MaxWorldwide, Inc., f.k.a. L90, Inc.

Securities Exchange Act of 1934
Release No. 47727 / April 23, 2003

Accounting and Auditing Enforcement
Release No. 1760 / April 23, 2003

Administrative Proceeding
File No. 3-11090

In the Matter of MaxWorldwide, Inc., f.k.a. L90, Inc., Respondent.

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ORDER INSTITUTING PROCEEDING PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that a cease-and-desist proceeding be, and hereby is, instituted against MaxWorldwide, Inc., f.k.a. L90, Inc., ("Respondent" or "L90") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

II.

In anticipation of the institution of this proceeding, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of this proceeding, Respondent consents to the entry of this Order Instituting Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Cease-And-Desist Order ("Order"), as set forth below.

III.

On the basis of this Order and Respondent's Offer, the Commission finds¹ that:

Respondent

1. L90, during the relevant period, was a Delaware corporation headquartered in Marina Del Rey, California. In July 2002, as part of a reorganization and merger, L90 changed its name to MaxWorldwide, Inc., a Delaware corporation, and relocated to New York, New York. L90 has a calendar fiscal year. L90's stock is registered with the Commission under Section 12(g) of the Exchange Act and previously traded on the Nasdaq National Market System. L90's shares were delisted from Nasdaq in August 2002. L90 is an advertising firm that provides Internet-based marketing services for both advertising clients and web publisher clients.

Summary

2. L90 materially overstated its revenues in 2000 and 2001. The principal method to generate these revenues involved barter transactions in which L90 either recognized its own cash as revenue or overstated its revenue by "check-swapping" or "round-tripping" cash with one or more third parties. In these transactions, L90 swapped advertising on its proprietary website, webMillion.com, with advertising on another company's website and, to generate revenue from the barter transactions, exchanged cash with the other company. In the second revenue-generating method, L90 booked revenue for a large advertising campaign despite the fact that certain top L90 managers knew from the outset of the campaign that L90 would never receive payment from the client. Through these transactions, from Q3 2000 through Q3 2001, L90 overstated its revenue by a total of $4.9 million, or 9.2%, and as much as 29% in one quarter, and was thereby able to meet analysts' revenue estimates in all but one quarter.

3. L90 also misclassified its 2000 and 2001 research and development expenses. Specifically, L90 improperly recorded as research and development expenses approximately $26 million of operating expenses related to L90's proprietary computer system.

The Improper Barter Transactions

4. L90 acquired webMillion in July 2000. Soon after acquiring webMillion, L90 began entering into barter transactions with other Internet-related companies. In these transactions, L90 exchanged advertising on webMillion (e.g., banners, pop-ups, email newsletters) for similar advertising on other companies' websites. Also as part of these transactions, however, L90 "swapped" checks with these companies or "round-tripped" money through them.

5. From Q3 2000 through Q3 2001, L90 engaged in ten barter transactions to overstate its revenue. In five of these transactions, L90 agreed to exchange Internet advertising on webMillion with one other company, swapped checks of identical or similar amounts with the same company, and recognized revenue on the money received in the exchange. In five other transactions, L90 agreed to exchange advertising on webMillion with at least one other company, engaged in the round-tripping of money through at least two other companies, and recognized revenue on money received from the round-tripping. As a result of the barter transactions, L90 improperly recognized $4.3 million of revenue. Described below are a representative check-swap transaction (a $320,000 swap), a representative round-trip transaction (a $1.098 million round-trip), and two round-trip transactions involving a major online real estate company (the "Real Estate Co.").

6. From Q4 2000 through Q2 2001, L90 recognized $320,000 in total revenue from a barter transaction between webMillion and an online game company (the "Online Game Co."). In late October 2000, webMillion and the Online Game Co. entered into a barter transaction in which each agreed to advertise the other in 80 million banner and button advertisements on each other's websites. These advertisements subsequently ran on the respective websites. Then in April 2001, L90 and the Online Game Co. engaged in the check-swap. Specifically, as set forth in the diagram below, the check-swap occurred on April 12, 2001 when L90 issued a check for $320,000 to the Online Game Co. and the Online Game Co. issued a check for $320,000 to L90.

7. In Q1 2001, L90 recognized a total of $1.098 million in revenue from barter transactions between webMillion and three Internet-related companies. Beginning in March 2001, webMillion entered into barter transactions with the three Internet-related companies. Subsequently, webMillion exchanged roughly similar amounts of Internet advertising via email with each of these companies. Then, as set forth in the diagram below, in March to June 2001, L90 engaged in the round-tripping of cash and recognized $1.098 million in revenue.

8. The first part of the round-tripping involved L90 transferring funds to a company that L90 paid $5,000 per quarter and which served as an intermediary (the "Intermediary") in the round-trip transactions. Specifically, on April 2, 2001, L90 wire transferred $1.603 million to the Intermediary.

9. The second part of the round-tripping involved the Intermediary transferring a total of $1.598 million to the three Internet-related companies. Specifically, the Intermediary wired $800,000 to the First Internet Company (the "First Internet Co.") on April 3, 2001, and sent to L90 a $298,000 check made payable to the Second Internet Company (the "Second Internet Co.") on April 3, 2001, and a $500,000 check made payable to the Third Internet Company (the "Third Internet Co.") on May 22, 2001. L90 caused these checks to be provided to the respective Internet companies.

10. The third part of the round-trip transaction involved the three Internet-related companies transferring the $1.598 million back to L90. Specifically, on March 29, 2001, the First Internet Co. sent an $800,000 check to L90. On April 12, 2001, the Second Internet Co. issued a $298,000 check to L90. L90 then recognized $1.098 million as revenue in Q1 2001. Finally, on June 7, 2001, the Third Internet Co. issued a $500,000 check to L90. L90, however, placed the $500,000 in a deferred revenue account and did not recognize any revenue from this portion of the transaction.

11. L90 engaged in two round-trip transactions involving the Real Estate Co. These two transactions were different from the type of round-trip transaction discussed above, however, because the cash circulated in these transactions originated not from L90, but primarily from the Real Estate Co. These transactions were also different from the type of round-trip transaction discussed above because L90 recognized only the net cash gain on them as advertising revenue rather than the amount of money that was circulated in the transaction. Specifically, in the first round-trip transaction involving the Real Estate Co., L90 received a wire transfer of $4.25 million from a company participating in the transaction on July 20, 2001, and then wired $4 million to the Real Estate Co. on the same date. L90 recognized revenue of $250,000 on this transaction in Q2 2001. Further, in the second round-trip transaction involving the Real Estate Co., L90 received a wire transfer of $5.9 million from a participating company on November 19, 2001, and then wired $5.65 million to the Real Estate Co. on the same date. L90 recognized revenue of $250,000 on this transaction in Q3 2001.

12. The result of the barter transactions was the improper recognition of revenue. Even if the barter transactions were legitimate business deals, revenue recognition on the barter transactions was not in conformity with Generally Accepted Accounting Principles ("GAAP"). By recognizing revenue on these transactions, L90 overstated its revenues and departed from GAAP. To recognize barter revenue from the transactions under GAAP, L90 would have had to record the transactions at fair value and disclose the circular nature of the transactions in its financial statements.² L90 engaged in the check-swap and round-trip transactions to circumvent GAAP and made no disclosure to investors that it derived advertising revenue from barter, check-swaps, or round-trip transactions.

The Improper Advertising Campaign Revenue

13. In Q4 2000 and Q1 2001, L90 recognized a total of $567,421 from an advertising campaign it ran for another Internet company. L90 ran the campaign on webMillion in late December 2000 and early January 2001, but it never received any payment for the campaign. At the time that L90 recorded the revenue from this campaign, certain top L90 management knew that the Internet company would never pay for the advertising and that L90 would later have to write off the revenue as uncollectible. The recordation of this revenue was not in conformity with GAAP because the collection of money from this campaign was not reasonably assured.³ Indeed, in late Q2 2001, L90 wrote off the $567,421 receivable as uncollectible.

L90 Reported Overstated Revenue

14. L90 reported certain payments received in the barter transactions and advertising campaign discussed above as revenue in Commission filings and in press releases. As discussed above, however, L90 should not have recognized any revenue from these transactions under GAAP. As a result, as shown in the chart below, L90 materially overstated its system revenue⁴ and GAAP revenue. As a result of this improperly recognized revenue, L90 met or exceeded analysts' revenue estimates in each quarter set forth below with the exception of Q2 2001.

	Q3 2000	Q4 2000	FY 2000	Q1 2001	Q2 2001	Q3 2001
Analysts' Estimates For System Revenue ($ in Millions)	15 to 16.2	18.2 to 18.3	58.8 to 58.9	10.5	14.2	14.5
Reported System Revenue ($ in Millions)	16.2	18.3	58.9	10.6	12.7	14.9
Reported GAAP Revenue ($ in Millions)	14.7	16.5	52.0	9.8	9.0	8.4
GAAP Revenue Adjusted For Improper Revenue-Generating Transactions	14.3	15.2	50.3	7.6	8.3	8.1
Overstated Revenue From Improper Revenue-Generating Transactions ($ in Millions)	0.4	1.3	1.7	2.2	0.7	0.3
Percentage of Overstatement of GAAP Revenue	2.8%	8.6%	3.4%	29.0%	8.4%	3.7%

15. L90 reported the overstated financial results as shown in the chart above in its 2000 Form 10-K and its Q3 2000, Q1, Q2, and Q3 2001 Forms 10-Q. Further, none of the filings disclosed that L90 engaged in barter transactions, check-swaps, or round-trip transactions or that L90 recognized revenue from these types of transactions.

The Restatements

16. In May and June 2002, L90 restated its financial statements in its amended Q3 2000 through Q3 2001 Forms 10-Q and in its 2001 Form 10-K. Specifically, the company reduced reported revenue for the first three quarters of 2001 from $27.2 million to $22.2 million, and reduced reported revenue for fiscal 2000 from $52 million to $48.7 million. Further, the company disclosed that these restatements were due to groups of cash transactions that substantially offset one another and appeared to represent barter arrangements, as well as other revenue transactions that were subsequently written off as bad debts or generated other concerns about the services provided. The restatements included the $4.9 million of overstated revenue from the improper barter transactions and advertising campaign discussed above.

The Misclassification of Research and Development Expenses

17. L90 also misclassified certain operating expenses as research and development expenses. In 2000 and 2001, L90 used in its advertising business a proprietary computer system called "adMonitor." adMonitor, which was fully operational in 1999, was the vehicle by which L90 targeted, delivered, and tracked advertising campaigns. During 2000 and 2001, L90 spent approximately $26 million to run adMonitor, correct its operational problems, and increase its operating capacity. Specifically, in 2000 and 2001, L90 recorded approximately $12 million and $14 million, respectively, in expenses relating to adMonitor as research and development. L90's periodic filings reported that its "research and development expenses consist[ed] primarily of compensation, consulting expenses and expenses for hardware, software and materials associated with the development and improvement of our adMonitor technology."

18. L90's recording of the adMonitor expenses as research and development was improper and not in conformity with GAAP. The vast majority of L90's adMonitor expenses in 2000 and 2001 were for running and correcting problems with the existing system and increasing its capacity, but not for developing and implementing new programs. Such expenses therefore were directly related to operating adMonitor and did not constitute research and development.⁵ L90 reported research and development expenses as a separate line item in its 2000 and 2001 financial statements included in its Commission filings. These line items represented 16% of total expenses in both years. If L90 had included all of its research and development expenses in the cost of revenue for 2000 and 2001, it would have increased cost of revenue by 38% and 106%, respectively.

19. L90 is currently in the process of restating its financial statements concerning research and development expenses for 2000 and 2001.

Legal Analysis

20. As a result of the conduct described above, L90 violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which require issuers of securities registered pursuant to Section 12 of the Exchange Act to file accurate periodic reports on Forms 10-K and 10-Q. These reports must contain any material information necessary to make the required statements in the reports not misleading. As previously discussed, from Q3 2000 through Q3 2001, L90 filed periodic reports with the Commission that overstated L90's revenue and therefore misstated its financial results. Indeed, the financial statements contained in L90's 2000 Form 10-K and Q3 2000, Q1, Q2, and Q3 2001 Forms 10-Q were restated. In addition, L90's 2000 and 2001 periodic filings misclassified research and development expenses.

21. As a result of the conduct described above, L90 also violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies registered under Section 12 of the Exchange Act to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions of the issuer. From Q3 2000 through Q3 2001, L90's books and records reflecting certain revenue transactions were misstated. Further, L90's restatement demonstrates that L90's books and records were not accurate during this time period. In addition, L90's books and records reflecting research and development expenses were inaccurate in 2000 and 2001.

22. As a result of the conduct described above, L90 also violated Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a system of internal accounting controls sufficient to reasonably assure that transactions are recorded and financial statements are prepared in conformity with GAAP. L90 had insufficient internal controls to prevent the recording of revenue generated from the improper barter transactions and advertising campaign. As a result, from Q3 2000 through Q3 2001, L90's financial statements were not prepared in conformity with GAAP. L90 also violated Section 13(b)(2)(B) by failing to have adequate internal controls regarding proper recording of expenses related to adMonitor.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. In determining to accept the Offer, the Commission considered the Respondent's remedial actions and cooperation in the staff's investigation.

ACCORDINGLY, IT IS HEREBY ORDERED:

Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

¹ The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

² Barter transactions should be accounted for based on the fair value of the assets or services involved. See AICPA Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions," ("APB 29") ¶¶ 1, 3 & 4. In the case of barter transactions involving advertising, the guidance under Emerging Issues Task Force No. 99-17, "Accounting for Advertising Barter Transactions" ("EITF 99-17") applies. In fact, EITF 99-17 specifically addresses advertising barter transactions that involve check swaps. EITF 99-17 ¶ 4 states that an exchange between the parties to a barter transaction of offsetting monetary consideration, such as a swap of checks for equal amounts, does not evidence the fair value of the transaction. EITF 99-17 also provides that revenue and expense should be recognized at fair value from an advertising barter transaction only if the fair value of the advertising surrendered in the transaction is determinable based on the entity's own historical practices. If the fair value of the advertising surrendered in the barter transaction is not determinable within the limits of this Issue, the barter transaction should be recorded based on the carrying value of the advertising surrendered, which likely will be zero. EITF 99-17 ¶ 4. For the reasons discussed above, L90 did not meet the revenue recognition conditions required by EITF 99-17. Both APB 29 ¶ 28 and EITF 99-17 ¶ 8 require the reporting entity to disclose that it recognized revenue from barter transactions in its financial statements.

³ GAAP generally requires that for recognition of revenue, collection of that revenue should be reasonably assured. Accounting Research Bulletin No. 43 Chapter 1 §A ¶ 1 states that profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that the collection of the sale price is not reasonably assured. AICPA Accounting Principles Board Opinion No. 10, "Omnibus Opinion-1966," ¶ 12, Financial Accounting Statement of Concepts No. 5, "Recognition and Measurement in Financial Statements of Business Enterprises" ("CON 5") ¶ 84g, and AICPA Statement of Position No. 97-2, "Software Revenue Recognition," ¶ .08 reaffirm that position. When collection is not reasonably assured, revenue may be recognized on the basis of cash received. CON 5 ¶ 84g.

⁴ In reporting its financial results, L90 reported both purported GAAP revenue and system revenue. L90 disclosed in its periodic filings with the Commission that system revenue represents the full value of gross billings for ads sold under either commission-based contracts or service fee-based contracts and is not affected by the mix of such contracts. L90 also disclosed in its periodic filings that although system revenue is not recognized under GAAP, L90 believes that system revenue is a standard measure of advertising volume for the Internet advertising industry that enables a meaningful comparison of activity from period to period and from one company to another.

⁵ See Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," ¶¶ 8b & 10.