<PAGE>
================================================================================
U.S. 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, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-29244
ONSALE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0408319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1861 LANDINGS DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
_____________________
(415) 428-0600
(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 [_]
As of July 31, 1997, there were 16,763,425 shares of the Registrant's Common
Stock outstanding.
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Page 1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Balance Sheet as of June 30, 1997 and
December 31, 1996 (Unaudited) 3
Statement of Operations for the three and six months
ended June 30, 1997 and June 30, 1996 (Unaudited) 4
Statement of Cash Flows for the six months ended
June 30, 1997 and June 30, 1996 (Unaudited) 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3: Quantitative and Qualitative Disclosures about
Market Risk 17
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings 18
ITEM 2: Changes in Securities 19
ITEM 3: Defaults upon Senior Securities 19
ITEM 4: Submission of Matters to a Vote of Security Holders 19
ITEM 5: Other Information 19
ITEM 6: Exhibits and Reports on Form 8-K 20
</TABLE>
Page 2
<PAGE>
Part I - Financial Information
ITEM 1: FINANCIAL STATEMENTS
ONSALE, INC.
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
----------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,585 $2,649
Restricted cash 84 80
Accounts receivable, net 613 395
Merchandise inventory 6,708 1,520
Prepaid expenses and other current assets 183 439
------- ------
Total current assets 20,173 5,083
Property and equipment, net 1,223 578
Other assets 20 19
------- ------
Total assets $21,416 $5,680
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 533 $2,268
Accrued expenses 904 480
Deferred revenue 1,017 604
------- ------
Total current liabilities 2,454 3,352
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 2,000,000 shares
authorized; 804,521 shares designated; no and 568,101 shares issued - 1
Common stock, $0.001 par value; 30,000,000 shares authorized;
16,763,425 and 12,178,757 shares issued and outstanding 17 12
Additional paid-in capital 19,198 2,494
Accumulated deficit (253) (79)
Less: note receivable from stockholder - (100)
------- ------
Total stockholders' equity 18,962 2,328
------- ------
Total liabilities and stockholders' equity $21,416 $5,680
======= ======
</TABLE>
See notes to financial statements.
Page 3
<PAGE>
ONSALE, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Merchandise $17,860 $ 1,493 $29,556 $ 1,961
Commission 715 317 1,333 426
------- ------- ------- -------
Total revenue 18,575 1,810 30,889 2,387
Cost of revenue 16,146 1,380 26,672 1,798
------- ------- ------- -------
Gross profit 2,429 430 4,217 589
------- ------- ------- -------
Operating expenses:
Sales and marketing 948 115 1,338 173
General and administrative 1,294 89 2,083 121
Engineering 589 115 1,150 167
------- ------- ------- -------
Total operating expenses 2,831 319 4,571 461
------- ------- ------- -------
Income (loss) from operations (402) 111 (354) 128
Interest and other income 148 - 180 -
------- ------- ------- -------
Income (loss) before income taxes (254) 111 (174) 128
(Provision) benefit for income taxes 28 (11) - (13)
------- ------- ------- -------
Net income (loss) $ (226) $ 100 $ (174) $ 115
======= ======= ======= =======
Net income (loss) per share $(0.01) $0.00 $(0.01) $0.01
======= ======= ======= =======
Shares used to compute net income per share 16,356 15,326 15,844 15,326
======= ======= ======= =======
</TABLE>
See notes to financial statements.
Page 4
<PAGE>
ONSALE, INC.
STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1997 1996
--------- -------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (174) $ 115
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 122 8
Changes in assets and liabilities:
Restricted cash (4) (80)
Accounts receivable, net (218) (184)
Merchandise inventory (5,188) (21)
Prepaid expenses and other current assets 256 (23)
Other assets (1) (10)
Accounts payable (1,735) 298
Accrued expenses 424 92
Deferred revenue 413 25
------- -----
Net cash provided by
(used in) operating activities (6,105) 220
------- -----
Cash flows from investing activities:
Purchase of property and equipment (768) (73)
------- -----
Cash flows from financing activities:
Proceeds from note receivable from stockholder, net 100 117
Proceeds from issuance of common stock, net 16,709 -
------- -----
Net cash provided by financing activities 16,809 117
------- -----
Net increase in cash and cash equivalents 9,936 264
Cash and cash equivalents at beginning of period 2,649 33
------- -----
Cash and cash equivalents at end of period $12,585 $ 297
======= =====
</TABLE>
Page 5
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ONSALE, Inc.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly present ONSALE, Inc's. ("ONSALE" or
the "Company") financial position, results of operations and cash flows for the
periods presented. These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Prospectus dated April 17, 1997 filed as part of a Registration
Statement on Form S-1 (Reg. No. 333-18459), as amended. The results of
operations for the three and six month periods ended June 30, 1997 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the year ending December 31, 1997.
2. REVENUE RECOGNITION
The Company obtains merchandise from vendors in one of two primary
arrangements, either the Principal Sales model (merchandise revenue) or the
Agent Sales model (commission revenue). Under the Principal Sales model, the
Company either purchases the merchandise or acquires the rights to sell
merchandise under consignment relationships with vendors.
Principal sales - purchases
For sales of merchandise owned by ONSALE, the Company is responsible for
conducting the auction, billing the customer, shipping the merchandise to the
customer and processing merchandise returns. The Company recognizes the full
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction, the
Company bears both inventory and credit risk with respect to sales of its
inventory. In instances where the credit card authorization has been received
but the merchandise has not been shipped, the Company defers revenue recognition
until the merchandise is shipped.
Principal sales - consignment
For sales on consignment, the Company will either take physical possession
of the merchandise or the vendor will retain physical possession of the
merchandise. In either case, the Company is not obligated to take title to the
merchandise unless it successfully sells the merchandise at auction. Upon
completion of an auction, the Company takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or arranges
for a third party to complete delivery to the customer. The Company pays the
vendor any amounts due for the purchase of the related merchandise. The Company
records the full sales amount as revenue upon the verification of the credit
card authorization and shipment of the merchandise. In consignment transactions,
the Company is at risk of loss for collecting all of the auction proceeds,
delivery of the merchandise and returns from customers. In instances where
credit card authorization has been received but the merchandise has not been
shipped, the Company defers revenue recognition until
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the merchandise is shipped.
Beginning in the third quarter of 1997, the Company expects to begin
offering credit to certain of its customers that have been prequalified as
having appropriate credit ratings and, accordingly, will be required to manage
the associated risks of accounts receivable expansion and collection.
Agent sales
In Agent Sales transactions, the Company conducts electronic auctions and
processes orders in exchange for a commission on the sale of the vendor's
merchandise. Under this arrangement, at the conclusion of an auction the Company
forwards the order information to the vendor, which then charges the customer's
credit card and ships the merchandise to the customer. In an Agent Sales
transaction, the Company does not take title to or possession of the
merchandise, and the vendor bears all of the risk of credit card chargebacks.
For Agent Sales transactions, the Company recognizes the commissions as revenue
upon completion of the auction process and the forwarding of the auction sales
information to the vendor. The vendor is typically responsible for merchandise
returns.
Under primarily the Principal Sales model, the Company will allow customers
to return products, in certain circumstances. Accordingly, the Company provides
for allowances for estimated future returns at the time of shipment based on
historical data.
Supplemental financial data
The Company's relationships with its vendors have evolved from a purely
Agent Sales business at the Company's inception to a business that now includes
a significant percentage of Principal Sales transactions. Gross merchandise
sales represent what the Company's total revenue would have been if all Agent
Sales had been made as Principal Sales. Due to the ongoing evolution in the
Company's operations toward the Principal Sales model, management believes that
the information on gross merchandise sales is relevant to a reader of the
Company's financial statements since it provides a more consistent comparison
between historical periods and a more accurate comparison to future periods than
does total revenue. Gross merchandise sales should not be considered in
isolation or as a substitute for other information prepared in accordance with
generally accepted accounting principles.
The reconciliation of total revenue in the Statement of Operations to gross
merchandise sales is as follows:
Page 7
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
(in thousands) 1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Total revenue $18,575 $1,810 $30,889 $2,387
Plus: gross Agent Sales 6,683 3,797 12,928 5,121
Less: net Agent Sales (715) (317) (1,333) (426)
------- ------ ------- ------
Gross merchandise sales $24,543 $5,290 $42,484 $7,082
======= ====== ======= ======
</TABLE>
3. INITIAL PUBLIC OFFERING
In April 1997, the Company completed its initial public offering and issued
2,500,000 shares of its common stock to the public at a price of $6.00 per
share. The Company received approximately $12.6 million of cash, net of the
underwriting discount and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
preferred stock were automatically converted into shares of common stock. On May
21, 1997, the Company's underwriters exercised an option to purchase an
additional 375,000 shares of common stock, to cover over-allotments, at a price
of $6.00 per share. The Company received approximately $2.1 million of cash,
net of the underwriting discount and offering expenses.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. In the
period subsequent to the effective date of the Company's initial public
offering, common equivalent shares consisting of stock options and stock
warrants are antidilutive and have been excluded from the weighted average share
computation. Common equivalent shares for the period before the effective date
of the Company's initial public offering consist of convertible preferred stock
(using the if-converted method), even though their effect is antidilutive,
pursuant to a Securities and Exchange Commission Staff Accounting Bulletin.
5. LITIGATION
On October 17, 1996, Tredex California, Inc. ("Tredex") filed a complaint
in the Superior Court of the State of California in and for the County of Los
Angeles against a former Tredex employee for, among other claims,
misappropriation of trade secrets, intentional interference with contractual
relations, fraud and deceit, breach of fiduciary duty, unfair competition,
conspiracy, unjust enrichment and conversion (the "Claims"). Tredex subsequently
amended its complaint to name ONSALE, among others, as a defendant and served
ONSALE with a summons and complaint on January 6, 1997. Tredex alleges that
ONSALE wrongfully obtained customer and vendor lists and other proprietary
information of Tredex from such former employee. Tredex was seeking damages in
excess of $1,750,000 from all the defendants collectively. Tredex was also
seeking injunctive relief to stop the defendants from using the customer and
vendor lists and other
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proprietary information of Tredex. ONSALE has filed a general denial. On June
10, 1997, ONSALE and Tredex entered into a settlement agreement (the "Settlement
Agreement") pursuant to which Tredex released the Claims. The Settlement
Agreement did not have a material adverse effect on ONSALE's results of
operations or financial condition.
On March 6, 1997, the Company filed a complaint in the Superior Court of
the State of California in and for the County of Santa Clara against a Tredex
employee and Tredex, for, among other claims, misappropriation of trade secrets,
fraud and deceit, breach of contract (only against the Tredex employee),
intentional interference with contractual relations, intentional interference
with prospective business relations, unfair competition, unjust enrichment,
conspiracy and conversion (the "March Claims"). The Company alleged that the
Tredex employee obtained marketing information, financial and technical data,
and other proprietary and confidential information of the Company while
interviewing for a sales position at the Company. The Company believed that the
Tredex employee disclosed some or all of the confidential information that he
obtained from the Company to Tredex, and that Tredex, knowing that the
information was wrongfully obtained, used the information to establish a
competing on-line auction site. The Company sought unspecified compensatory
damages as well as injunctive relief against both the Tredex employee and
Tredex. On June 10, 1997, ONSALE and Tredex entered into the Settlement
Agreement, pursuant to which the Company released the March Claims. The
Settlement Agreement did not have a material adverse effect on ONSALE's results
of operations or its financial condition.
6. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), and No. 129, "Disclosure of Information about Capital
Structure ("SFAS No. 129")." SFAS No. 128 establishes financial accounting and
reporting standards for calculation of basic earnings per share and diluted
earnings per share. SFAS No. 128 supersedes APB No. 15 and is effective for the
periods ending after December 15, 1997, including interim periods. SFAS No.129
establishes standards for disclosing information about an entity's capital
structure. It eliminates the exemption of nonpublic entities from certain
disclosure requirements of accounting standards previously issued. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997. The Company will adopt the standards in the year ending December 31,
1997. The cumulative effect of adopting SFAS No.128 and SFAS No.129 will not
have a material impact on the financial statements for the three months ended
June 30, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for reporting and
display of comprehensive income. SFAS 131 establishes standards for disclosing
information about operating segments for public business enterprises and
supersedes FASB Statement No. 14. Both SFAS 130 and SFAS 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of SFAS 130 and SFAS 131 will not have a material effect on its
financial position or results of operations.
Page 9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements regarding the
Company and future expectations that involve risks and uncertainties, including,
but not limited to, the Company's limited operating history and fluctuations in
operating results, its reliance on merchandise vendors and other third parties,
the inventory and price risks of the Company's purchasing merchandise in
principal transactions, actual and potential competition, the limited management
and other resources that the Company has available to it to address its rapid
growth, dependence on the Internet, technological change, uncertain acceptance
of the ONSALE brand and reliance on automated technology. These risks and
uncertainties are described in greater detail in the Company's prospectus dated
April 17, 1997 (the "Prospectus") and other documents filed by ONSALE, Inc. with
the Securities and Exchange Commission. The Company's actual future results
could differ materially from those discussed in the forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the quarters ended September 30, 1995 through June 30, 1997.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec 31, Sept. 30,
1997 1997 1996 1996 1996 1996 1995 1995
--------- --------- --------- ---------- --------- --------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise $17,860 $11,696 $ 7,622 $2,990 $1,493 $ 468 $ 30 $ -
Commission 715 618 684 586 317 109 70 23
------- ------- ------- ------ ------ ------ ----- -----
Total revenue 18,575 12,314 8,306 3,576 1,810 577 100 23
Cost of revenue 16,146 10,526 7,076 2,665 1,380 418 27 -
------- ------- ------- ------ ------ ------ ----- -----
Gross profit 2,429 1,788 1,230 911 430 159 73 23
------- ------- ------- ------ ------ ------ ----- -----
Operating expenses:
Sales and marketing 948 390 379 339 115 58 69 44
General and administrative 1,294 789 362 275 89 32 63 61
Engineering 589 561 365 182 115 52 77 49
------- ------- ------- ------ ------ ------ ----- -----
Total operating expenses 2,831 1,740 1,106 796 319 142 209 154
------- ------- ------- ------ ------ ------ ----- -----
Income (loss) from operations (402) 48 124 115 111 17 (136) (131)
Interest and other income 148 32 34 3 - - - -
------- ------- ------- ------ ------ ------ ----- -----
Income (loss) before income taxes (254) 80 158 118 111 17 (136) (131)
(Provision) benefit for income taxes 28 (28) (18) (12) (11) (2) - -
------- ------- ------- ------ ------ ------ ----- -----
Net income (loss) $ (226) $ 52 $ 140 $ 106 $ 100 $ 15 $(136) $(131)
======= ======= ======= ====== ====== ====== ===== =====
Supplemental Financial Data:
Gross Merchandise Sales $24,543 $17,941 $14,399 $9,246 $5,290 $1,792 $ 827 $ 199
</TABLE>
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During the three months ended June 30, 1997, March 31, 1997 and June 30,
1996, the Company's total revenue was approximately $18.6 million, $12.3 million
and $1.8 million, respectively. The amount for the three months ended June 30,
1997 represented an increase of 50.8% and 926%, respectively, over the three
months ended March 31, 1997 and June 30, 1996. During the six months ended June
30, 1997, December 31, 1996 and June 30, 1996, the Company's total revenue was
approximately $30.9 million, $11.9 million, and $2.4 million, respectively. The
amount for the six months ended June 30, 1997 represented an increase of 160%
and 1194%, respectively, over the amounts for the six months ended December 31,
1996 and June 30, 1996. In each instance, the significant increases in revenue
over the previous periods are a result of several factors, including increased
product availability, technological advancements in the Company's systems
allowing for greater volume of sales, the increase from three to five auctions
per week beginning in June 1997 and an overall increase in demand for the
Company's merchandise, which the Company believes is attributable to its
investments in marketing designed to promote and maintain brand awareness.
The following tables illustrate gross merchandise sales, which represent
what the Company's total revenue would have been if sales for which the Company
acted as a commissioned auction agent for its vendors (Agent Sales) were
recorded as transactions in which the Company purchased or accepted consignment
of merchandise from vendors for resale at auction (Principal Sales). This
presentation of sales on a gross basis does not affect the Company's gross
profit or net income. Management believes that gross merchandise sales provide
a more consistent comparison between historical periods and a more accurate
comparison to future periods than does total revenue. Gross merchandise sales
should not be considered in isolation or as a substitute for other information
prepared in accordance with generally accepted accounting principles.
The reconciliation of total revenue to gross merchandise sales is as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
(in thousands) 1997 1996 1997 1996
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Total revenue $18,575 $1,810 $30,889 $2,387
Plus: gross Agent Sales 6,683 3,797 12,928 5,121
Less: net Agent Sales (715) (317) (1,333) (426)
------- ------ ------- ------
Gross merchandise sales $24,543 $5,290 $42,484 $7,082
======= ====== ======= ======
</TABLE>
During the three months and six months ended June 30, 1997 and June 30,
1996, gross merchandise sales were comprised of the following:
Page 11
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands) 1997 1996 1997 1996
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Principal Sales model--purchased inventory $ 9,359 $ - $13,920 $ -
Principal Sales model--consigned inventory 8,501 1,493 15,636 1,961
Agent Sales model 6,683 3,797 12,928 5,121
------- ------ ------- ------
Gross merchandise sales $24,543 $5,290 $42,484 $7,082
======= ====== ======= ======
</TABLE>
During the three months ended June 30, 1997, March 31, 1997 and June 30,
1996, the Company's gross merchandise sales were approximately $24.5 million,
$17.9 million and $5.3 million, respectively. The amounts for the three months
ended June 30, 1997 represented increases of 36.8% and 364%, respectively, over
the three months ended March 31, 1997 and June 30, 1996. For the six months
ended June 30, 1997, December 31, 1996 and June 30, 1996, gross merchandise
sales were approximately $42.5 million, $23.6 million and $7.1 million,
respectively. The amount for the six months ended June 30, 1997 represented an
increase of 79.7% and 500%, respectively, over the six months ended December
31, 1996 and June 30, 1996. In each instance, the significant increases in
revenue over the previous periods are a result of several factors, including
increased product availability, technological advancements in the Company's
systems allowing for greater volume of sales, and an overall increase in demand,
which the Company believes is attributable to its investments in marketing
designed to promote and maintain brand awareness. Sales of purchased inventory
more than doubled from the quarter ended March 31, 1997 to the quarter ended
June 30, 1997, while sales of consignment inventory and Agent Sales increased
19% and 7%, respectively, as the Company continued its shift in product mix from
Agent Sales to Principal Sales.
For the three months ended June 30, 1997, March 31, 1997 and June 30, 1997,
the Company's overall gross profit on sales was $2.4 million, $1.7 million and
$430,000, respectively. The amount for the three months ended June 30, 1997
represented an increase of 35.9% and 465%, respectively, over the three months
ended March 31, 1997 and June 30, 1996. For the six months ended June 30, 1997,
December 31, 1996 and June 30, 1996, the Company's overall gross profit on sales
was $4.2 million, $2.1 million and $589,000, respectively. The amount for the
six months ended June 30, 1997 represented an increase of 97% and 616%,
respectively, over the six months ended December 31, 1996 and June 30, 1996.
During the three months and six months ended June 30, 1997 and June 30,
1996, gross profit was comprised of the following:
Page 12
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(in thousands) 1997 1996 1997 1996
---------- ------ -------- ------
<S> <C> <C> <C> <C>
Principal Sales model $1,714 $ 113 $2,884 $ 163
Agent Sales model 715 317 1,333 426
------ ----- ------ -----
Gross profit $2,429 $ 430 $4,217 $ 589
====== ===== ====== =====
</TABLE>
During the three months and six months ended June 30, 1997 and June 30,
1996, gross margin on merchandise revenue was comprised of the following:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
------- -------- ---------- ------
<S> <C> <C> <C> <C>
Principal Sales model 9.6% 7.6% 9.8% 8.3%
Agent Sales model 10.7% 8.3% 10.3% 8.3%
---- ---- ---- ----
Gross margin 9.9% 8.1% 9.9% 8.3%
==== ==== ==== ====
</TABLE>
The Company's gross profit on the Principal Sales model only, for the three
months ended June 30, 1997, was $1.7 million or 9.6% of merchandise revenue
(i.e., revenue made under the Principal Sales model), compared to $113,000 or
7.6% of merchandise revenue in the three months ended June 30, 1996. The
remaining $715,000 of gross profit, which is attributable to Agent Sales,
represented 10.7% of gross merchandise sales made under the Agent Sales model,
compared to $317,000 or 8.3% of Agent Sales in the three months ended June 30,
1996. The Company's gross profit on the Principal Sales model only, for the six
months ended June 30, 1997, was $2.9 million or 9.8% of merchandise revenue made
under the Principal Sales model, compared to $163,000 million or 8.3% of
merchandise revenue in the six months ended June 30, 1996. The remaining $1.3
million of gross profit, which is attributable to Agent Sales, represented
10.3% of gross merchandise sales made under the Agent Sales model compared to
$426,000 or 8.3% of Agent Sales for the six months ended June 30, 1996. Gross
margins on the Principal Sales model, although lower than the Agent Sales
model, continue to increase. The Company believes the investment in the
Principal Sales model is necessary for the future growth of the business. The
Company's gross margin for the quarter ending September 30, 1997 may be
adversely affected by the United Parcel Service drivers strike that began in
August 1997. See the second paragraph of "Fluctuations in Operating Results"
for further information.
Sales and marketing expenses consist primarily of sales and marketing
personnel costs, agency and consulting fees, commissions, and promotional and
advertising expenses. For the three months ended June 30, 1997, March 31, 1997
and June 30, 1996, sales and marketing expenses were $948,000, $390,000 and
$115,000, respectively. The amount for the three months ended June 30,
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<PAGE>
1997 represented an increase of 143% and 724% over the three months ended March
31, 1997 and June 30, 1996, respectively. These expenses represented 5.1%, 3.2%
and 6.4% of revenues for the three months ended June 30, 1997, March 31, 1997
and June 30, 1996, respectively. For the six months ended June 30, 1997,
December 31, 1996 and June 30, 1996, sales and marketing expenses were $1.3
million, $718,000 and $173,000, respectively. The amount for the six months
ended June 30, 1997 represented an increase of 86.4% and 673% over the six
months ended December 31, 1996 and June 30, 1996, respectively. These expenses
represented 4.3%, 6.0% and 7.2% of revenues for the six months ended June 30,
1997, December 31, 1996 and June 30, 1996, respectively. The increases in
absolute dollars for the three month and six month periods were primarily the
result of increases in sales and marketing payroll and related expenses, due to
an increase in personnel, as well as approximately $250,000 of additional
advertising expense aimed primarily at increasing brand awareness.
General and administrative expenses consist principally of administrative
and personnel costs, provision for doubtful accounts, allocation of overhead and
fees for professional services. For the three months ended June 30, 1997, March
31, 1997 and June 30, 1996, general and administrative expenses were $1.3
million, $789,000 and $89,000, respectively. The amount for the three months
ended June 30, 1997 represented an increase of 64% and 1354%, over the three
months ended March 31, 1997 and June 30, 1997, respectively. These expenses
represented 7.0%, 6.4% and 4.9% of revenues for the three months ended June 30,
1997, March 31, 1997 and June 30, 1996, respectively. For the six months ended
June 30, 1997, December 31, 1996 and June 30, 1996, general and administrative
expenses were $2.1 million, $637,000 and $121,000, respectively. The amount for
the six months ended June 30, 1997 represented an increase of 227% and 1621%
over the six months ended December 31, 1996 and June 30, 1996, respectively.
These expenses represented 6.7%, 5.4% and 5.1% of revenues for the six months
ended June 30, 1997, December 31, 1996 and June 30, 1996, respectively. The
increases in percentages and absolute dollars were primarily the result of
increases in general and administrative payroll and related expenses,
attributable to an increase in personnel.
Engineering expenses consist mainly of engineering personnel and related
expenses and equipment costs. For the three months ended June 30, 1997, March
31, 1997 and June 30, 1997, engineering expenses were $589,000, $561,000 and
$115,000, respectively. The amount for the three months ended June 30, 1997
represented an increase of 5% and 412% over the three months ended March 31,
1997 and June 30, 1996, respectively. These expenses represented 3.2%, 4.6% and
6.4% of revenues for the three months ended June 30, 1997, March 31, 1997 and
June 30, 1996, respectively. For the six months ended June 30, 1997, December
31, 1996 and June 30, 1996, engineering expenses were $1.2 million, $547,000 and
$167,000, respectively. The amount for the six months ended June 30, 1997
represented an increase of 110% and 589% over the six months ended December 31,
1996 and June 30, 1996, respectively. These expenses represented 3.7%, 4.6% and
7.0% of revenues for the six months ended June 30, 1997, December 31, 1996 and
June 30, 1996, respectively. The increases in absolute dollars were primarily
the result of increases in engineering payroll and related expenses, due to an
increase in personnel.
The Company's loss from operations for the three months and six months
ended June 30, 1997 was ($402,000) and ($354,000), respectively, representing a
decline of $450,000 and $594,000, respectively, from the three months ended
March 31, 1997 and six months ended December 31, 1996, respectively. These
losses reflect the Company's decision to continue to
Page 14
<PAGE>
increase certain operating expenses significantly in order to increase the size
of its staff, expand its marketing efforts to enhance its brand image, purchase
larger volumes of merchandise to be sold at auction, increase its software
development efforts, and support its growing infrastructure. The Company
believes the decision to increase operating expenses will cause the Company to
experience net losses at least through the fiscal year.
FLUCTUATION IN OPERATING RESULTS
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside the Company's control. These factors include (i) the
Company's ability to attract new customers at a steady rate, manage its
inventory mix and the mix of products offered at auction, meet certain pricing
targets, liquidate its inventory in a timely manner, maintain gross margins and
maintain customer satisfaction, (ii) the availability and pricing of merchandise
from vendors, (iii) product obsolescence and pricing erosion, (iv) the amount
and timing of costs relating to expansion of the Company's operations, (v) the
announcement or introduction of new types of merchandise or customer services by
the Company, (vi) the announcement or introduction of new types of merchandise
or customer services by the Company's competitors, (vii) technical difficulties
with respect to consumer use of the auction format on the Company's Web site,
(viii) delays in revenue recognition at the end of a fiscal period as a result
of shipping or logistical problems, (ix) the level of merchandise returns
experienced by the Company , (x) consumer confidence in encrypted transactions
in the Internet environment and (xi) general economic conditions and economic
conditions specific to the Internet and electronic commerce. As a strategic
response to changes in the competitive environment, the Company may from time to
time make certain service, marketing or supply decisions or acquisitions that
could have a material adverse effect on the Company's quarterly results of
operations and financial condition. The Company also expects that, in the
future, it like other retailers may experience seasonality in its business. Due
to all of the foregoing factors, in some future quarters the Company's operating
results may fall below the expectations of securities analysts and investors. In
such event, the trading price of the Company's Common Stock would likely be
materially adversely affected.
A substantial majority of the Company's recent product deliveries have been
made by means of United Parcel Service ground delivery. As a result of the
ongoing strike by United Parcel Service drivers that began in early August, the
Company has been forced to utilize alternative delivery services. The Company
has elected to pay incremental cost of deliveries made to those customers that
purchased after the strike precluded ground delivery and before the Company had
announced to all customers that it would be forced to ship future purchases by a
more expensive alternative delivery service until the strike was resolved. As a
result, the Company has spent approximately $75,000 in incremental shipping
costs. In addition, the Company may also experience some decline in sales
volume as a result of customers' electing, prior to the conclusion of the
strike, not to purchase products on which they have to pay the higher
incremental costs of shipping.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the sale of Common Stock in the Company's April 1997 initial public offering for
approximately $14.7 million, the private sale of convertible preferred stock for
approximately $2.3 million and cash flows from operations. Net cash used in
operating activities for the six months ended June 30, 1997 was
Page 15
<PAGE>
approximately $6.1 million. The amount of net cash used in operating activities
was primarily for two reasons. First, merchandise inventory increased $5.2
million. This increase was the result of the Company's decision to expand its
Principal Sales model, which required it to invest in greater inventory
balances. Second, accounts payable decreased $1.7 million. The Company was able
to utilize a portion of the net proceeds from its initial public offering in
order to decrease accounts payable.
Net cash used in investing activities for the six ended June 30, 1997
represented purchases of property and equipment of $768,000. Net cash of $16.8
million provided by financing activities in the six months ended June 30, 1997
resulted almost entirely from proceeds received from the Company's initial
public offering, which occurred in the second quarter of 1997.
As of June 30, 1997, the Company had approximately $12.6 million of cash
and cash equivalents. The Company also has available a $4.0 million line of
credit from Silicon Valley Bank that expires on April 17, 1998./1/ As of June
30, 1997, the Company's principal commitments consisted of obligations
outstanding under its operating leases. Although the Company has no material
commitments for capital expenditures, it anticipates purchasing approximately
$500,000 of property and equipment during the remainder of 1997, primarily for
computer equipment and furniture and fixtures. As the Company continues to enter
into more transactions structured as Principal Sales, the Company will need to
continue to commit more cash to support a larger merchandise inventory. Also, as
a result of the Company's intention to offer credit to certain customers,
beginning in the third quarter of 1997, the Company may require additional cash
to support the anticipated growth in sales made on credit. The Company plans to
increase its operating expenses significantly in order to increase the size of
its staff, expand its marketing efforts to enhance its brand image, purchase
larger volumes of merchandise to be sold at auction, increase its software
development efforts and support its growing infrastructure. As a result, the
Company may experience net losses through at least the remaining quarters of
1997. Thus, the Company may well have to continue to finance its capital
expenditures, increased inventory, increased accounts receivable and some
portion of its growth in operating expenses from the proceeds of its initial
public offering. The Company believes that its current cash and cash
equivalents, borrowings under its line of credit and its cash flows from
operations, if any, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or convertible debt securities or obtain another credit facility. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available to the Company in amounts or on terms acceptable to the
Company.
- ---------
/1/ Borrowings under the line bear interest at an annual rate of 0.75% over the
bank's prime rate. Pursuant to the line of credit, Silicon Valley Bank has been
granted a continuing security interest in substantially all assets of the
Company, now owned or hereafter acquired, including intellectual property.
Pursuant to the line of credit, the Company is required to maintain certain
financial ratios (including a ratio of "quick assets" (cash, cash equivalents,
accounts receivable and investments, with maturities not to exceed 90 days) to
current liabilities (less deferred revenue) of at least 2.5 to 1, and a ratio
of total liabilities to tangible net worth of not more than 0.5 to 1), is
prohibited from incurring a monthly pre-tax loss of more than $400,000,
provided that accumulative monthly pretax losses on a rolling three month
basis do not exceed $750,000. The Company has also agreed to certain negative
covenants, including a prohibition on incurring additional indebtedness, other
than secured equipment financing debt, indebtedness to trade creditors
incurred in the ordinary course of business and debt that is subordinated to
the debt owing under the line of credit, and a prohibition, with limited
exceptions, on creating additional security interests in the assets of the
Company. In connection with the line, the Company issued the bank a five-year
warrant to purchase 8,571 shares of its Common Stock with an exercise price of
$7.00.
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<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), and No. 129, "Disclosure of Information about Capital
Structure ("SFAS No. 129")." SFAS No. 128 establishes financial accounting and
reporting standards for calculation of basic earnings per share and diluted
earnings per share. SFAS No. 128 supersedes APB No. 15 and is effective for the
periods ending after December 15, 1997, including interim periods. SFAS No.129
establishes standards for disclosing information about an entity's capital
structure. It eliminates the exemption of nonpublic entities from certain
disclosure requirements of accounting standards previously issued. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997. The Company will adopt the standards in the year ending December 31,
1997. The cumulative effect of adopting SFAS No.128 and SFAS No.129 will not
have a material impact on the financial statements for the three months ended
June 30, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for reporting and
display of comprehensive income. SFAS 131 establishes standards for disclosing
information about operating segments for public business enterprises and
supersedes FASB Statement No. 14. Both SFAS 130 and SFAS 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of SFAS 130 and SFAS 131 will not have a material effect on its
financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21A of the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth above and those discussed in the Company's Prospectus
on file with the Securities and Exchange Commission.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 17, 1996, Tredex California, Inc. ("Tredex") filed a complaint
in the Superior Court of the State of California in and for the County of Los
Angeles against a former Tredex employee for, among other claims,
misappropriation of trade secrets, intentional interference with contractual
relations, fraud and deceit, breach of fiduciary duty, unfair competition,
conspiracy, unjust enrichment and conversion (the "Claims"). Tredex subsequently
amended its complaint to name ONSALE, among others, as a defendant and served
ONSALE with a summons and complaint on January 6, 1997. Tredex alleges that
ONSALE wrongfully obtained customer and vendor lists and other proprietary
information of Tredex from such former employee. Tredex was seeking damages in
excess of $1,750,000 from all the defendants collectively. Tredex was also
seeking injunctive relief to stop the defendants from using the customer and
vendor lists and other proprietary information of Tredex. ONSALE has filed a
general denial. On June 10, 1997, ONSALE and Tredex entered into a settlement
agreement (the "Settlement Agreement") pursuant to which Tredex released the
Claims. The Settlement Agreement did not have a material adverse effect on
ONSALE's results of operations or financial condition.
On March 6, 1997, the Company filed a complaint in the Superior Court of
the State of California in and for the County of Santa Clara against a Tredex
employee and Tredex, for, among other claims, misappropriation of trade secrets,
fraud and deceit, breach of contract (only against the Tredex employee),
intentional interference with contractual relations, intentional interference
with prospective business relations, unfair competition, unjust enrichment,
conspiracy and conversion (the "March Claims"). The Company alleged that the
Tredex employee obtained marketing information, financial and technical data,
and other proprietary and confidential information of the Company while
interviewing for a sales position at the Company. The Company believed that the
Tredex employee disclosed some or all of the confidential information that he
obtained from the Company to Tredex, and that Tredex, knowing that the
information was wrongfully obtained, used the information to establish a
competing on-line auction site. The Company sought unspecified compensatory
damages as well as injunctive relief against both the Tredex employee and
Tredex. On June 10, 1997, ONSALE and Tredex entered into the Settlement
Agreement, pursuant to which the Company released the March Claims. The
Settlement Agreement did not have a material adverse effect on ONSALE's results
of operations or its financial condition.
Page 18
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Between April 1, 1997 and June 30, 1997, the Company's California
predecessor sold the following equity securities that were not registered under
the Securities Act of 1933.
<TABLE>
<CAPTION>
AGGREGATE
PURCHASE PRICE
CLASS OF TITLE OF NUMBER OF AND FORM OF
PURCHASERS DATE OF SALE SECURITIES SECURITIES CONSIDERATION
<S> <C> <C> <C> <C>
Two employee
optionees 4/1/97 and 4/2/97 Common Stock 2,784 $586
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In April 1997, the Company completed its initial public offering and issued
2,500,000 shares of its common stock to the public at a price of $6.00 per
share. The Company received approximately $12.6 million of cash, net of the
underwriting discount and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
preferred stock were automatically converted into shares of common stock. On May
21, 1997, the Company's underwriters exercised an option to purchase an
additional 375,000 shares of common stock, to cover over-allotments, at a price
of $6.00 per share. The Company received approximately $2.1 million of cash,
net of the underwriting discount and offering expenses.
In April 1997, the Company entered into an employment agreement with Dennis
Shepard, as Vice President of Operations. Alan Fisher remains Vice President of
Development and Operations, Chief Technical Officer and Director.
In July 1997, the Company announced the introduction of two new auction Web
sites - the Consumer Electronics Auction SuperSite(TM) and the Computer Products
Auction SuperSite(TM). These new properties are the first step in the Company's
strategy of expanding its merchandise offerings and simplifying the customers'
shopping experience.
Page 19
<PAGE>
In August 1997, the Company announced its plan to begin accepting paid
advertising on its Web site in the third quarter of 1997.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) The following exhibits are being filed as part of this Report:
10.20 Employment Agreement -Dennis Shepard
11.01 Calculation of Earnings Per Share
27.01 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1997.
Page 20
<PAGE>
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.
Date: August 14, 1997 By: /s/ John F. Sauerland
____________________ ___________________________
John F. Sauerland
Chief Financial Officer
and Duly Authorized Officer
Page 21
<PAGE>
Exhibit 10.20
April 28, 1997
Dennis Shepard
8285 Sturbridge Way #303
Cordova, TN 38018
Dear Dennis:
This is to confirm ONSALE's offer of employment to you at a salary of $14,583.34
per month starting April 28, 1997.
You will receive 120,000 stock options of ONSALE common stock (post-November
1st, 1996 stock split) upon board approval. The stock will vest monthly over a
four-year period after a six-month "cliff".
You will participate in ONSALE's standard benefits package as amended from time
to time. This includes a 401K plan and health insurance for yourself. You may,
at your expense, purchase coverage for additional family members under this
plan.
ONSALE will reimburse you up to $5000 in actual moving expenses.
You will also be required to sign a standard Employee Inventions and Assignment
Agreement. Your employment is 'at will', which means that you or ONSALE can
terminate your employment at any time with or without formal 'cause'.
Please sign and return a copy of this letter to indicate your acceptance of
these terms. I look forward to working with you to make ONSALE a success.
Sincerely,
/s/ Jerry Kaplan /s/ Dennis Shepard 4/28/97
Jerry Kaplan ____________________________
CEO Dennis Shepard Date
<PAGE>
Exhibit 11.01
ONSALE, INC.
CALCULATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1997 1996 1997 1996
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ (226) $ 100 $ (174) $ 115
======= ======= ======= =======
Weighted average common and common equivalent shares:
Common stock 16,356 13,883 15,844 13,883
Common stock equivalents from convertible preferred stock - - - -
and warrants using the "if converted" method - - - -
Common stock equivalents from stock options using the
"treasury stock" method - 1,443 - 1,443
------- ------- ------- -------
Shares used in calculation of net income (loss) per share 16,356 15,326 15,844 15,326
======= ======= ======= =======
Net income (loss) per share $ (0.01) $ 0.00 $ (0.01) $ 0.01
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,669
<SECURITIES> 0
<RECEIVABLES> 613
<ALLOWANCES> 0
<INVENTORY> 6,708
<CURRENT-ASSETS> 20,173
<PP&E> 1,223
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,416
<CURRENT-LIABILITIES> 2,454
<BONDS> 0
0
0
<COMMON> 19,215
<OTHER-SE> (253)
<TOTAL-LIABILITY-AND-EQUITY> 21,416
<SALES> 0
<TOTAL-REVENUES> 18,575
<CGS> 16,146
<TOTAL-COSTS> 16,146
<OTHER-EXPENSES> 2,831
<LOSS-PROVISION> (402)
<INTEREST-EXPENSE> 148
<INCOME-PRETAX> (254)
<INCOME-TAX> (28)
<INCOME-CONTINUING> (226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (226)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
