Results of Operations
Revenue
Advertising Services. We derive advertising revenue from advertising contracts in which we typically undertake to deliver a minimum number of impressions to users over a specified time period for a fixed fee. Advertising services revenue was $1.3 million in the three months ended March 31, 2009, an increase of 19% from the three months ended March 31, 2008. This increase in advertising services revenue was primarily due to marketing and advertising services of $0.7 million provided to Regent under the Marketing Agreement entered into in conjunction with the sale of our Publishing business.
For the remainder of fiscal 2009, we expect advertising services revenue to decrease in comparison to fiscal 2008 due to the completion of advertising services provided to Regent under the Marketing Agreement from May 2008 to March 2009, overall economic conditions and potential softening of the online advertising market.
Subscription Services. We derive subscription services revenue from paid membership subscriptions to our online media properties. Our subscription services revenue was $2.5 million in the three months ended March 31, 2009, a decrease of 32% from the three months ended March 31, 2008. These decreases in subscription services revenue were due primarily to a reduction in the number of online subscribers to our Gay.com website primarily as a result of increases in credit card failures on renewals of online subscriptions and increased cancellation of subscriptions. We believe the increased cancellations are the result of multiple factors, including the failure to introduce new features and functionalities on site until the relaunch of the Gay.com website on September 30, 2008, increased competition and general overall economic conditions.
For the remainder of fiscal 2009, we expect total subscription services revenue to decrease in comparison to fiscal 2008, as a result of continued increased credit card failures on renewals of online subscriptions, increased competition and general economic conditions.
Transaction Services. Transaction services revenue includes revenue generated from co-marketing opportunities with other affiliates that are marketing to the LGBT community. Our transaction services revenue totaled $0.1 million and zero for the three months ended March 31, 2009 and 2008, respectively, as a result of the decrease in online subscribers to our Gay.com website.
For the remainder of fiscal 2009, we expect transaction services revenue to continue to decrease slightly in comparison to fiscal 2008.
Operating Costs and Expenses
Cost of Revenue. Cost of revenue primarily consists of payroll and related benefits associated with supporting our subscription-based services, the development and expansion of site operations and support infrastructure and producing and maintaining content for our various websites. Other expenses directly related to generating revenue included in cost of revenue include transaction processing fees, computer equipment maintenance, occupancy costs, co-location and Internet connectivity fees, purchased content and cost of goods sold. Cost of revenue was $2.0 million in the three months ended March 31, 2009, decreasing 16% from cost of revenue of $2.4 million in the three months ended March 31, 2008. This decrease was due to an overall decrease in compensation and employee related costs as a result of reduced headcount and decreases in computer equipment and infrastructure maintenance costs, credit card fees and advertising servicing costs, partially offset by decreased capitalization of labor of our product development and technology personnel upon the re-launching of our Gay.com website during the latter half of 2008.
For the remainder of fiscal 2009, we expect cost of revenue and cost of revenue as a percentage of revenue to decrease in comparison to fiscal 2008, as a result of reductions in headcount from our January 2009 restructuring.
Sales and Marketing. Sales and marketing expense primarily consists of payroll and related benefits for employees involved in sales, advertising client service, customer service, marketing and other support functions; product, service and general corporate marketing and promotions; and occupancy costs. Sales and marketing expenses were $0.9 million in the three months ended March 31, 2009, decreasing 44% from sales and marketing expenses of $1.6 million in the three months ended March 31, 2008. Sales and marketing expenses as a percentage of revenue was 23% for the three months ended March 31, 2009, down from 33% in the three months ended March 31, 2008. These decreases were primarily due to decreased compensation and employee related costs as a result of reduced headcount and a reduction in advertising and market research expenses.
For the remainder of fiscal 2009, we expect sales and marketing expenses and sales and marketing as a percentage of revenue to decrease in comparison to fiscal 2008 as a result of reductions in headcount from our January 2009 restructuring and further reductions in advertising and marketing research expenditures for the remainder of 2009.
General and Administrative. General and administrative expense consists primarily of payroll and related benefits for executive, finance, administrative and other corporate personnel, occupancy costs, professional fees, insurance and other general corporate expenses. Our general and administrative expenses were $2.7 million for the three months ended March 31, 2009, increasing 34% from general and administrative expenses of $2.0 million in the three months ended March 31, 2008. General and administrative

expenses as a percentage of revenue were 71% for the three months ended March 31, 2009, up from 42% in the three months ended March 31, 2008. These increases were due primarily to transactions costs related to our pending business combination with Here Media of $0.9 million recognized in accordance with the adoption of FAS 141R and severance and related costs of $0.7 million, including, stock-based compensation expense of $0.2 million, related to the departure of our former Chief Executive Officer.
For the remainder of fiscal 2009, we expect general and administrative expenses to decrease from fiscal 2008 primarily due to decreased compensation and employee related costs as a result of decreases in headcount from our January 2009 restructuring and the departure of our former Chief Executive Officer in the three months ended March 31, 2009.
Restructuring. On January 16, 2009, we reduced our workforce by approximately 33%, including our Chief Technology Officer, to reduce costs and manage operating expenses. In connection with this reduction in our workforce, we recorded expense related to employee severance benefits of approximately $554,000 during the three months ended March 31, 2009. We completed this restructuring in the first quarter of 2009.
Depreciation and Amortization. Depreciation and amortization expense was $0.7 million for the three months ended March 31, 2009, decreasing 35% from depreciation and amortization expense of $1.1 million in the three months ended March 31, 2008. These decreases were primarily due to a decrease in depreciable assets in service during the three months ended March 31, 2009 compared to the prior year periods.
For the remainder of fiscal 2009, we expect depreciation and amortization expense will decrease over fiscal 2008 as a result of a decrease in our depreciable assets in service.
Other Income and Expenses
Other Income, Net. Other income, net consists primarily of interest earned on cash, cash equivalents, short-term investments and restricted cash. Other income, net was $0.1 million and zero in the three months ended March 31, 2009 and 2008, respectively. These decreases were primarily due to decreases in interest income resulting from lower cash balances.
Discontinued Operations
In an effort to simplify our business model, we discontinued our Travel and Events businesses during 2007. In December 2007, we sold substantially all of the assets of RSVP. In August 2008, we sold our Publishing business to Regent, which included the operations of LPI and SpecPub and recorded a net loss on sale of discontinued operations of $0.1 million related to the sale of our Publishing business. The net loss on sale of discontinued operations included $0.8 million of estimated direct costs incurred in connection with the sale. In estimating net loss on sale, management relied on a number of other estimates including estimates of the amounts attributable to the consummation of this sale transaction. In the three months ended March 31, 2009, we revised our estimate of the net loss on sale of our Publishing business based on the completion of our services to Regent under our Marketing Agreement with them.
As a result of the sale of substantially all the assets of RSVP, the sale of substantially all of the assets of LPI and SpecPub and our decision to exit our Publishing and Travel and Events businesses, we have reported the results of operations and financial position of RSVP, LPI and SpecPub as discontinued operations within the condensed consolidated financial statements for the three months ended March 31, 2008 and 2009 in accordance with FAS 144. In addition, we have segregated the cash flow activity of RSVP, LPI and SpecPub from the condensed consolidated statements of cash flows for the three months ended March 31, 2008 and 2009. The results of operations of RSVP were previously reported and included in the results of operations and financial position of our Travel and Events segment. The results of operations of LPI and SpecPub were previously reported and included in the results of operations and financial position of our Publishing segment.
As a result of the agreement to sell LPI, we reduced the net carrying value of the LPI reporting unit by $2.0 million in the three months ended March 31, 2008 to the estimated amount attributable to the sale of this reporting unit. As a result of the agreement to sell SpecPub, we reduced the net carrying value of the SpecPub reporting unit $4.3 million in the three months ended March 31, 2008 to the estimated amount attributable to the sale of this reporting unit. These reductions in carrying value are reflected in impairment of goodwill and intangible assets in the results of discontinued operations. We reviewed the carrying values of the LPI and SpecPub reporting units at August 13, 2008, the closing date for the sale, and deemed that no impairment had occurred subsequent to March 31, 2008. In estimating the reduction in carrying value of these reporting units, we relied on a number of estimates in calculating the amounts attributable to the consummation of this sale transaction.

The results of discontinued operations for the three months ended March 31, 2008 were as follows (in thousands):

                                                         Three months ended March 31, 2008
                                                 LPI            SpecPub          RSVP          Total
Total revenue                                 $    4,005        $  1,133        $    -        $  5,138
Operating costs and expenses:
Cost of revenue                                    3,488             952           (12 )         4,428
Sales and marketing                                1,368             318             1           1,687
General and administrative                           621             115             2             738
Depreciation and amortization                         52               2             -              54
Impairment of goodwill and intangible
assets                                             1,978           4,294             -           6,272

Total operating costs and expenses                 7,507           5,681            (9 )        13,179

Income (loss) from operations                     (3,502 )        (4,548 )           9          (8,041 )
Other income (expense), net                           (6 )             1             -              (5 )

Net income (loss) from discontinued
operations                                    $   (3,508 )      $ (4,547 )      $    9        $ (8,046 )

The results of discontinued operations for the three months ended March 31, 2009 were as follows (in thousands):

                                                           Three months ended March 31, 2009
                                                 LPI               Total
Total revenue                                 $        -         $        -
Operating costs and expenses:
Cost of revenue                                       (8 )               (8 )
General and administrative                            (5 )               (5 )

Total operating costs and expenses                   (13 )              (13 )

Income from operations                                13                 13
Other income (expense), net                            -                  -

Income from discontinued operations                   13                 13
Loss on sale of discontinued operations             (318 )             (318 )

Net income (loss) from and loss on sale
of discontinued operations                    $     (305 )       $     (305 )

Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31, 2009 was $2.9 million, due primarily to our loss from continuing operations of $3.5 million which included one-time transaction costs of $0.8 million related to our pending business combination with Here Media. Cash used in operating activities for the three months ended March 31, 2008 was $1.4 million, and was primarily attributable to our loss from continuing operations of $2.3 million.
Cash used in investing activities in the three months ended March 31, 2009 was $0.1 million and was primarily attributable to an adjustment to proceeds from our sale of discontinued operations partially offset by refunds from our credit card processors for reserves that they had previously held back from us to cover any exposure that they may have had. Cash used in investing activities in the three months ended March 31, 2008 was $0.5 million and was primarily attributable to purchases of property and equipment.
Net cash used in financing activities in each of the three months ended March 31, 2008 and 2009 was $0.2 million, due primarily to principal payments under capital lease obligations.
We expect that cash used in operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, advertising sales, subscription trends and accounts receivable collections.
During the three months ended March 31, 2009, we invested $0.1 million in property and equipment of which zero was financed through capital leases. During the three months ended March 31, 2008, we invested $0.5 million in property and equipment of which $0.1 million was financed through capital leases. 100% of this investment related to computer equipment and software and website development costs related to enhancements to our website infrastructure and features. For the remainder of fiscal 2009, we expect to continue investing in our technology development as we improve our online technology platform and enhance our features and functionality across our network of websites, but to a lesser extent than we had invested in those activities in 2008.

Our capital requirements depend on many factors, including the level of our revenues, the resources we devote to developing, marketing and selling our products and services, the timing and extent of our introduction of new features and services, the extent and timing of potential investments and other factors. In particular, our subscription services consist of prepaid subscriptions that provide cash flows in advance of the actual provision of services. We expect to invest capital resources to continue our product development and marketing efforts and for other general corporate activities.
Based on our current operations, we expect that our available funds and anticipated cash flows from operations will be sufficient to meet our expected needs for working capital and capital expenditures for the next twelve months, although we can provide no assurances in that regard. If we do not have sufficient cash available to finance our operations, we may be required to obtain additional public or private debt or equity financing. We cannot be certain that additional financing will be available to us on favorable terms when required or at all. If we are unable to raise sufficient funds, we may need to reduce our planned operations.
We have carefully assessed our anticipated cash needs for the next twelve months and adopted an operating plan to manage our costs of capital expenditures and operating activities along with our revenues in order to meet our working capital needs for the next twelve months.
On January 8, 2009, we signed a definitive agreement to combine with Here Networks LLC and Regent Entertainment Media Inc. Under the proposed business combination, the combined entity will be called Here Media Inc. ("Here Media") and will be effected through a contribution by the owners of Here Networks and Regent Entertainment Media of those businesses and an estimate of $4.7 million of cash into Here Media, a newly formed holding company. We incurred a significant net loss in 2008 and expect to incur additional losses during 2009. We expect that raising additional financing will be very difficult, if it could be obtained at all. Accordingly, if we are unsuccessful in completing the proposed business combination, we could be forced to engage in dispositions of our remaining assets or businesses on unfavorable terms, or consider curtailing or ceasing operations. In that event, we cannot provide any assurance that our assets will be sufficient to meet our liabilities.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet liabilities or transactions as of March 31, 2009.
Contractual Obligations
The following table summarizes our contractual obligations as of March 31, 2009, and the effect that these obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

                                                   Payments Due by Period
                                                Remainder of
                                     Total          2009           2010        2011-2012
    Contractual obligations:
    Capital leases                  $   880     $         550     $   272     $        58
    Operating leases                  7,206             1,856       2,386           2,964

    Total contractual obligations   $ 8,086     $       2,406     $ 2,658     $     3,022

Capital Leases. We hold property and equipment under noncancelable capital leases with varying maturities.
Operating Leases. We lease or sublease office space and equipment under cancelable and noncancelable operating leases with various expiration dates through July 31, 2012. Operating lease amounts include minimum rental payments under our non-cancelable operating leases for office facilities, as well as limited computer and office equipment that we utilize under lease arrangements. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit an office facility early or expand our occupied space.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis on which we make judgments about the carrying values of assets and liabilities that

are not readily apparent from other sources. Because this can vary in each situation, actual results may differ from the estimates under different assumptions and conditions.
There have been no significant changes in our critical accounting policies from those listed in our Form 10-K for the fiscal year ended December 31, 2008.
Seasonality and Inflation
We anticipate that our business may be affected by the seasonality of certain revenue lines. For example, advertising buys are usually higher approaching year-end and lower at the beginning of a new year than at other points during the year.
Inflation has not had a significant effect on our revenue or expenses historically and we do not expect it to be a significant factor in the short-term. However, inflation may affect our business in the medium-term to long-term. In particular, our operating expenses may be affected by a tightening of the job market in certain job types, resulting in increased pressure for salary adjustments for existing employees and higher cost of replacement for employees that are terminated or resign.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS 141R"). Under SFAS 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R changes the accounting treatment for certain specific acquisition-related items including: expensing acquisition-related costs as incurred, valuing non-controlling interests at fair value at the acquisition date and expensing restructuring costs associated with an acquired business. SFAS 141R also requires acquisition-related costs be recorded as expenses in the periods in which the costs are incurred and the services are received. Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal . . .