Startup Files for IPO in Bid to Raise Needed Cash
By ANDREW SIMONS
Have you heard of the Internet search company’s impending initial public offering?
Not Silicon Valley-based Google Inc. Try Laguna Hills-based Interchange Corp.
Interchange, which operates a paid Internet search service, plans to go public in the coming months, according to a filing with the Securities and Exchange Commission.
The company could raise as much as $28.8 million in the public offering, according to the filing. Newport Beach’s Roth Capital Partners LLC is lead manager in the stock sale.
By Interchange’s own account, the public offering is crucial to the company’s future.
“Management believes, based upon projected operating needs, that our working capital is insufficient for us to maintain our current level of operating activities through Dec. 31, 2004,” the company said in the filing.
Interchange must raise funds through the offering or by other means to help pay off debts, including taxes owed. The company had accumulated $12.8 million in losses by the end of the March quarter.
In its regulatory filing, Interchange said it expects to use $2 million of the funds raised to pay back taxes to the federal government. The company said it failed to pay, or pay on time, taxes from 2000 through 2002.
Interchange declined an interview for this story, citing the Securities and Exchange Commission’s mandatory “quiet period” prior to a stock offering.
Interchange, which has about 50 workers, also plans to use money from the stock offering to expand internationally, boost marketing and for other corporate purposes.
Interchange was founded in 1999 as eWorld Commerce Corp. The company’s name was changed to eLiberation.com Corp. later that year.
Last year, it again changed its name, this time to Interchange.
The company has about 5,000 direct advertisers in its database. It supplies those listings to some 200 Web sites and search engines. When a Web surfer does a search with an Interchange partner, the advertiser’s name appears with the search results.
Interchange, like Google, makes money each time the Internet user clicks on a sponsored listing.
During the March quarter, Interchange said it received 40 million searches a day.
One search engine partner,LookSmart Ltd.,accounted for 38% of Interchange’s total revenue for the three months ended March 31.
Interchange, which may be hoping to be swept up in investors’ enthusiasm over Google’s pending $2.7 billion stock offering, operates on a much smaller scale than its counterpart.
While Google is expected to rake in more than $1 billion in sales from its advertising clients alone this year, Interchange reported sales of $8.8 million and an operating profit of $713,000 in 2003.
Interchange is growing revenue. It posted sales of $3.5 million in the March quarter, more than double last year’s results in the period.
The company is hoping to carve its own space in the competitive paid Internet search market. Besides Google, Yahoo! Inc. became a big player in the sector following its buy of Overture for $1.6 billion last year.
Second-tier search competitors include FindWhat.com.
“Nearly all of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do,” Interchange said in its prospectus.
Even so, there’s still room for companies the size of Interchange.
“You have advertisers that go with top-tier sites like Google and then you have a market below that’s the second tier,” said Kevin Lee, chief executive of Did-it.com LLC in Rockville Centre, N.Y., which resells Interchange’s services. “That leaves some people unserved. That’s where (Interchange) can serve the market.”
Interchange is led by chairman and chief executive, Heath Clarke.
Before joining Interchange in 1999, Clarke was vice president of eCommerce at LanguageForce Inc., a maker of language translation software.
Clarke is a member of several public policy think tanks, including the Heritage Foundation and the American Enterprise Institute.
Interchange has been funded through loans and investments from San Francisco-based Sutter Capital Management, Monterey-based Bear Flag Ventures and Toronto’s Frastacky Associates Inc., among others.
Private equity investor Frastacky is the company’s largest shareholder, holding 32% of Interchange stock.
Interchange leases about 8,600 square feet of space in Laguna Hills and says it will need more space in the next 12 months.
The company’s lease runs out in March 2007.
