Banks.com (BNNX) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 001-33074

BANKS.COM, INC.

(Exact name of registrant as specified in its charter)

Florida	59-3234205
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

222 Kearny Street, Suite 550, San Francisco, CA 94108

(Address of principal executive offices) (Zip Code)

(415) 962-9700

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 31, 2010
Common Stock, $.001 par value per share	26,321,151 shares

BANKS.COM, INC. AND SUBSIDIARIES

INDEX

	PAGE
PART I – FINANCIAL INFORMATION
ITEM 1— FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets, June 30, 2010 (unaudited) and December 31, 2009	1
Condensed Consolidated Statements of Operations, Three and Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)	2
Condensed Consolidated Statements of Stockholders’ Equity, Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)	3
Condensed Consolidated Statements of Cash Flows, Six Months Ended June 30, 2010 and June 30, 2009 (unaudited)	4
Notes to Condensed Consolidated Financial Statements (unaudited)	5
ITEM 2—MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3—QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	17
ITEM 4—CONTROLSAND PROCEDURES	17
PART II – OTHER INFORMATION
ITEM 1—LEGAL PROCEEDINGS	18
ITEM 1A—RISK FACTORS	19
ITEM 2—UNREGISTERED SALESOF EQUITY SECURITIESAND USEOF PROCEEDS	19
ITEM 3—DEFAULTS UPON SENIOR SECURITIES	19
ITEM 4—(REMOVEDANDRESERVED)	19
ITEM 5—OTHER INFORMATION	19
ITEM 6—EXHIBITS	20
SIGNATURES	21

BANKS.COM, INC. AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30, 2010		December  31, 2009
	(unaudited)
Assets
Current assets:
Cash	$	196	$	176
Accounts receivable		1,461		2,019
Prepaid expenses and other		228		285
Deferred income taxes		122		125
Total current assets		2,007		2,605
Property and equipment, net		468		674
Debt issuance costs, net		—		176
Patents and trademarks, net		12		27
Domains, net		10,383		10,902
Other intangible assets, net		626		750
Other assets		15		5
Deferred income taxes		754		764
Total assets	$	14,265	$	15,903
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,158	$	1,261
Accrued liabilities		491		637
Accrued dividends		45		30
Deferred revenue		18		107
Revolving line of credit		627		—
Notes payable, net of discount		—		2,128
Total current liabilities		2,339		4,163
Total liabilities		2,339		4,163
Stockholders’ equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized, 3,000,000 and 3,000,000 shares issued and outstanding		3		3
Common stock, $.001 par value, 125,000,000 shares authorized, 26,321,151 and 26,113,651 shares issued and outstanding		26		26
Additional paid-in capital		10,966		10,831
Retained earnings		931		880
Total stockholders’ equity		11,926		11,740
Total liabilities and stockholders’ equity	$	14,265	$	15,903

See accompanying Notes to Condensed Consolidated Financial Statements.

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BANKS.COM, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010		2009
Revenues	$	2,919		$	3,029		$	7,088	$	5,885
Cost of revenues		1,324			1,123			2,823		1,904
Gross profit		1,595			1,906			4,265		3,981
Operating expenses:
Sales and marketing		282			183			642		372
General and administrative		1,655			1,318			3,118		2,757
Total operating expenses		1,937			1,501			3,760		3,129
(Loss) earnings from operations		(342	)		405			505		852
Interest expense		30			397			349		707
(Loss) earnings before income tax expense (benefit)		(372	)		8			156		145
Income tax expense (benefit)		(141	)		24			90		80
Net (loss) earnings		(231	)		(16	)		66		65
Preferred stock dividends		8			8			15		15
Net (loss) earnings available to common stockholders	$	(239	)	$	(24	)	$	51	$	50
(Loss) earnings per common share available to common stockholders:
Basic	$	(.01	)	$	—		$	—	$	—
Diluted	$	(.01	)	$	—		$	—	$	—
Weighted-average common shares outstanding:
Basic		26,204,118			26,013,102			26,159,134		25,817,380
Diluted		26,204,118			26,013,102			27,958,849		26,998,631

See accompanying Notes to Condensed Consolidated Financial Statements.

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BANKS.COM, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

For the Six Months Ended June 30, 2010 and 2009

(Dollars in thousands)

	Preferred Stock			Common Stock			Additional Paid-In			Retained			Total Stockholders’
	Shares	Amount		Shares	Amount		Capital			Earnings			Equity
Balance at December 31, 2008	—	$	—	25,438,651	$	25	$	10,316		$	624		$	10,965
Preferred stock Series C issued (unaudited)	3,000,000		3	—		—		297			—			300
Costs associated with issuance of preferred stock (unaudited)	—		—	—		—		(46	)		—			(46	)
Preferred stock dividends (unaudited)	—		—	—		—		—			(15	)		(15	)
Common stock issued to directors in connection with option exchange program (unaudited)	—		—	525,000		1		36			—			37
Common stock issued to directors for services (unaudited)	—		—	150,000		—		31			—			31
Stock-based compensation (unaudited)	—		—	—		—		82			—			82
Net earnings (unaudited)	—		—	—		—		—			65			65
Balance at June 30, 2009 (unaudited)	3,000,000	$	3	26,113,651	$	26	$	10,716		$	674		$	11,419
Balance at December 31, 2009	3,000,000	$	3	26,113,651	$	26	$	10,831		$	880		$	11,740
Preferred stock dividends (unaudited)	—		—	—		—		—			(15	)		(15	)
Exercise of common stock options (unaudited)	—		—	7,500		—		1			—			1
Common stock issued for services (unaudited)	—		—	50,000		—		25			—			25
Common stock issued to directors for services (unaudited)	—		—	150,000		—		54			—			54
Stock-based compensation (unaudited)	—		—	—		—		55			—			55
Net earnings (unaudited)	—		—	—		—		—			66			66
Balance at June 30, 2010 (unaudited)	3,000,000	$	3	26,321,151	$	26	$	10,966		$	931		$	11,926

See accompanying Notes to Condensed Consolidated Financial Statements.

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BANKS.COM, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net earnings	$	66		$	65
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		219			239
Amortization of domains and other		657			644
Amortization of debt issuance costs		258			255
Deferred income taxes		13			73
Stock-based compensation expense		134			150
Decrease (increase) in accounts receivable		558			(956	)
Decrease (increase) in prepaid expenses and other		57			(26	)
Decrease in refundable income taxes		—			1,331
(Increase) decrease in other assets		(10	)		125
(Decrease) increase in accounts payable		(103	)		310
Decrease in accrued liabilities		(146	)		(105	)
Decrease in deferred revenue		(89	)		—
Net cash provided by operating activities		1,614			2,105
Cash flows from investing activities:
Purchase of property and equipment		(12	)		(58	)
Net cash used in investing activities		(12	)		(58	)
Cash flows from financing activities:
Proceeds from sale of preferred stock		—			300
Preferred stock issuance costs		—			(46	)
Exercise of common stock options		1			—
Debt issuance costs		—			(32	)
Net increase in revolving line of credit		627			—
Net decrease in notes payable		(2,210	)		(2,532	)
Net cash used in financing activities		(1,582	)		(2,310	)
Net increase (decrease) in cash		20			(263	)
Cash at beginning of period		176			479
Cash at end of period	$	196		$	216
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	85		$	362
Income taxes	$	300		$	11
Noncash financing and investing activities:
Preferred stock dividends accrued	$	15		$	15

See accompanying Notes to Condensed Consolidated Financial Statements.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)

(1) Description of Business and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Banks.com, Inc. (“Banks.com”) and its wholly-owned subsidiaries which consist of InterSearch Corporate Services, Inc. (“ICS”), Dotted Ventures, Inc. (“Dotted”), and MyStockFund Securities, Inc. (“MyStockFund”), collectively, the “Company”.

Banks.com operates in the pay-per-click search engine and Internet advertising industries, and owns and maintains an Internet domain portfolio includingwww.irs.com,www.banks.com, andwww.look.com.

ICS is engaged principally in the business of providing highly skilled Internet and technology focused consultants.

Dotted owns an ICANN accredited domain Registrar business.

MyStockFund is an online broker-dealer that offers an array of financial products and services with a focus on fractional share investing.

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Our business is highly seasonal and operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010, or for any other period. The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”).

Management has evaluated events occurring subsequent to the balance sheet date through the financial statement issuance date for disclosure.

(2) Significant Accounting Policies

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(2) Significant Accounting Policies, Continued

Stock-Based Compensation.Effective January 1, 2006, the Company adopted the fair value recognition method, using the modified-prospective-transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value, and (b) compensation cost for all stock-based payments granted subsequent to December 31, 2005, based on the estimated grant-date fair value.

The Company had two equity incentive plans at June 30, 2010, the 2004 Equity Incentive Plan (“2004 Plan”), and the 2005 Equity Incentive Plan (“2005 Plan”), which replaced the 2004 Plan. The termination of the 2004 Plan did not affect any outstanding options under the 2004 Plan, and all such options will continue to remain outstanding and governed by the 2004 Plan, but no shares will be available for grant under the 2004 Plan. At June 30, 2010, 58,206 shares remained available for grant under the 2005 Plan.

A summary of the stock option activity in the Company’s equity incentive plans is as follows:

	Number of Shares		Weighted- Average Per Share Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2009	1,717,031		$	0.74
Granted	420,000			0.25
Forfeited	(20,000	)		0.25
Exercised	(7,500	)		0.12
Outstanding at June 30, 2010	2,109,531		$	0.65	7.82 years	$	279,000
Exercisable at June 30, 2010	1,022,496		$	0.91	7.02 years	$	112,000

At June 30, 2010, the Company had 1,087,035 unvested stock options outstanding and there was $539,000 of total unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the plans. This cost is expected to be recognized monthly on a straight-line basis over the appropriate vesting periods through January, 2014. The total fair value of stock options vested and recognized as compensation expense was $55,000 for the six months ended June 30, 2010, compared to $82,000 for the same period in 2009. The associated income tax benefit recognized was $1,000 for the six months ended June 30, 2010 compared to $16,000 for the same period in 2009.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(2) Significant Accounting Policies, Continued

Stock-Based Compensation, Continued.The fair value of each option granted for the six months ended June 30, 2010 and the three and six months ended June 30, 2009 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions. There were no options granted during the three months ended June 30, 2010:

	Three Months Ended June 30,
	2010			2009
Risk-free interest rate		—			4	%
Expected dividend yield		—			—
Expected volatility		—			167	%
Expected life in years		—			5.75
Grant-date fair value of options issued during the period	$	—		$	10,000
Per share value of options at grant date	$	—		$	0.20
	Six Months Ended June 30,
	2010			2009
Risk-free interest rate		5.13	%		4	%
Expected dividend yield		—			—
Expected volatility		167	%		167	%
Expected life in years		6.25			5.75
Grant-date fair value of options issued during the period	$	102,000		$	10,000
Per share value of options at grant date	$	0.24		$	0.20

On January 1, 2005, the Company established an Employee Stock Ownership Plan (“ESOP”) to serve as a benefit to employees. Each year, at the discretion of the Board of Directors, the Company may make a contribution to the ESOP in Company stock or in cash. As of June 30, 2010, no shares have been allocated to the plan.

On February 4, 2009, the board of directors approved a stock option exchange program for non-employee directors whereby Company options previously granted could be exchanged for shares of Company common stock. On March 12, 2009, all non-employee directors exchanged an aggregate of 480,000 options for an aggregate of 525,000 shares of Company common stock. These items have been recorded at fair value as stock compensation and additional paid-in capital. The amount of expense recognized in connection with this transaction totaled $37,000. The associated income tax benefit recognized was $15,000.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(2) Significant Accounting Policies, Continued

On June 4, 2009, following the Company’s 2009 annual meeting of shareholders and the election of directors for the ensuing year, the board of directors approved an award of an aggregate of 150,000 shares of Company common stock which was granted to non-employee directors on June 5, 2009. This item has been recorded at fair value as stock compensation and additional paid-in capital. The amount of expense recognized in connection with this transaction totaled $31,000. The associated income tax benefit recognized was $12,000. Pursuant to our 2005 Equity Compensation Plan, on the day following our annual meeting of shareholders each year, each active non-employee director is eligible to receive an annual grant of options to purchase 45,000 shares of our Common Stock. However, each non-employee director elected to waive such non-qualified stock option award in 2009.

On June 24, 2010, following the Company’s 2010 annual meeting of shareholders and the election of directors for the ensuing year, the board of directors approved an award of an aggregate of 150,000 shares of Company common stock which was granted to non-employee directors on June 25, 2010. This item has been recorded at fair value as stock compensation and additional paid-in capital. The amount of expense recognized in connection with this transaction totaled $54,000. The associated income tax benefit recognized was $21,000. Pursuant to our 2005 Equity Compensation Plan, on the day following our annual meeting of shareholders each year, each active non-employee director is eligible to receive an annual grant of options to purchase 45,000 shares of our Common Stock. However, each non-employee director elected to waive such non-qualified stock option award in 2010.

(3) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed on the basis of the weighted-average number of common shares outstanding. Diluted earnings per share for the six months ended June 30, 2010 and 2009 was computed based on the weighted-average number of shares outstanding plus the effect of outstanding stock options and warrants, computed using the treasury stock method, plus the effect of outstanding convertible preferred stock using the if converted method. Outstanding stock options and warrants are not considered dilutive securities for the three months ended June 30, 2010 and 2009 due to the net losses incurred by the company. Earnings per common share have been computed based on the following:

	Three Months Ended June 30,
	2010							2009
	Loss			Weighted- Average Shares	Per Share Amount			Loss			Weighted- Average Shares	Per Share Amount
	(dollars in thousands, except share and per share amounts)
Basic:
Net loss	$	(231	)	26,204,118	$	(.01	)	$	(16	)	26,013,102	$	—
Less: preferred stock dividends		(8	)	—		—			(8	)	—		—
Net loss available to common stockholders		(239	)	26,204,118		(.01	)		(24	)	26,013,102		—
Effect of dilutive securities:
Assumed conversion of preferred stock		—		—					—		—
Incremental shares from assumed conversion of options		—		—					—		—
Incremental shares from assumed conversion of warrants		—		—					—		—
Diluted:
Net loss available to common stockholders and assumed conversions	$	(239	)	26,204,118	$	(.01	)	$	(24	)	26,013,102	$	—

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(3) Earnings (Loss) Per Share, Continued

	Six Months Ended June 30,
	2010						2009
	Earnings			Weighted- Average Shares	Per Share Amount		Earnings			Weighted- Average Shares	Per Share Amount
	(dollars in thousands, except share and per share amounts)
Basic:
Net earnings	$	66		26,159,134	$	—	$	65		25,817,380	$	—
Less: preferred stock dividends		(15	)	—		—		(15	)	—		—
Net earnings available to common stockholders		51		26,159,134		—		50		25,817,380		—
Effect of dilutive securities:
Assumed conversion of preferred stock		15		1,000,000				15		1,000,000
Incremental shares from assumed conversion of options		—		799,715				—		181,251
Incremental shares from assumed conversion of warrants		—		—				—		—
Diluted:
Net earnings available to common stockholders and assumed conversions	$	66		27,958,849	$	—	$	65		26,998,631	$	—

At June 30, 2010 and 2009, a total of 730,000 and 842,500 outstanding options and 6,327,435 and 6,327,435 outstanding common stock warrants were excluded from the calculation of earnings per share due to the exercise price exceeding the average market price for the six months ended June 30, 2010 and 2009, respectively. All outstanding options and warrants were anti-dilutive for the three months ended June 30, 2010 and 2009 because of the Company’s loss positions and were therefore excluded from the earnings per share calculation.

(4) Warrants

At June 30, 2010, outstanding warrants to purchase the Company’s common stock were as follows:

Number of Common Stock Warrants	Exercise Price		Expiration Date
39,063	$	1.60	October 7, 2010
477,000	$	1.60	July 20, 2011
5,311,559	$	1.20	September 29, 2010
499,813	$	0.80	September 29, 2010
6,327,435

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(5) Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock. On January 6, 2009 and January 9, 2009, the Company amended the Articles of Incorporation of the Company to designate a series of preferred stock of the Company as Series C Preferred Stock, and authorized the issuance of 3,000,000 shares of Series C Preferred Stock. The Series C Preferred Shares are convertible, at any time at the option of the holders, into shares of the Company’s common stock on a 3:1 ratio, subject to adjustments for any stock dividends, splits, combinations and similar events. Each share of the Series C Preferred Stock will be entitled to receive a 10% annual cumulative dividend, compounded annually. These dividends will be payable only upon a liquidation or conversion to common. For any other dividends or distributions, the Series C Preferred Stock will participate with the common stock. On January 6, 2009, the Company’s Chief Executive Officer purchased 3,000,000 shares of Series C Preferred Stock, par value $.001 per share, for an aggregate purchase price of $300,000 or $0.10 per share.

(6) Income Taxes

The Company records deferred income tax assets and liabilities to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statement and those reported for income tax purposes. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are provided against assets which are not likely to be realized.

(7) Notes Payable

In July 2006, the Company completed the sale of 13.5% Senior Subordinated Notes in the aggregate principal amount of $7.0 million (the “Notes”), together with 195,000 shares of common stock and warrants to purchase up to an aggregate of 477,000 shares of common stock at an exercise price of $1.60 (the “Warrants”). The Notes issued by the Company were secured by a first priority lien on all assets of tax-related Internet domains, includingwww.irs.com,and had a maturity date of June 30, 2010. On March 5, 2010, the Company paid off the outstanding balance of $1.9 million on the Notes with the proceeds of an advance through a new credit facility and cash on hand.

(8) Revolving Line of Credit

In March, 2010, the Company established a $2.5 million revolving line of credit with Silicon Valley Bank (“SVB”) for a term of one year. The interest rate applied when net cash is above $1 is prime plus 2.50%, while the applicable interest rate when net cash is below $1 is prime plus 3.25% with a 0.55% monthly collateral handling fee calculated daily. Net cash is defined as the deposit, unrestricted cash and short-term investments at or through SVB less SVB debt. This agreement was executed and effective on March 3, 2010 and initially funded on March 5, 2010. Under the terms of the Loan Agreement, SVB may advance funds to the Company collateralized by certain receivables not to exceed $3,125,000. On March 5, 2010, SVB advanced approximately $1,850,000 to the Company, which was used to pay the outstanding balance on the Company’s Notes described in Note 7. The outstanding balance of the SVB credit facility was $627,000 at June 30, 2010, and the interest rate, excluding collateral handling fees, was 7.25%.

(9) Compliance Notice

On September 17, 2009, the NYSE Amex (the “Exchange”) notified the Company of a continued listing deficiency under Section 1003(f)(v) of the Exchange’s Company Guide (the “Company Guide”) regarding the low selling price of the Company’s common stock, and granted the Company an extension until March 16, 2010 to regain compliance. On April 14, 2010, the Exchange notified the Company that it has determined that, in accordance with Section 1009 of the Company Guide, the Company made a reasonable demonstration of its ability to regain compliance with Section 1003 (f)(v) of the Company Guide by the end of the revised plan period, which they have now determined to be no later than October 14, 2010. The Company will be subject to periodic review by the Exchange staff during this extension period. If the Company does not show progress, the Exchange will review the circumstances and may immediately commence delisting proceedings.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(10) Economic Dependence, Accounts Receivable and Concentration of Risk

A substantial portion of the Company’s revenues have historically been generated by a limited number of advertising network partners. The Company is paid when search results generated by these partners are clicked on one of the Company’s web properties. The expiration of one or more of these contracts has historically adversely impacted the operations of the Company. Our contractual relationship with InfoSpace, Inc., was consummated in the fourth quarter of 2007 and accounted for a substantial portion of the Company’s revenues during the six months ended June 30, 2010 and 2009 totaling $4,701,000 and $4,404,000, respectively. This agreement will automatically renew on December 31, 2010 for successive one year terms unless either party provides the other written notice of termination at least thirty (30) days prior to the end of the then current term. Accounts receivable at June 30, 2010 and December 31, 2009, respectively, included $983,000 and $1,741,000 due from this advertising network partner. The Company is taking proactive measures to both expand this relationship and develop new partnerships with alternative providers of online search and advertising. In addition, the change in the Company’s business model to diversify its strategy to include customer acquisition through offering financial products and services is expected to gradually reduce the Company’s reliance on advertising network partners.

(11) Contingencies

Litigation Against Former Officers.The Company is currently involved in the legal proceedings described below. In addition, the Company is subject to other routine litigation arising in the normal course of business from time to time.

On November 5, 2009, the Company filed a lawsuit in the Superior Court of the State of California for the County of San Francisco against Robert Hoult, Dale Giessman, ProStream Media, and Moxiesearch, and filed an arbitration claim in San Francisco, California under the Commercial Rules of the American Arbitration Association against Andrew Keery alleging: (1) breach of contract, (2) breach of fiduciary duty and duty of loyalty to the Company, (3) violation of California’s Uniform Trade Secrets Act, (4) trade dress infringement, and (5) violation of California’s unfair competition law. Messrs. Hoult and Keery are former executive officers of the Company. On December 29, 2009, Robert Hoult, Dale Giessman and ProStream Media filed a Notice of Removal to remove the above mentioned case from the Superior Court of the State of California for the County of San Francisco to the United States District Court, Northern District of California. The complaints allege that, among other things, Hoult, Giessman and Keery improperly used the Company’s trade secrets and other confidential information in connection with the business of Prostream Media and the domain names Moxiesearch.com, and Winestore.com. The complaints further allege that Messrs. Hoult and Keery breached their fiduciary duty and duty of loyalty by improperly competing directly with the Company and injuring its financial performance.

The Company is seeking unspecified damages, including consequential and punitive damages, and preliminary and permanent injunctive relief to enjoin the defendants from, among other things (1) continuing to improperly use the Company’s trade secrets and confidential and proprietary information and (2) contacting or soliciting any of the Company’s customers or employees.

In the matter of the Banks.com, Inc. vs. Andrew Keery arbitration claim, the parties have agreed on preliminary settlement terms, have advised the American Arbitration Association of such and have suspended all proceedings pending memorializing the settlement, which is expected to be finalized within the next thirty (30) days, followed shortly thereafter by the filing of a dismissal with prejudice of the parties.

In the matter of the Banks.com, Inc. vs. Robert Hoult, Dale Giessman, ProStream Media, and Moxiesearch, all parties have agreed on preliminary settlement terms, have advised the United States District Court, Northern District of California of such and have suspended all proceedings pending memorializing the settlement, which is expected to be finalized within the next thirty (30) days, followed shortly thereafter by the filing of a dismissal with prejudice of the complaint against all plaintiffs.

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BANKS.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements, Continued

(11) Contingencies, Continued

Derivative Action. On March 9, 2010, Robert Hoult filed a putative Verified Shareholder Derivative Complaint (the “Derivative Complaint”) in the Superior Court for the State of California for the County of San Francisco against the Company’s five current directors, as defendants, and against the Company, as a nominal defendant. The putative Derivative Complaint asserts state-law claims for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement, and waste of corporate assets against the individual defendants principally in connection with the operation of the Company’s search engine marketing services and the terms and conditions of certain transactions between the Company and certain of its current and former officers and directors, among other allegations. The plaintiff alleges that certain of the individual defendants caused the Company to engage in click fraud and untargeted traffic resulting in advertisers paying for unwanted clicks on their advertisements. The plaintiff further alleges that these actions ultimately led to loss of revenues from two of the Company’s former advertising network partners. The plaintiff also alleges that the defendants were parties to or approved transactions with the Company that failed to provide the Company with reasonable value. The plaintiff purports to seek an unspecified amount of damages, together with other relief, on behalf of the Company and against the individual defendants. Prior to filing the putative Derivative Complaint, the plaintiff requested that the Company assert certain of such claims against the individual defendants.

In this matter, the parties have agreed to preliminary settlement terms in which the derivative action filed by plaintiff against, among other parties, Banks.com, Inc. and its Board of Directors (SF Superior Court, Case No. CGC-10-497625) will be dismissed with prejudice. Plaintiff agrees to make a representation to the court that he is surrendering all of his shares of Banks.com, Inc. which removes his standing from maintaining the derivative action. This settlement, as well as the settlement of the federal action of Banks.com, Inc. vs. Robert Hoult, is contingent upon the court dismissing this derivative action.

At this time, the Company is unable to ascertain or predict with any certainty whether these proceedings will be ultimately dismissed or have a material positive or adverse effect on its business, financial condition or results of operations. Accordingly, no amounts have been accrued in the Company’s financial statements. Although the results of litigation and claims cannot be predicted with certainty, such proceedings can be costly and result in the diversion of management’s attention. Should the settlements described herein be finalized, the litigation will cease and the Company’s exposure will cease.

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ITEM 2 – MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS

When reading this section of this Quarterly Report, it is important that you also read the financial statements and related notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. This section of this Quarterly Report contains forward–looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward–looking statements. Our actual results may differ materially from the information contained in these forward–looking statements for many reasons, including those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”). The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

OVERVIEW

General

We own and operate Internet web and media properties that provide targeted online advertising opportunities. Through banks.com, we provide access to current financial content, including financial news, business articles, interest-rate tables, stock quotes, stock tracking and financial calculators. We also provide users access to online financial services including tax preparation and stock brokerage. We believe that focusing our content and services in the high-traffic financial services vertical will allow us to provide our advertisers operating in that vertical access to highly relevant traffic. We operate other proprietary search and shopping related websites including look.com andsearchexplorer.com. We generate revenue on these sites primarily via traffic generation and search engine marketing efforts. In late 2009, we launched a premium pay per click advertising network known as the InterSearch AdNet, which currently serves over 10 billion advertising impressions per month on our proprietary web sites, as well as a high quality publishing distribution network.

We depend, and expect to continue to depend for the foreseeable future, upon a relatively small number of advertising network partners and direct advertisers for a significant percentage of our revenues. In October 2008, we entered into a distribution agreement with InfoSpace, Inc. to provide paid metasearch results from Google, Yahoo, Microsoft and Ask.com onbanks.com. This agreement will automatically renew on December 31, 2010 for successive one year terms unless either party provides the other written notice of termination at least thirty (30) days prior to the end of the then current term. Our advertising network partner, InfoSpace, Inc., represented a substantial majority of our revenues for the quarters ended June 30, 2010 and 2009.

We are always working at upgrading our traffic quality and conversion standards and algorithms, and as a result, we continuously modify the traffic sources that we use to advertise our sites in an effort to concentrate on those who have shown consistently high conversion metrics for our advertisers and those of our advertising network partners. Although these actions generally result in an increase in the quality of traffic to our sites, our year over year results of operations may be adversely affected by changes in either ours or our advertising network partners’ conversion standards. We are continuing our efforts to mitigate our reliance on advertising network partners and are now primarily focused on the financial services vertical of online advertising through our network of financial sites includingbanks.com andirs.com. We expect that this will result in further diversification of our revenues through the sale of financial products and services such as online tax preparation and stock brokerage. Additionally, we anticipate this will help to increase revenues derived from direct advertisers and other partners making us gradually less reliant on our current advertising network partner.

NYSE Amex Listing

On September 17, 2009, the NYSE Amex (the “Exchange”) notified us of a continued listing deficiency under Section 1003(f)(v) of the Exchange’s Company Guide (the “Company Guide”) due to the low selling price of our common stock, and granted us an extension until March 16, 2010 to regain compliance. On April 14, 2010, the Exchange notified us that it has determined that, in accordance with Section 1009 of the Company Guide, we made a reasonable demonstration of our ability to regain compliance with Section 1003 (f)(v) of the Company Guide by the end of the revised plan period, which they have now determined to be no later than October 14, 2010. We will be subject to periodic review by the Exchange staff during this extension period. If we do not show progress, the Exchange will review the circumstances and may immediately commence delisting proceedings.

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Quarterly Results May Fluctuate

Our quarterly results have fluctuated in the past and will continue to do so in the future due to our concentration in the online tax related business. Our reliance on revenues generated through our ownership of the Internet domainirs.com will continue to cause our revenues to be largely seasonal in nature, with peak revenues occurring during the U.S. tax filing season of January through April. Therefore, our first and second quarter results are not indicative of results for the entire fiscal year.

RESULTS OF OPERATIONS

The following tables set forth information for the three and six months ended June 30, 2010 and 2009 derived from our unaudited condensed consolidated financial statements which, in the opinion of our management, reflect all adjustments, which are of a normal recurring nature, necessary to present such information fairly (dollars in thousands).

	Three Months Ended June 30,
	2010					2009
Statements of Operations Data:
Revenues	$	2,919		100	%	$	3,029		100	%
Cost of revenues		1,324		45			1,123		37
Sales and marketing		282		10			183		6
General and administrative		1,655		57			1,318		44
Total expenses		3,261		112			2,624		87
(Loss) earnings from operations		(342	)	(12	)		405		13
Interest expense		30		1			397		13
(Loss) earnings before income tax expense		(372	)	(13	)		8		—
Income tax expense (benefit)		(141	)	(5	)		24		1
Net loss		(231	)	(8	)		(16	)	(1	)
Preferred stock dividends		8		—			8		—
Net loss available to common stockholders	$	(239	)	(8	)	$	(24	)	(1	)
	Six Months Ended June 30,
	2010					2009
Statements of Operations Data:
Revenues	$	7,088		100	%	$	5,885		100	%
Cost of revenues		2,823		40			1,904		33
Sales and marketing		642		9			372		6
General and administrative		3,118		44			2,757		47
Total expenses		6,583		93			5,033		86
Earnings from operations		505		7			852		14
Interest expense		349		5			707		12
Earnings before income tax expense		156		2			145		2
Income tax expense		90		1			80		1
Net earnings		66		1			65		1
Preferred stock dividends		15		—			15		—
Net earnings available to common stockholders	$	51		1		$	50		1

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

Revenue.Revenue of $2.9 million for the three months ended June 30, 2010 was adversely impacted by charge backs of $226,000. This compares to revenue of $3 million for the same period in 2009, which was not affected by such charge backs.

Cost of Revenue.Cost of revenue was $1.3 million for the three months ended June 30, 2010 compared to $1.1 million for the same period in 2009. This 18% increase is primarily attributable to higher traffic acquisition cost resulting from an increase in Internet marketing.

Sales and Marketing.Sales and marketing expense increased to $282,000 for the three months ended June 30, 2010 from $183,000 for the same period in 2009. This increase of $99,000 is mainly attributable to an increase in sales commission expenses.

General and Administrative.General and administrative expenses increased 26% to $1.7 million for the three months ended June 30, 2010 from $1.3 million for the same period in 2009. This increase is primarily a result of an increase in legal fees in connection with the litigation against former officers.

Interest Expense.Interest expense was $30,000 for the three months ended June 30, 2010 compared to $397,000 for the same period in 2009. This $367,000 decrease is primarily a result of the payoff of our 13.5% Senior Subordinated Notes (the “Notes”) on March 5, 2010.

Income Taxes.Income tax benefit was $141,000 for the three months ended June 30, 2010 compared to income tax expense of $24,000 for the same period in 2009. This increase is primarily a result of having a pretax loss of $372,000 for the three months ended June 30, 2010 compared to pretax earnings of $8,000 for the same period in 2009. Any differences from the statutory federal income tax rate are a result of state taxes and permanent tax differences, such as stock compensation.

Net Loss.As a result of the foregoing, net loss available to common stockholders for the three months ended June 30, 2010 was $239,000 or $.01 per basic and diluted share compared to net loss of $24,000 or $.00 per basic and diluted share for the same period in 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenue.Revenue increased 20% to $7.1 million for the six months ended June 30, 2010, from $5.9 million for the same period in 2009. This is primarily attributable to an increase in tax related direct advertiser revenue, an increase in Internet marketing and incremental revenue from the launch of theInterSearch AdNet.

Cost of Revenue.Cost of revenue was $2.8 million for the six months ended June 30, 2010 compared to $1.9 million for the same period in 2009. This 48% increase is primarily attributable to higher traffic acquisition cost resulting from an increase in Internet marketing.

Sales and Marketing.Sales and marketing expense increased to $642,000 for the six months ended June 30, 2010 from $372,000 for the same period in 2009. This increase of $270,000 is mainly attributable to an increase in sales commission expenses.

General and Administrative.General and administrative expenses increased 13% to $3.1 million for the six months ended June 30, 2010 from $2.8 million for the same period in 2009. This increase is primarily a result of an increase in legal fees in connection with the litigation against former officers.

Interest Expense.Interest expense was $349,000 for the six months ended June 30, 2010, $172,000 of which was the result of the acceleration of debt issuance costs on our Notes which were paid off on March 5, 2010. This compares to $707,000 for the same period in 2009. This decrease is primarily a result of the payoff of our Notes.

Income Taxes.Income tax expense was $90,000 for the six months ended June 30, 2010 compared to $80,000 for the same period in 2009. This increase is primarily a result of having pretax earnings of $156,000 for the six months ended June 30, 2010 compared to pretax earnings of $145,000 for the same period in 2009. Any differences from the statutory federal income tax rate are a result of state taxes and permanent tax differences, such as stock compensation.

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Net Earnings.As a result of the foregoing, net earnings available to common stockholders for the six months ended June 30, 2010 was $51,000 or $.00 per basic and diluted share compared to net earnings of $50,000 or $.00 per basic and diluted share for the same period in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through internally generated funds and the use of our line of credit when available. We have engaged in private sales of our common stock and debt financing in order to fund the purchase price of some of our acquisitions. As of June 30, 2010, we had $196,000 in cash compared to $176,000 at December 31, 2009. As of June 30, 2010, our current liabilities exceeded our current assets resulting in a working capital deficit of $332,000 compared to a working capital deficit of $1.6 million on December 31, 2009, which included amounts related to our Notes due June 30, 2010. Our working capital improved mainly due to the generation of cash flow from operations that was used to pay down debt.

Effective March 3, 2010, we established a $2.5 million revolving line of credit with Silicon Valley Bank (“SVB”) for a term of one year. Under the terms of the loan agreement with SVB (the “Loan Agreement”), SVB may advance funds to us to finance certain Eligible Accounts (as defined in the Loan Agreement). When SVB makes an advance, the Eligible Account becomes a Financed Receivable (as described in additional detail in the Loan Agreement). The aggregate face amount of all Financed Receivables outstanding at any time under the Loan Agreement may not exceed $3,125,000. The interest rate applied when net cash is above $1 is prime plus 2.50%, while the applicable interest rate when net cash is below $1 is prime plus 3.25% with a 0.55% monthly collateral handling fee calculated daily. Net cash is defined as the deposit, unrestricted cash and short-term investments at or through SVB less SVB debt. On March 5, 2010, SVB advanced approximately $1,850,000 to us, which we used to pay the outstanding balance on our Notes. As of June 30, 2010, the outstanding balance of the SVB credit facility was approximately $627,000, and the interest rate, excluding collateral handling fees, was 7.25%.

Although always current with respect to principal and interest payments on our Notes, we were not continuously in compliance with certain financial covenants contained in the investment agreement relating to the Notes (the “Investment Agreement”), which were measured on the last day of each fiscal quarter. On November 21, 2008, we and the Note holders (the “Lenders”) entered into a waiver (the “Waiver”) with respect to our noncompliance with certain financial covenants in the Investment Agreement for the period ended September 30, 2008. Pursuant to the Waiver, the Lenders consented to and waived any event of default, including any default interest, by reason of our noncompliance with the financial covenants set forth in the Investment Agreement (the “Events of Default”) for the fiscal quarters ended September 30, 2008, December 31, 2008, and June 30, 2009 (the “Waiver Period”). We regained compliance with all financial covenants relating to the Notes for the fiscal quarter ended June 30, 2009, and maintained compliance for all subsequent fiscal quarters.

Pursuant to the terms and conditions of the Waiver, we entered into an amendment to the Investment Agreement with the Lenders effective as of December 31, 2008, providing that, among other things, (1) we use the proceeds of any federal tax refund and any state tax refund (in excess of $5,000) to repay our obligations under the Notes, and (2) the maturity date of the Notes be changed to June 30, 2010. On March 20, 2009, we received a federal tax refund of approximately $1,330,000, all of which was used to pay down the principal obligation under the Notes pursuant to the Waiver. In satisfaction of an additional condition of the Waiver, on January 6, 2009, our Chief Executive Officer and certain of his affiliates agreed to purchase 3,000,000 shares of a new series of preferred stock of the Company designated as the Company’s “Series C Preferred Stock,” par value $.001 per share, for an aggregate purchase price of $300,000 or $0.10 per share. On March 5, 2010, we paid off the remaining $1.9 million due on our Notes primarily using funds drawn on our revolving line of credit with SVB.

We continually review our capital requirements to ensure that we have sufficient funding available to support our anticipated levels of operations, obligations and growth strategies. We intend to use cash flow from operations and our revolving line of credit to fund anticipated levels of operations for the next 12 months.

In the comparisons below, net cash flows provided by operating activities primarily consist of net earnings adjusted for certain items such as depreciation and amortization, deferred income taxes and changes in working capital.

Cash Flows for the Six Months Ended June 30, 2010

Net cash provided by operating activitiesfor the six months ended June 30, 2010 was $1.6 million consisting primarily of net earnings of $66,000, increased by depreciation and amortization of $876,000, stock compensation expense of $134,000, and a decrease in accounts receivable of $558,000.

Net cash used in investing activities for the six months ended June 30, 2010 of $12,000 was primarily for the purchase of computer hardware.

Net cash used in financing activities for the six months ended June 30, 2010 of $1.6 million was primarily attributable to a decrease in notes payable of $2.2 million resulting from the payoff of our Notes, partially offset by an increase of $627,000 in our revolving line of credit.

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Cash Flows for the Six Months Ended June 30, 2009

Net cash provided by operating activities for the six months ended June 30, 2009 was $2.1 million consisting primarily of net earnings of $65,000, increased by a tax refund of approximately $1.3 million, depreciation and amortization of $883,000, and stock compensation expense of $150,000, partially offset by an increase in accounts receivable of $956,000. This increase in accounts receivable was a result of increased revenue due to the seasonality of the U.S. tax filing season.

Net cash used in investing activities for the six months ended June 30, 2009 of $58,000 was primarily for the purchase of software.

Net cash used in financing activities for the six months ended June 30, 2009 of $2.3 million was primarily attributable to the repayment of our Notes, which was partially offset by proceeds of $300,000 from the sale of preferred stock.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management’s discussion and analysis are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are discussed in Note 2 to our unaudited condensed consolidated financial statements appearing at the beginning of this quarterly report and are fully disclosed in our annual report on Form 10-K for the year ended December 31, 2009 filed with the SEC.

ITEM 3 – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLSAND PROCEDURES

Our Chief Executive Officer (principal executive officer and principal financial officer), Daniel M. O’Donnell, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”), and, based on such evaluation, concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information we are required to disclose in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Litigation Against Former Officers—On November 5, 2009, we filed a lawsuit (case # CGC-09-494156) in the Superior Court of the State of California for the County of San Francisco against Robert Hoult, Dale Giessman, ProStream Media, and Moxiesearch, and filed an arbitration claim in San Francisco, California under the Commercial Rules of the American Arbitration Association against Andrew Keery alleging: (1) breach of contract, (2) breach of fiduciary duty and duty of loyalty to the Company, (3) violation of California’s Uniform Trade Secrets Act, (4) trade dress infringement, and (5) violation of California’s unfair competition law. Messrs. Hoult and Keery are former executive officers of the Company. On December 29, 2009, Robert Hoult, Dale Giessman and ProStream Media filed a Notice of Removal to remove the above mentioned case from the Superior Court of the State of California for the County of San Francisco to the United States District Court, Northern District of California (case # 3:09-cv-06039-WHA).

Based on reports received from the Company’s transfer agent, at the time Mr. Hoult’s employment terminated, he beneficially owned more than five percent of the Company’s outstanding common stock. Mr. Hoult was formerly employed by the Company as its Executive Vice President of Revenue Development.

Based on reports received from the Company’s transfer agent, at the time the suit was filed, Mr. Keery beneficially owned more than five percent of the Company’s outstanding common stock. Mr. Keery was formerly employed by the Company as its Executive Vice President of Product Development.

The complaints allege that, among other things, Hoult, Giessman and Keery improperly used the Company’s trade secrets and other confidential information in connection with the business of Prostream Media and the domain names Moxiesearch.com, and Winestore.com. The complaints further allege that Messrs. Hoult and Keery breached their fiduciary duty and duty of loyalty by improperly competing directly with the Company and injuring its financial performance.

The Company is seeking unspecified damages, including consequential and punitive damages, and preliminary and permanent injunctive relief to enjoin the defendants from, among other things (1) continuing to improperly use the Company’s trade secrets and confidential and proprietary information and (2) contacting or soliciting any of the Company’s customers or employees.

In the matter of the Banks.com, Inc. vs. Andrew Keery arbitration claim in San Francisco, California under the Commercial Rules of the American Arbitration Association (“AAA”), the parties have agreed on preliminary settlement terms, have advised AAA of such and have suspended all proceedings pending memorializing the settlement, which is expected to be finalized within the next thirty (30) days, followed shortly thereafter by the filing of a dismissal with prejudice of the parties.

In the matter of the Banks.com, Inc. vs. Robert Hoult, Dale Giessman, ProStream Media, and Moxiesearch, all parties have agreed on preliminary settlement terms, have advised the United States District Court, Northern District of California of such and have suspended all proceedings pending memorializing the settlement, which is expected to be finalized within the next thirty (30) days, followed shortly thereafter by the filing of a dismissal with prejudice of the complaint against all plaintiffs.

Derivative Action—On March 9, 2010, Robert Hoult filed a putative Verified Shareholder Derivative Complaint (the “Derivative Complaint”) in the Superior Court for the State of California for the County of San Francisco (case # CGC-10-497625) against the Company’s five current directors, as defendants, and against the Company, as a nominal defendant. The putative Derivative Complaint asserts state-law claims for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement, and waste of corporate assets against the individual defendants principally in connection with the operation of the Company’s search engine marketing services and the terms and conditions of certain transactions between the Company and certain of its current and former officers and directors, among other allegations. The plaintiff alleges that certain of the individual defendants caused the Company to engage in click fraud and untargeted traffic resulting in advertisers paying for unwanted clicks on their advertisements. The plaintiff further alleges that these actions ultimately led to loss of revenues from two of the Company’s former advertising network partners. The plaintiff also alleges that the defendants were parties to or approved transactions with the Company that failed to provide the Company with reasonable value. The plaintiff purports to seek an unspecified amount of damages, together with other relief, on behalf of the Company and against the individual defendants. Prior to filing the putative Derivative Complaint, the plaintiff requested that the Company assert certain of such claims against the individual defendants.

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In this matter, the parties have agreed to preliminary settlement terms in which the derivative action filed by plaintiff against, among other parties, Banks.com, Inc. and its Board of Directors (SF Superior Court, Case No. CGC-10-497625) will be dismissed with prejudice. Plaintiff agrees to make a representation to the court that he is surrendering all of his shares of Banks.com, Inc. which removes his standing from maintaining the derivative action. This settlement, as well as the settlement of the federal action of Banks.com, Inc. vs. Robert Hoult, is contingent upon the court dismissing this derivative action.

At this time, we are unable to ascertain or predict with any certainty whether these proceedings will be ultimately dismissed or will have a material positive or adverse effect on our business, financial condition or results of operations. Accordingly, no amounts have been accrued in our financial statements. Although the results of litigation and claims cannot be predicted with certainty, such proceedings can be costly and result in the diversion of management’s attention. Should the settlements described herein be finalized, the litigation will cease and our exposure  will cease. From time to time, we are also involved in other legal actions arising in the ordinary course of business.

ITEM 1A – RISK FACTORS

In addition to the risk factors described below, see “Risk Factors” in Part I, Item 1A of our Form 10-K for the year ended December 31, 2009 for a description of other risk factors relevant to our company, business, and industry, and ownership of our common stock.

We generate a substantial majority of our revenue through InfoSpace, who provides us with Google, Yahoo and other paid search results, and cannot be assured that we will ultimately collect on all of the revenue we produce.

InfoSpace provides us with paid search results from Google, Yahoo and other providers and is the source of a substantial majority of our revenue. We have had instances in the past where we have not been paid for all of the revenue we generate and we cannot assure you that this will not happen in the future. In these instances, Google, Yahoo and others have retroactively charged us back for revenue generated that they deemed to be questionable. Although we take proactive measures to mitigate these instances through the use of tools to gauge our traffic quality, these credits to our revenue come with little or no substantiation and/or support and our recourse options are limited. In these instances, we likely have already incurred traffic acquisition costs that in all probability will not be recoverable. These revenue credits and the corresponding traffic acquisition costs have adversely impacted our financial performance in the past and may again in the future.

ITEM 2 – UNREGISTERED SALESOF EQUITY SECURITIESAND USEOF PROCEEDS

The Silicon Valley Bank Loan and Security Agreement, dated March 3, 2010, between Silicon Valley Bank (“SVB”), on the one hand, and Banks.com, Inc., Corporate Consulting Services, Inc., and Dotted Ventures, Inc. (together referred to as “Borrower”) on the other hand, prohibits us from paying any dividends or making any distribution or payment without the prior written consent of SVB. We must obtain prior written consent from SVB to redeem, retire or purchase any capital stock other than permitted distributions, which are: (a) purchases of capital stock from former employees, consultants and directors pursuant to repurchase agreements or other similar agreements in an aggregate amount not to exceed $100,000 in any fiscal year, provided that at the time of such purchase no event of default has occurred and is continuing; (b) distributions or dividends consisting solely of Borrower’s capital stock; and (c) purchases of fractional shares of capital stock arising out of stock dividends, splits or combinations or business combinations.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 –(Removed and Reserved.)

ITEM 5 – OTHER INFORMATION

Not applicable.

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ITEM 6 – EXHIBITS

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit No.	Filing Date	Filed Herewith
31.1	Certification by Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002					X

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BANKS.COM, INC.
Date: August 16, 2010	By	/S/    DANIEL M. O’DONNELL
		Daniel M. O’Donnell
		President and Chief Executive Officer
		(Principal Executive Officer, Principal Financial and Accounting Officer)

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