating to (1) removal of traffic sources, (2) spyware, (3) implementation of screening policies and procedures, and (4) amounts of traffic purchased from distribution partners. On March 29, 2007, Defendants filed a motion for amendment to the March 15, 2007 order to include certification for interlocutory appeal or, in the alternative, for reconsideration. On July 17, 2007, the Court (1) denied the motion for amendment to the March 15, 2007 order to include certification for interlocutory appeal and (2) granted the motion for reconsideration as to the issue of whether Plaintiffs pled a strong inference of scienter in light of intervening precedent. The Court requested additional briefing on the scienter issue, which is now complete. In addition, Plaintiffs have moved the Court to certify the putative class, and Defendants have filed briefs in opposition thereto. The matter currently is pending for consideration by the Court. Plaintiffs have also served discovery requests on Defendants, and the discovery phase of the lawsuit is presently underway.

Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.

Derivative Stockholder Litigation

On July 25, 2005, a shareholder, Bruce Verduyn, filed a putative derivative action purportedly on behalf of us in the United States District Court for the Middle District of Florida, against certain of our directors and officers. This action is based on substantially the same facts alleged in the securities class action litigation described above. The complaint is seeking to recover damages in an unspecified amount. By agreement of the parties and by Orders of the Court, the case was stayed pending the resolution of Defendants’ motion to dismiss and renewed motion to dismiss in the securities class action. On July 10, 2007, the parties filed a stipulation to continue the stay of the litigation. On July 13, 2007, the Court granted the stipulation to continue the stay and administratively closed the case pending notification by plaintiff’s counsel that the case is due to be reopened. Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.

Payday Advance Plus, Inc.

On March 10, 2006, a putative class action was filed in the U.S. District Court for the Southern District of New York against us and Advertising.com, Inc. by Payday Advance Plus, Inc. The Complaint alleges that Advertising.com, a MIVA Media distribution partner, has engaged in click fraud to increase revenues to themselves with MIVA’s alleged knowledge and participation. The lawsuit is brought on behalf of a putative class of individuals who have allegedly been overcharged by the defendants and seeks monetary damages, restitution, prejudgment interest, attorneys’ fees, injunctive relief, and other remedies. On May 12, 2006, MIVA moved to dismiss the Complaint. In an order dated March 12, 2007, the Court denied MIVA’s motion to dismiss the plaintiff’s breach of contract claim but granted the motion as it related to the remainder of the plaintiff’s claims. On April 2, 2007, the plaintiff filed an amended complaint in which it dropped its claims against Advertising.com. The amended complaint asserts only a claim for breach of contract claim against MIVA. The plaintiff filed a motion for class certification on September 11, 2007, and MIVA filed its response on October 15, 2007. The motion is currently pending, and no hearing date has yet been set on the motion.

MIVA denies liability, believes it has strong defenses to the plaintiff’s claims, and intends to defend the claims vigorously. We have not assessed the amount of potential damages involved in plaintiff’s claims and would be unable to do so unless and until a class is certified by the court. We intend to defend the claims vigorously. Regardless of the outcome, the litigation could have a material adverse impact on our results because of defense costs, diversion of management’s attention and resources, and other factors

Comet Systems Inc.

The agent for the former shareholders of Comet Systems, Inc., a company that merged with and into one of our subsidiaries in March 2004, filed a lawsuit against us in Delaware Chancery Court on March 13, 2007. In the suit the shareholders’ agent contends that our calculation and payment of contingent amounts payable under the merger agreement were not correct. However, we contend that we calculated and paid the contingent amounts correctly. We intend to defend the claim vigorously. Regardless of the outcome, the litigation could have a material adverse impact on our results because of defense costs, diversion of management’s attention and resources, and other factors.

Other Litigation

We are a defendant in various other legal proceedings from time to time, regarded as normal to our business and, in the opinion of management the ultimate outcome of each such proceeding is not expected to have a material adverse effect on our financial position or the results of our operation.

No accruals for potential losses for litigation are recorded as of September 30, 2007, in accordance with FAS 5, but if circumstances develop that necessitate a loss contingency being recorded, we will do so. We expense all legal fees for litigation as incurred.

NOTE J– COMMITMENTS AND CONTINGENCIES

We have ongoing contractual cash payment obligations to our distribution partners. These payments are funded by payments from our advertisers for the paid click-through (visitors), delivered to them via our distribution partners. Agreements with certain distribution partners contain guaranteed minimum payments through December 2007.

We have minimum contractual payments as part of our royalty bearing non-exclusive license to certain Yahoo! patents payable quarterly through August 2010. In addition, we have ongoing royalty payments based on our use of those patents.

We have minimum contractual payments as part of the Perot Master Services Agreement described in Note F.

We have contractual obligations regarding future minimum payments under non-cancelable operating leases, net of payments to be received under our sublease agreement, guaranteed distributor payments, a royalty agreement, and the Master Services Agreement, which consisted of the following at September 30, 2007 (in thousands):

We entered into a real estate sublease agreement with an unrelated third party to sublease 20,171 square feet in our office located in Fort Myers, Florida. The term of the sublease agreement commenced on August 17, 2007 and ends on November 30, 2012, unless certain conditions (as defined) are met for earlier termination.

Amounts are attributed to the country of the legal entity that recognized the sale or holds the asset. Other international activity as reported in the table above relates to several European entities, including France, Germany, Spain, and Italy that are subsidiaries of MIVA Media (UK) Ltd. In addition, activity from Sweden, Denmark, Norway, and Finland is included to the extent of the private label agreement with Eniro AB. This private label agreement was signed in conjunction with the sale of substantially all of the assets of our indirect, wholly owned subsidiary Espotting Scandinavia AB, to Eniro AB during the third quarter of 2005.

NOTE L – INCOME TAXES

Income Tax Expense

Income tax expense for the three and nine months ended September 30, 2007, was $0.1 million and $0.2 million. This income tax expense recorded for the three and nine months ended September 30, 2007, relates to state income taxes associated with our US based entities.

Income taxes for the three and nine months ended September 30, 2006 reflected an expense of $(0.4) million and a benefit of $1.3 million, respectively. The tax expense for the three months ended September 30, 2006, arises from an adjustment to state income taxes, while the tax benefit for the nine months ended September 30, 2006, results from income tax benefits of operating losses and the reversal of deferred tax liabilities associated with intangibles written-off as part of the impairment charge taken earlier in the year, offset by valuation allowances provided against deferred tax assets and the state income tax adjustment referenced above. These tax amounts differ from the expected amounts that would be calculated by applying the federal statutory rate to losses before income taxes for the aforementioned reasons, the inability to recognize future tax benefits from operating losses carried forward due to recent financial results, and from the non-deductibility of that portion of the impairment charge related to goodwill.

The effective tax rate is impacted by a variety of estimates, including the amount of income expected during the remainder of the fiscal year, the mix of that income between foreign and domestic sources, and expected utilization of tax losses, that have a full valuation allowance.

FIN48

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted FIN 48 as of January 1, 2007. This standard modified the previous guidance provided by SFAS 5, “Accounting for Contingencies,” and SFAS 109, “Accounting for Income Taxes for uncertainties related to the Company’s global income tax liabilities.” In connection with this adoption of FIN 48, the Company recorded a net decrease to retained earnings of approximately $0.7 million related to the measurement of a position previously taken with respect to certain transfer pricing adjustments reported on our foreign tax returns. This amount of unrecognized tax benefit did not materially change as of September 30, 2007.

The Company recognized accrued interest and penalties related to these unrecognized tax benefits in income tax expense. As of January 1, 2007, the Company had recorded a liability of approximately $0.1 million for interest and penalties. The liability for the payment of interest and penalties did not materially change as of September 30, 2007.

As of January 1, 2007, open tax years in major jurisdictions date back to 2002 due to the taxing authorities’ ability to adjust operating loss carry forwards.

It is expected that the amount of unrecognized tax benefits will change in the next twelve months; however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

NOTE M – TREASURY STOCK

In the third quarter of 2007, the Company’s shares held in treasury increased by a total of 3,391 shares or approximately $0.02 million. This increase in treasury shares was due to shares that were withheld to pay withholding taxes upon the vesting of restricted stock units during the quarter.

In the second quarter of 2007, the Company’s shares held in treasury increased by a total of 158,032 shares or approximately $0.8 million. The main component of this increase in treasury shares related to the withholding of shares to pay withholding taxes in connection with the net issuance of stock options that were exercised by a former executive officer upon his resignation in May 2007. In addition, shares were withheld to pay withholding taxes upon the vesting of restricted stock units during the quarter.

In the first quarter of 2007, the Company’s shares held in treasury increased by a total of 258,678 shares or approximately $1.1 million. The main component of this increase in treasury shares related to the withholding of shares to pay withholding taxes in connection with the net issuances of stock options that were exercised by a former executive officers covering an aggregate of 253,779 shares ($1.1 million), including certain shares withheld to satisfy withholding taxes of the former executives. In addition, shares were withheld to pay withholding taxes upon the vesting of restricted stock units during the quarter.

NOTE N – RELATED PARTY TRANSACTIONS

Sebastian Bishop, our President and Chief Marketing Officer, is also a Director of Steakmedia Limited and owns a 2.5% interest in Steakmedia. Steakmedia is an advertising agency owned predominately by Oliver Bishop, Mr. Bishop’s brother. We use this agency to generate advertisers onto our MIVA Media Networks and invoice them for all revenue generated on our networks through their advertisers. Amounts invoiced to Steakmedia during the three and nine months ended September 30, 2007, was approximately $94,609 and $313,017, respectively. A foreign currency calculation adjustment is included in the year-to-date total of approximately $0.1 million; this adjustment did not impact the amounts invoiced. For the comparable periods in 2006, the amounts invoiced to Steakmedia were $310,589 and $647,606, respectively.

Lawrence Weber, who joined our Board of Directors in June 2005, and was subsequently elected Chairman of the Board of Directors in April 2006, is also the Chairman and Founder of W2 Group Inc., which owns Racepoint Group, Inc. The Company entered into an agreement in November 2005 with Racepoint for public relations professional services. We have paid Racepoint $0 and $62,305 for services rendered for the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2006 we paid Racepoint $62,461 and $217,842, respectively, for its services.

Executive Overview

We are a leading online media and advertising network company. We provide targeted and measurable online advertising campaigns for our advertiser and agency clients, generating qualified consumer leads and sales. The audiences for our advertisers’ campaigns are comprised of our multi-tiered ad network of third-party website publishers and our growing portfolio of MIVA-owned consumer entertainment properties. Our high traffic consumer destination websites organize audiences into marketable vertical categories and facilitate the distribution of our toolbar products. Our toolbars are designed to enhance consumers’ online experience by providing direct access to relevant content and search results. Our active toolbar installed base currently enables direct marketing relationships with approximately 7 million consumers worldwide.

We offer a range of products and services through the following divisions:

MIVA Media

MIVA Media is a leading auction based pay-per-click advertising and publishing network that operates across North America and Europe. MIVA Media connects millions of buyers and sellers online by displaying relevant and timely text ads in response to consumer search or browsing activity on select Internet properties. Such interactions between online buyers and sellers result in highly targeted, cost-effective leads for MIVA’s advertisers and a source of recurring revenue for MIVA’s publisher partners.

MIVA Direct

MIVA Direct operates a growing portfolio of MIVA-owned consumer destination websites as well as a range of consumer-oriented interactive products including toolbars, customized cursors, and screensavers. Our high traffic consumer destination websites organize audiences into marketable vertical categories and facilitate the distribution of our toolbar products. Our toolbars are designed to enhance consumers’ online experience by providing direct access to relevant content and search results. Our active toolbar installed base currently enables direct marketing relationships with approximately 7 million consumers worldwide.

For MIVA Media, which comprises a majority of our overall revenue, we derive our revenue primarily from online advertising by delivering relevant contextual and search ad listings to our third-party ad network and our MIVA-owned consumer audiences on a performance basis. Marketers only pay for advertising when a predetermined action occurs, such as when an Internet user clicks on an ad.

The majority of MIVA Direct’s revenue is generated through toolbar products. MIVA Direct’s toolbar products offer consumers direct links to what we believe is relevant content and provide search functionality, utilizing ad listings serviced primarily through our contractual relationship with Google, our third-party ad provider.

Recent Developments

On August 1, 2007, we entered into a definitive agreement and sold the assets, net of liabilities assumed, of our MIVA Small Business division for $0.2 million, resulting in a gain of $0.16 million. Our decision to divest our MIVA Small Business division was due primarily to inconsistencies between the division’s products and services and the Company’s current and future strategic plan.

As described in Note D to our unaudited condensed consolidated financial statements, in the second quarter of 2007, events occurred that caused us to reconsider and lower our operating projections for our MIVA Media Europe division, acquired in 2004, primarily as a result of their reduced revenue trend beginning in the last half of May 2006 and continuing into, and throughout, 2007. We anticipate further revenue growth challenges in the European marketplace in future periods and anticipate that revenues and our average revenue per click in our MIVA Media Europe division will continue to decline during the remainder of 2007. As a result, we performed an impairment test to determine if the value of goodwill, intangibles assets and other long-lived assets were recoverable under the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and it was determined that an impairment existed. Therefore, as provided under the provisions of those Statements, we recorded in the second quarter of 2007 an estimated non-cash impairment charge of $14.0 million which eliminated the MIVA Media Europe goodwill.

At the time of the filing of our second quarter Form 10-Q, the impairment test of long-lived assets and the second step of the analysis had not been finalized, therefore, as discussed more fully in Note D, we recorded our best estimate of the impairment at the time of $14.0 million. The final measurement of the impairment was completed in the third quarter of 2007, resulting in an additional impairment of $1.4 million related to the long-lived assets within our MIVA Media Europe division.

Organization of Information

Management’s discussion and analysis of financial condition and results of operations provides a narrative on our financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:

•

Results of operations

•

Liquidity and capital resources

•

Use of estimates and critical accounting policies

•

Special note regarding forward-looking statements

RESULTS OF OPERATIONS

Revenue

During the three months ended September 30, 2007, we recorded revenue, net of discontinued operations, of $36.4 million, a decrease of approximately 15.0% from the $42.8 million recorded in the same period in 2006. For the nine months ended September 30, 2007, we recorded $118.2 million in revenue net of discontinued operations, compared with $127.7 million for the nine months ended September 30, 2006, a decline of approximately 7.4%.

The decrease in our revenue is principally due to the performance of MIVA Media. For the three months ended September 30, 2007, MIVA Media recorded revenue of $26.5 million, a decrease of approximately 27.6% from the $36.6 million recorded in the same period in 2006. For the nine months ended September 30, 2007, MIVA Media recorded $88.6 million in revenue, compared with $108.2 million for the nine months ended September 30, 2006, a decline of approximately 18.0%. The decreases at MIVA Media have been partially offset by increases in revenue at our MIVA Direct division. For the three months ended September 30, 2007, MIVA Direct recorded revenue of $12.3 million, an increase of approximately 26.8% from the $9.7 million recorded in the same period in 2006. For

the nine months ended September 30, 2007, MIVA Direct recorded $39.3 million in revenue, compared with $28.9 million for the nine months ended September 30, 2006, an increase of approximately 36.0%. Additionally, MIVA Direct, as a percentage of total revenue, has increased from approximately 22.4% in the first nine months of 2006 to approximately 33.2% in the first nine months of 2007. The increase in revenue at MIVA Direct is due primarily to a change in MIVA Direct’s monetization partner in early 2007 to Google, Inc.

A significant portion of our revenue decline at MIVA Media was attributed to the performance of MIVA Media Europe. Revenue at MIVA Media Europe declined $5.3 million, or 32.8%, and $18.8 million, or 34.6%, respectively, for the three and nine months ended September 30, 2007, compared to the same periods in 2006. Revenue at MIVA Media US has declined $5.1 million or 25.2%, and $2.9 million or 5.4%, respectively, for the three and nine months ended September 30, 2007, compared to the same periods in 2006.

A portion of the revenue decline at MIVA Media is attributed to a decrease in our average revenue per click. Our average revenue per click in any given period is determined by dividing total click-through revenue by the number of paid clicks recorded during that same period. Beginning in fiscal year 2004, continuing in 2005 and 2006 and into the third quarter of 2007, we have experienced declines in our average revenue per click for both our MIVA Media US and MIVA Media Europe Operations. These declines in our average revenue per click may be caused by a number of factors, including, among others: our overall mix of traffic sources; the bid prices submitted by our advertisers for a keyword advertisement; fewer advertisers using our services and competing for keywords; the bid prices of the more frequently clicked keyword terms; the effects of increased competition; delayed updates to the MIVA Media technology platform and the nexus between the six.

Other factors negatively impacting our revenue at MIVA Media in the period ended September 30, 2007, include (i) reduced spending from a specific set of advertisers that we believe were affected by their inability to monetize large blocks of remnant keyword traffic, (ii) the impact of our on-going initiative to attempt to pro-actively screen Internet traffic sources to ensure that less desirable sources of Internet traffic are not sent to our advertiser base; and (iii) increased advertiser dissatisfaction with the MIVA Media platform.

We are actively seeking to stop the decline in revenue at MIVA Media and increase our average revenue per click by changing the overall mix of MIVA Media traffic sources to increase the click-to-conversion ratio for our advertisers, maximizing keyword efficiency for our advertisers, and seeking new implementations through which our advertisers’ keyword advertisements may be displayed. We plan to continue our efforts to invest in our business and seek additional revenue from our media services. Examples of these initiatives include (i) our development and initial launch of our Precision Network, and (ii) continued development of our product offering for Advertisers and Partners and (iii) the planned rollout of a new, single Global Technology Platform. We cannot assure you that any of these efforts will be successful. If we are unable to stop the revenue decline at MIVA Media, it will have a material adverse impact on our business, financial condition, and results of operations.

During the nine months ended September 30, 2007, one customer of our MIVA Direct division, Google, accounted for approximately 27.1% of our total revenue. In the first nine months of 2006, Yahoo!, which was then a MIVA Direct customer, accounted for approximately 17.6% of our total revenue.

Our industry, as a whole, deals with the receipt of fraudulent clicks or “click-fraud,” which occurs when a person or program clicks on an advertisement displayed on a website for the purpose of generating a click-through payment to MIVA and to the MIVA Media Networks partner, or to deplete the advertising account of a competitor, rather than to view the underlying content. We have proprietary automated screening applications and procedures to minimize the effects of these fraudulent clicks. Click-throughs received through the MIVA Media Networks are evaluated by these screening applications and procedures. We routinely evaluate the effectiveness of our efforts to combat click-through fraud, and may adjust our efforts for specific distribution partners or in general, depending on our ongoing analysis. These changes impact the number of click-throughs we record and bill to our advertisers, the bid prices our advertisers are willing to pay us for click-throughs, and the revenue we generate.

Additionally, we have been named in certain litigation, the outcome of which could directly or indirectly impact our revenue.  For additional information regarding pending litigation, reference Part II. Other Information, Item 1. Legal Proceedings below.

Cost of Services

Cost of services consists of traffic acquisition costs (revenue sharing or other arrangements with our MIVA Media distribution partners), obligations under the royalty bearing non-exclusive patent license agreement with Yahoo!, costs associated with designing and maintaining the technical infrastructure that supports our various services, cost of third-party providers of algorithmic search results, and fees paid to telecommunications carriers for Internet connectivity. Costs associated with our technical infrastructure, which supports our various services, include salaries of related technical personnel, depreciation of related computer equipment, co-location charges for our network equipment, and software license fees.

Cost of services decreased in the three and nine month periods ended September 30, 2007, compared with the same periods in the previous year primarily due to an overall reduction in the total amounts paid for traffic acquisition costs of $5.2 million and $8.9 million, respectively, to our distribution partners. The majority of our payments to our distribution partners are calculated as a percentage of the revenue generated on the Internet traffic we purchase, and as a result, as revenue declines a corresponding decrease will be realized in our traffic acquisition costs. Cost of services for the three and nine month periods ended September 30, 2007, compared to the same periods in 2006 decreased as a percentage of revenue from 53.7% to 47.3% and 51.5% to 47.6%, respectively. This decrease in cost of services as a percentage of revenue is due to a higher contribution of revenue generated by our MIVA Direct division, which is at a higher gross margin percentage, compared to the same period in the prior year. Additionally, the US generated revenue increased during the three and nine month periods ended September 30, 2007, in comparison to the European revenue, which contributes to the more favorable margins.

Operating expenses, as a percent of revenue, for the three and nine months ended September 30, 2007 and 2006, were as follows:

Marketing, sales, and service

Marketing, sales, and service expense consists primarily of payroll and related expenses for personnel engaged in marketing, advertiser solutions, business development, sales functions, affiliate relations, business affairs, corporate development, and credit transactions. It also includes advertising expenditures, promotional expenditures such as sponsorships of seminars, trade shows and expos, referral fees, other expenses to attract advertisers to our services, and fees to marketing and public relations firms.

Marketing, sales, and service decreased $0.1 million for the three months ended September 30, 2007, as compared to the same period in 2006. A period over period decrease was recorded in salaries, benefits, share-based compensation and other costs ($1.3 million) related to our 2007 restructuring initiatives. Additionally, marketing, sales and service expense benefited from the reversal of a portion of bonuses accrued through June 30, 2007, because during the period ended September 30, 2007, it became apparent that threshold requirements for portions of our 2007 Bonus Plan would not be achieved ($0.1 million). Also, we recorded a reduction in public relations and promotions costs of approximately $0.1 million. Offsetting these decreases was an increase of approximately $1.4 million in advertising spending, of which approximately $0.9 million was recorded at MIVA Direct and was used to promote and generate toolbar revenue.

Marketing, sales and service expense increased by $0.5 million for the nine months ended September 30, 2007, as compared to the same period in 2006. Increased advertising expense of approximately $5.2 million at MIVA Direct was offset by an approximate $4.2 million reduction in costs associated with salaries, benefits, share-based compensation and other costs related to our 2007 restructuring initiatives. Additionally, marketing, sales and service expense benefited from the bonus accrual reversal of $0.1 million for the reasons discussed above. Furthermore, marketing, sales, and services benefited from decreases recorded in travel expense ($0.1 million), public relations and promotion expense ($0.2 million), and seminars and conference expenses ($0.1 million).

General and Administrative

General and administrative expense consists primarily of: payroll and related expenses for executive and administrative personnel; fees for professional services; costs related to leasing, maintaining and operating our facilities; credit card fees; recruiting fees; travel costs for administrative personnel; insurance; depreciation of property and equipment not related to search serving or product development activities; expenses and fees associated with the reporting and other obligations of a public company; bad debts; and other general and administrative services. Fees for professional services include amounts due to lawyers, auditors, tax advisors, and other professionals in connection with operating our business, supporting litigation, and evaluating and pursuing new opportunities.

General and administrative expenses decreased by $0.9 million in the three months ended September 30, 2007, compared to the same period in the previous year. Decreases contributing to this quarter-over-quarter reduction include: salaries, benefits, and other employee expenses including share-based compensation ($1.8 million) associated with the 2007 employee restructuring and the 2006 executive severance costs; travel expense ($0.1 million); bad debt recovery ($0.1 million); rent and office expense ($0.1 million); bank fees, licenses and taxes ($0.1 million); and a recognized gain on the sale of assets ($0.1 million). Additionally, general and administrative expenses benefited from the reversal of a portion of bonuses accrued through June 30, 2007, because during the period ended September 30, 2007, it became apparent that threshold requirements for portions of our 2007 Bonus Plan would not be achieved ($0.5 million). Offsetting these decreases was an increase in consulting and outside services of approximately $1.3 million that was primarily due to expenses associated with our on-going Perot outsourcing initiatives.

General and administrative expenses decreased by $6.8 million in the nine months ended September 30, 2007, compared to the same period in the prior year. Decreases contributing to this reduction include: salaries, benefits, and other employee expenses including share-based compensation ($6.7 million) associated with the 2007 employee restructuring and the 2006 executive severance costs; consulting and outside services ($0.8 million); travel expense ($0.4 million); depreciation and amortization expense ($0.1 million); and a recognized gain on the disposition of fixed assets ($0.1 million). Additionally, general and administrative expenses benefited from the bonus accrual reversal of $0.5 million for the reasons discussed above. Partially offsetting these decreases were increases in rent expense ($0.8 million) that was primarily the result of a one-time 2006 lease modification agreement; bad debt expense ($0.1 million); depreciation and amortization expense ($0.1 million); and insurance expense ($0.1 million).

Product development

Product development expense consists primarily of payroll and related expenses for personnel responsible for the development and maintenance of features, enhancements, and functionality for our proprietary services, and depreciation for related equipment used in product development.

Product development costs decreased $0.7 million for the three months ended September 30, 2007, as compared to the same period in the previous year. Decreases were in the following categories: salaries, benefits and other employee expenses, including share-based compensation expense ($0.6 million); consulting and outside services ($0.2 million); and bank fees, licenses, and taxes ($0.1 million). Additionally, product development expenses benefited from the reversal of a portion of bonuses accrued through June 30, 2007, because during the period ended September 30, 2007, it became apparent that threshold requirements for portions of our 2007 Bonus Plan would not be achieved ($0.1 million). Also, these decreases were partially offset by increases in technology related expenses ($0.2 million).

Product development costs decreased $1.5 million for the nine months ended September 30, 2007, as compared to the same period in the previous year. Decreases were in the following categories: salaries, benefits and other employee expenses, including share-based compensation expense ($2.1 million); consulting and outside services ($0.2 million); and bank fees, licenses, and taxes ($0.2 million). Additionally, product development expenses benefited from the bonus accrual reversal of $0.1 million for the reasons discussed above. Also, these decreases were offset by an increase in technology related expenses ($1.0 million), which occurred primarily because a one-time credit had been recorded in 2006.

Impairment Loss

In the second quarter of 2007, events occurred that caused us to reconsider and lower our operating projections for our MIVA Media Europe division, acquired in 2004, primarily as a result of its reduced revenue trend initially beginning in the middle to latter half of 2006 and continuing into, and throughout, 2007. We anticipate further revenue growth challenges in the European marketplace in future periods and anticipate that revenues and our average revenue per click in our MIVA Media Europe division will continue to decline during the remainder of 2007. As a result, we performed an impairment test to determine if the value of goodwill, intangibles assets and other long-lived assets of this division were recoverable under the provisions of SFAS 142 and 144 and it was determined that an impairment existed. Therefore, as provided under the provisions of these statements we recorded a preliminary estimated non-cash impairment charge of $14.0 million to reduce the carrying value of goodwill to its fair value as of June 30, 2007. During the third quarter of 2007, we finalized the impairment test of long-lived assets and the second step of the impairment analysis, which resulted in an additional impairment charge of $1.4 million related to the long-lived assets of our MIVA Media Europe division. For additional information on impairment, refer to footnote D of the unaudited condensed consolidated financial statements. We will continue to evaluate our goodwill, intangible assets, and other long-lived assets for impairment in the future in accordance with SFAS 142 and 144.

Amortization

Amortization expense recorded for the three and nine month periods ending September 30, 2007, was $1.2 million and $3.6 million, compared to $1.5 million and $5.9 million in the same periods in the prior year. These decreases are attributed to an overall reduction in our intangible asset base eligible for amortization, primarily as a result of the recorded impairment losses in prior periods.

Interest Income, Net

Interest income, net, consists primarily of earnings on our cash, cash equivalents and short-term investments, net of interest expense. Net interest income was $0.2 million and $0.4 million in the three and nine months ended September 30, 2007, and $0.2 million and $0.6 million in the same periods in 2006.

Income Taxes

During the three and nine months ended September 30, 2007 and 2006, the following tax expense (benefit) was recorded (in millions):