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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-26275
drkoop.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4697615
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 North Mopac, Suite 400
Austin, Texas 78731
(Address of principal executive offices)
________________
(512) 583-5667 (Registrant's telephone number, including area code)
________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
(1) Yes X No
-------- --------
(2) Yes X No
-------- --------
As of April 30, 2000 there were 34,724,249 shares of the Registrant's
common stock outstanding.
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drkoop.com, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at March 31,2000 (Unaudited) and December 31,1999................... 3
Condensed Statements of Operations for the three-month periods ended
March 31, 2000 and 1999 (Unaudited)..................................................... 4
Condensed Statements of Cash Flows for the three-months ended
March 31, 2000 and 1999 (Unaudited)..................................................... 5
Notes to Condensed Financial Statements (Unaudited).......................................... 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.......................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 26
Item 2. Changes in Securities and Use of Proceeds........................................... 26
Item 3. Defaults Upon Senior Securities..................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................................. 26
Item 5. Other Information................................................................... 26
Item 6. Exhibits and Reports on Form 8-K.................................................... 27
SIGNATURES................................................................................... 28
</TABLE>
2
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Item 1: Financial Information
drkoop.com, Inc. 05/02/00
Balance Sheets 9:00 am
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
Assets (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 23,860 $ 35,706
Trade accounts receivable, net 4,723 6,532
Other receivable -- 4,000
Prepaids and other 18,735 22,862
------------ ------------
Total current assets 47,318 69,100
------------ ------------
Property and equipment, net 12,181 10,435
Investment in HealthMagic 5,000 5,000
Intangible assets, net 2,444 2,778
Other assets 11,262 12,407
------------ ------------
Total assets $ 78,205 $ 99,720
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable $ 10,148 $ 8,197
Accrued liabilities 7,072 8,711
Leases payable 1,263 473
Related party payables 10 2
Deferred credit 2,000 2,000
Deferred revenue 3,833 3,415
------------ ------------
Total current liabilities 24,326 22,798
------------ ------------
Leases payable, less current portion 1,438 605
Deferred credit 4,500 5,000
------------ ------------
Total liabilities 30,264 28,403
------------ ------------
Stockholders' equity:
Common stock, par value $.001; 75,000,000 shares authorized; 31,182,744
and 30,508,324 shares issued and outstanding at March 31, 2000
and December 31, 1999 31 30
Additional paid-in capital 151,000 149,447
Deferred stock compensation (2,620) (2,447)
Accumulated deficit (100,470) (75,713)
------------ ------------
Total stockholders' equity 47,941 71,317
------------ ------------
Total liabilities and stockholders' equity $ 78,205 $ 99,720
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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04/20/00
7:22pm
drkoop.com, Inc.
Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Content subscription and software license $ 829 $ 216
Advertising and sponsorship 3,909 188
E-commerce and other 5 --
-------- --------
4,743 404
-------- --------
Operating expenses:
Production, content and product development 5,786 1,035
Sales and marketing 19,365 2,048
General and administrative 4,002 1,104
Amortization of deferred stock compensation 652 481
-------- --------
Total operating expenses 29,805 4,668
-------- --------
Loss from operations (25,062) (4,264)
Interest income (expense) 305 (31)
-------- --------
Net loss (24,757) (4,295)
Accretion of redeemable securities to fair value -- (10,936)
Dividend to preferred stockholders -- (9,147)
-------- --------
Loss attributable to common stockholders $(24,757) $(24,378)
======== ========
Basic net loss per share attributable
common stockholders $ (0.80) $ (2.84)
======== ========
Weighted average shares used in computing basic
net loss per share attributable to common
stockholders 30,799 8,569
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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04/20/00
6:59pm
drkoop.com, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
Operating Activities: 2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Net loss $(24,757) $ (4,295)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,767 259
Amortization of deferred stock compensation 652 481
Provision for doubtful accounts 125 --
Interest accretion on convertible notes payable -- 20
Stock issued for services 346
Changes in assets and liabilities:
Accounts receivable 1,684 (365)
Other receivable 4,000 1
Prepaids and other assets 2,847 (91)
Accounts payable 1,950 56
Accrued liabilities (1,639) 807
Related party payables 8 (1,089)
Deferred revenue 418 544
Deferred credit (500) --
-------- --------
Cash used in operating activities (11,099) (3,672)
-------- --------
Investing Activities:
Purchase of furniture, fixtures and equipment (1,337) (120)
-------- --------
Cash used in investing activities (1,337) (120)
-------- --------
Financing Activities:
Proceeds from issuance of preferred stock, net -- 3,500
Proceeds from issuance of convertible notes payable -- 2,300
Proceeds from exercise of stock options 185 --
Proceeds from issuance of common stock, net 405 13
-------- --------
Cash provided by financing activities 590 5,813
-------- --------
Increase / (decrease) in cash and cash equivalents (11,846) 2,021
Cash and cash equivalents at beginning of period 35,706 --
-------- --------
Cash and cash equivalents at end of period $ 23,860 $ 2,021
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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drkoop.com, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - ORGANIZATION
drkoop.com, Inc. (the "Company"), a Delaware corporation, operates an Internet-
based consumer healthcare network, consisting of an interactive Web site
providing consumers with healthcare information and services, as well as
affiliate relationships with portals, other Web sites, local healthcare
organizations and traditional media outlets.
Effective June 11, 1999 the Company completed an initial public offering of
10,781,250 shares, including the underwriter's over allotment, at $9 per share.
Offering proceeds, net of aggregate expenses to the Company (including
underwriters' discount) totaled approximately $88.5 million. Upon closing of
the initial public offering, each outstanding share of the Company's convertible
Series A and C preferred stock and mandatorily redeemable convertible (Series B)
preferred stock were automatically converted into shares of common stock. The
conversion resulted in the issuance of 8,594,835 shares of common stock,
including the issuance of 1,345,185 shares of common stock to satisfy in full a
purchase option and related anti-dilution adjustment rights. An additional
916,908 shares of common stock were issued upon conversion of certain
convertible notes payable.
NOTE 2 - BASIS OF PRESENTATION
The condensed financial statements included herein are unaudited and reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto for the year ended December 31, 1999, which are
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission (File No. 333-73459). The results of operations for the
three month periods ended March 31, 2000 and 1999 are not necessarily indicative
of results that may be expected for any other interim period or for the full
fiscal year.
NOTE 3 - NET LOSS PER SHARE
Diluted net loss per share has not been presented as the effect of the assumed
exercise of stock options and warrants for common stock shares is antidilutive
due to the Company's net loss.
The following pro forma calculation of net loss per share for the three months
ended March 31, 1999, assumes the conversion of all outstanding convertible
notes payable, preferred stock and mandatorily redeemable convertible preferred
stock into common stock upon the Company's initial public offering using the if-
converted method from their respective dates of issuance. This presentation is
deemed necessary as the Company's historical capital structure is not indicative
of the current capital structure due to the automatic conversion of all shares
of convertible notes payable, preferred stock and mandatorily redeemable
convertible preferred stock into common stock concurrent with the closing of the
Company's initial public offering.
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------
<S> <C> <C>
(in thousands, except per share data) 2000 1999
------- -------
Net Loss $ (24,757) $ (4,295)
================= =================
Basic and diluted:
Shares used in computing basic and diluted net loss 30,799 8,569
================= =================
</TABLE>
6
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<TABLE>
<CAPTION>
<S> <C> <C>
Basic and diluted net loss per share $ (0.80) $ (0.50)
================= =================
Pro forma:
Shares used above 30,799 8,569
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible notes payable and
preferred stock - 7,778
----------------- -----------------
Shares used in computing pro forma basic and diluted net
loss per share 30,799 16,347
================= =================
Pro forma basic and diluted net loss per share $ (0.80) $ (0.26)
================= =================
</TABLE>
NOTE 4 - COMMITMENTS & CONTINGENCIES
Portal Agreements
GO.com (Infoseek and Buena Vista Internet Group)
On April 9, 1999, the Company entered into agreements with Infoseek Corporation
and the Buena Vista Internet Group (collectively, "GO.com" or the "GO network"),
a unit of The Walt Disney Company, under which the Company became the exclusive
provider of health and related content on three Web sites of the Go Network:
GO.com Health Center, ESPN.com Training Room and the Family.com Health Channel.
Under the GO.com agreement, the Company also became the premier health content
provider for ABCnews.com. Under these agreements, users on the Go Network were
to be able to access various health information, services, interactive tools and
commerce opportunities through a co-branded Web site served by the Company.
The term of both agreements was originally three years with the ability to
terminate the relationship after two years. The Company was scheduled to pay
Infoseek and the Buena Vista Internet Group $57,900,000 in total consideration
consisting of cash and warrants to purchase 775,000 shares of common stock at an
exercise price of $8.60 per share over the full three year term.
The Company recognized total expense of $7,200,000 for the year ended December
31, 1999 and $2,700,000 for the quarter ended March 31, 2000.
See Footnote 6 Subsequent Events for additional information.
America Online
Effective July 1, 1999, the Company and America Online, Inc. ("AOL") signed a
four-year Interactive Services Agreement ("ISA") pursuant to which the Company
was designated as AOL's premier provider of healthcare content. The ISA
obligated the Company to make carriage payments aggregating $89,000,000 in cash
over a four-year period. Concurrently, the Company and AOL entered into a
four-year Development and Services Agreement ("DSA") pursuant to which the
Company is to provide specified software development services to AOL for the
term of the agreement and AOL is to pay the Company $8.0 million. In addition,
the Company provided AOL 1,570,932 immediately vested warrants (the "time
warrants") to purchase drkoop.com, Inc. common stock at an exercise price of
$15.94 per share and the right to earn up to an additional 4,320,063 warrants
based on performance (the "performance warrants"). As of March 31, 2000, the
Company had made an initial cash payment of $24,250,000 with a remaining cash
payment obligation under the ISA totaling $65,000,000 and the Company had
received payment in full for the $8.0 million under DSA.
7
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The immediately vested time warranted allowed AOL to purchase 1,570,932 shares
of the Company's common stock. The immediately vested warrants were exerciseable
at any time on or after June 30, 2000 and on or prior to June 30, 2008, subject
to limited exceptions relating to a change in control of drkoop.com or the early
termination of the ISA between AOL and drkoop.com.
The Company recognized total carriage and warrant expense, net of fees earned
under the DSA, of $12,125,000 for the year ended December 31, 1999 and
$6,062,500 during the quarter ended March 31, 2000.
See Footnote 6 Subsequent Events for additional information.
Legal Matters
On April 12, 1999, a civil complaint was filed against the Company in the
District Court of Travis County, Texas, 126 Judicial District, Case No. 99-
04294. In the lawsuit, plaintiff attempted to allege causes of action including
fraud, promissory estoppel, negligence, misrepresentation, breach of contract,
conversion, stock fraud, defamation and misrepresentation. The suit was settled
in February 2000.
The Company is also involved in other claims and disputes that are incidental to
the regular conduct of our business and are not presently believed to be
material.
NOTE 5 - SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- -----------------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Cash and Noncash Investing and Financing
Activities:
- -----------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 58 $ -
- -----------------------------------------------------------------------------------------------------------------
Deferred stock compensation related to options granted $ 826 $ 1,854
- -----------------------------------------------------------------------------------------------------------------
Accretion of redeemable securities to fair value $ - $ 10,936
- -----------------------------------------------------------------------------------------------------------------
Issuance of preferred stock for investment in affiliate $ - $ 5,000
- -----------------------------------------------------------------------------------------------------------------
Issuance of preferred stock for intangible asset $ - $ 4,000
- -----------------------------------------------------------------------------------------------------------------
Obligation to issue common stock pursuant to option
cancellation agreement $ - $ 9,147
- -----------------------------------------------------------------------------------------------------------------
Acquisition of assets under capital lease $ 1,899 $ -
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 - SUBSEQUENT EVENTS
Portal Agreements
Go.com Network (Infoseek and Buena Vista Internet Group)
Effective April 15, 2000 Infoseek Corporation, the Buena Vista Internet Group
and the Company entered into an amendment to the original agreements. In
exchange for additional cash payments of $5.3 million, an additional 820,000
warrants to purchase common stock at an exercise price of $1.25, and
acceleration of the vesting of the initial warrants, the original agreements
will terminate effective July 15, 2000 without further obligation for either
party. The warrants are to be exercisable on or after July 15, 2000 and will be
recorded at a fair value of $1.91 per share which was calculated at the time of
issuance using the Black-Scholes option-pricing model with the following
weighted average assumptions: zero dividend yield; 1.0 volatility; risk-free
interest rate of 5.0% and a legal life of 3 years.
8
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America Online
Effective April 12, 2000 the Company and AOL entered into a First Amendment to
Interactive Services Agreement ("First Amendment"). In exchange for 3.5 million
shares of drkoop.com, Inc. common stock, the Company was relieved of any further
cash payments to AOL under the ISA; all existing warrant agreements, vested and
unvested, were canceled; and the Company will receive reduced carriage for a
twelve-month period.
Legal Matters
HealthMagic, Inc.
Effective April 18, 2000 the Company and HealthMagic, Inc. ("HMI") entered into
a Settlement Agreement and Mutual General Releases ("Settlement"). Under the
terms of the Settlement Agreement the business relationship between the Company
and HMI is terminated; HMI will transfer back to the Company the previously
acquired intellectual property; the Company will rescind and return its 10%
ownership of HMI; and the Company agreed that it will not launch a Personal
Medical Record (as defined in its agreements with HMI) for a period of nine
months after the date of the Settlement subject to change in control exception.
No cash payment was made and no drkoop.com, Inc. equity securities were issued
in connection with the termination of the relationship. Our investment in HMI of
$5 million will be written off in the second quarter 2000. Also in connection
with the termination of the Health Magic relationship, Mardian Blair resigned
from the Company's board of directors and Dr. C. Everett Koop resigned from the
board of HMI.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of operations
should be read in conjunction with our condensed financial statements and the
related notes thereto included elsewhere in this report. This document contains
certain forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. When used in
this document, the words "expects," "anticipates," "intends" and "plans" and
similar expressions are intended to identify certain of these forward-looking
statements. The cautionary statements made in this document should be read as
being applicable to all related forward-looking statements wherever they appear
in this document. Our actual results could differ materially from those
discussed in this document. We do not intend to update any of the forward-
looking statements after the date of this filing on Form 10-Q to conform these
statements to actual results.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed in our Form 10-K, filed March 30,
2000.
Overview
Our company operates drkoop.com, an Internet-based consumer healthcare network.
Our network consists of a consumer-focused interactive Web site that provides
users with comprehensive healthcare information and services, as well as
affiliate relationships with portals, other Web sites, healthcare organizations
and traditional media outlets. Our Web site, www.drkoop.com, is a healthcare
portal which integrates dynamic healthcare content on a wide variety of
subjects, interactive communities and tools as well as opportunities to purchase
healthcare related products and services on-line.
Revenues
We derive our revenues primarily from advertising and sponsorship arrangements
and content subscription and software licensing fees. To a lesser extent, we
generate lesser revenues from electronic commerce through alliances with certain
retailers of pharmaceuticals and related products and through providing
insurance companies users with the opportunity to sell products and services to
our users.
Advertising revenues are derived primarily from short-term advertising contracts
in which we typically guarantee a minimum number of user "impressions" to be
delivered over a specific period of time for a fixed fee. Impressions are the
number of times that users on our Web site view an advertisement. We recognize
advertising revenues at the lesser of the ratio of impressions delivered over
the guaranteed impressions or the straight-line rate over the term of the
contract, provided that no significant obligations remain and collection of the
resulting receivable is probable. We have utilized a combination of third-party
firms and in-house staff for the sales and insertion of advertisements on the
drkoop.com Web site. Advertising rates, measured on a cost per thousand
impressions basis, are dependent on whether the impressions are for general
rotation throughout the drkoop.com Web site or for target audiences and
properties within specific areas of the Web site. In addition, some of our
advertising is performance-based whereby payment is based on "click-throughs" to
the customer's Web site.
Sponsorship revenues are derived from long-term contracts, generally ranging
from twelve to fifty months, in which we commit to provide sponsors enhanced
promotional opportunities that go beyond traditional banner advertising.
Sponsorships are designed to support broad marketing objectives, including
branding, awareness, product introductions, research and transactions.
Sponsorship arrangements typically include the delivery of a guaranteed minimum
number of impressions and the design and implementation of customized pages on
the Web site that enhance the promotional objective of the sponsor. Costs
associated with the development of the web pages are minimal and are expensed
when incurred. Sponsorship revenues are recognized at the lesser of the ratio of
impressions delivered over the total guaranteed impressions or the straight-line
rate over the term of the contract, provided that no significant obligations
10
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remain and collection of the resulting receivable is probable. Additionally,
dependent upon the complexity of an advertising or sponsorship revenue
arrangement, we may provide initial site design consulting and engineering
services that require the development and implementation of specific Web site
enhancements prior to launching a co-branded site. Revenues and related costs
for initial site design and engineering services are recognized under contract
accounting.
Content subscription and software licensing fees are facilitated through our
Community Partnership Program ("CPP") and from the sale of calculators.
Subscriptions to our Community Partnership Program generally vary from one to
three years. Under this program, we develop co-branded Internet pages and
software consisting of visual icons containing embedded links back to our
drkoop.com Web site for local healthcare organizations, such as hospitals and
payor organizations. Advance billings and collections relating to future
services are recorded as deferred revenue and recognized when revenue is earned.
Sales of software licenses to CPP affiliates are recognized into revenue upon
shipment of the software, provided that the portion of the contract allocated to
the software license is based upon vendor specific objective evidence of fair
value, and collectibility is probable. Content subscription revenue is
recognized ratably over the term of the CPP contract, generally ranging from one
to three years. Software licenses are also sold as a stand-alone product for
both calculators and under the Health Links program independent of the Community
Partnership Program.
Contract research organizations offer comprehensive clinical trial services
which are the basis for obtaining regulatory approval for drugs and medical
devices. The identification and enrollment of qualified individuals into these
studies is usually a time consuming and expensive process. We created a
Clinical Research Center, a portion of our website designed to educate consumers
about clinical trials, including how to find and enroll in an appropriate trial
if the individual and their physician believe that it is a viable therapy
option. We expect to receive transaction fee revenues for assisting contract
research organizations in the identification and enrollment of qualified
individuals into studies. Revenues to date have been nominal.
We have begun to generate electronic commerce revenues through alliances with
certain retailers of pharmaceuticals and related products and to provide
insurance companies with the opportunity to sell products and services to our
audience. We do not provide any of the goods or services offered. We receive
compensation in the form of transaction fees or anchor tenant rental fees from
third parties who have entered into preferred provider arrangements with us.
Revenues from our share of the proceeds from the commerce partner's transactions
are recognized by us upon notification from the commerce partner of sales
attributable to users from the drkoop.com website. E-commerce revenues were
nominal for the three months ended March 31, 2000 and 1999.
From time to time, and dependent upon the complexity of an advertising or
sponsorship revenue arrangement, we provide initial site design consulting and
engineering services which require the development and implementation of
specific Web site enhancements prior to launching a co-branded site. Revenues
and related costs for initial site design and engineering services are
recognized under contract accounting.
As our market develops, seasonal and cyclical patterns may emerge. These
patterns may affect our revenues. We cannot yet predict to what extent our
operations will prove to be seasonal.
Portal Agreements
After the end of the quarter we made material changes to our relationships with
GO.com and AOL. Please see footnote 6 to the Condensed Financial Statements.
11
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Results of Operations
Comparison of the three months ended March 31, 2000 to the three months ended
March 31, 1999
Revenues. Revenues increased to $4.7 million for the three months ended March
31, 2000, as compared to $404,000 for the comparable period of 1999. Revenue
from content subscription and software licenses for the quarter ended March 31,
2000 totaled $829,000 or 18% of total revenues, as compared to $216,000, or 53%
of total revenues for the quarter ended March 31, 1999. All content
subscription and software license revenue is considered recurring revenue. The
increase in content subscription and software license revenue is attributable to
the growth of the Community Partner Program during 1999 and into 2000, resulting
in a total of 32 partners at the end of March 2000, as compared to three
partners at the end of March 1999. Additionally, in December 1999, we entered
into a content and tools syndication agreement with a company in Australia.
Revenue recognized under this agreement represents $282,000, or 6% of total
revenue for the quarter ended March 31, 2000.
12
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Advertising and sponsorship revenues totaled $3.9 million, or 82% of total
revenues for the quarter ended March 31, 2000 as compared to $188,000, or 47% of
total revenues, for the same period in 1999. Included in advertising and
sponsorship revenues were recurring revenues from sponsorship agreements of $2.9
million, or 61% of total revenues, for the quarter ended March 31, 2000, as
compared to $58,000, or 14% of total revenues for the same period during 1999.
The remaining advertising revenues of $946,000, or 20% of total revenues for the
quarter ended March 31, 2000 and $130,000, or 32% of total revenues for the
quarter ended March 1999, were derived from non-recurring short-term advertising
and sponsorship arrangements. The increase in advertising and sponsorship
revenues was primarily due to an increase in the number of advertising
arrangements combined with an increase in traffic to our Web site resulting in a
higher number of impressions delivered.
Other revenues totaled $5,000 and $500, for the quarters ended March 31, 2000
and 1999, respectively. Other revenues consist primarily of fees from e-
commerce transactions.
Included in content subscription and software licensing revenues are barter
transactions that accounted for $30,000 and $32,000 for the three months ended
March 31, 2000 and 1999, respectively. Barter revenues accounted for $97,000 and
$20,000 of the advertising and sponsorship revenues for the three months ended
March 31, 2000 and 1999, respectively. In total, barter revenues represented
$127,000, or 3%, and $52,000, or 13%, of total revenues for the quarters ended
March 31, 2000 and 1999, respectively.
Production, content and product development expenses. Production, content and
product development expenses consist primarily of salaries and benefits,
contract labor and consulting fees related to technology development and other
costs related to content acquisition and licensing, software development,
application development and Web site operations expense. Production, content
and product development expense increased by $4.8 million, or 459%, from $1.0
million for the quarter ended March 31, 1999 to $5.8 million for the quarter
ended March 31, 2000. The increase in production, content and product
development costs was primarily due to the addition of personnel, resulting in
higher salaries, benefits and travel costs, combined with an increase in content
licensing required as our Web site has continued to develop and expand. We
believe that in order to remain competitive, significant investments in content
development and operating infrastructure will be required; therefore, we expect
that production, content and product development expenses will continue to
increase in absolute dollars for the foreseeable future.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
portal fees, web-based advertising, salaries and related costs, commissions,
general advertising and other related expenses. Sales and marketing expense
increased by $17.3 million, from $2.1 million to $19.4 million for the quarters
ended March 31, 1999 and 2000, respectively. The primary reasons for the
increases were costs associated with the distribution agreements with major
portals totaling $9.0 million for the three months ended March 31 2000, as
compared to $67,000 for the same period in 1999. Advertising and promotion
expenses for the drkoop.com Web site totaled $6.2 million for the three months
ended March 31, 2000, as compared to $999,000 for the three months ended March
31, 1999. Additionally, we experienced significant growth in the number of
sales and marketing personnel, resulting in salary and related expenses of
approximately $1.8 million for the three months ended March 31, 2000, as
compared to $553,000 the three months ended March 31, 1999. We anticipate that
sales and marketing expenses will decrease significantly, as our portal
agreements have been amended during April 2000, resulting in total future cash
outlays of $5.3 million and issuance of 3.5 million shares of our common stock
and warrants to acquire 820,000 shares of common stock.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including executive, finance, accounting, investor relations, human resources,
facilities and fees for professional services. General and administrative
expenses increased by $2.9 million, or 264%, from $1.1 million to $4.0 million
for the quarters ended March 31, 1999 and 2000, respectively. The primary
reasons for the increases were, increased professional fees, increased salaries
and related expenses and the amortization of the intangible assets. We
anticipate that general and administrative expenses will remain constant or
decrease as the operating infrastructure is currently in place.
13
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Deferred stock compensation expense. We have recorded non-cash deferred stock
compensation of $826,000 and $3.1 million during the periods ended March 31,
2000 and 1999, respectively, for the difference between the exercise price and
the fair market value of certain stock options granted by us to our employees.
The deferred stock compensation is being amortized over the four-year vesting
period of such options. Of the total deferred stock compensation, $652,000 and
$481,000 were amortized in the three months ended March 31, 2000 and 1999,
respectively.
Net interest income. Net interest income includes interest income from our
cash balances and interest expenses related to our financing obligations,
particularly on the convertible notes payable prior to conversion and capital
leases on computer equipment. Net interest income was $305,000 for the three
months ended March 31, 2000 as compared to net interest expense of $31,000 for
the three months ended March 31, 1999. The increase was due to higher average
net cash and cash equivalents balances resulting from the investment of the
proceeds from our IPO completed in June 1999.
Income tax. We have incurred net losses to date. As of March 31, 2000, we had
net operating loss carryforwards of $87.1 million for financial reporting
purposes. We have recorded a valuation reserve equal to the amount of the
carryforward due to the uncertain realization of these tax benefits.
Liquidity and Capital Resources
Until our initial public offering in June 1999, which raised net proceeds of
$88.5 million, we financed our operations primarily through equity sales and
convertible notes payable debt financing. At March 31, 2000 we had $23.9
million in cash and cash equivalents and working capital of $23.0 million. We
require additional financing to fund operations.
Cash used in operating activities for the three months ended March 31, 2000 was
$11.1 million. The cash used in operating activities was attributable to funding
net operating losses offset by non-cash charges for amortization of deferred
stock compensation, depreciation and amortization. These amounts were further
offset by decreases in accounts receivable, other receivable, prepaids and other
assets and increases in accounts payable. Cash used in operating activities for
the three months ended March 31, 1999 was $3.7 million. The cash used in
operating activities was attributable to funding net operating losses and, also
reflected increases in accounts receivable, accrued expenses and deferred
revenue, offset by decreases in related party payables. Based on our
well-publicized need for additional capital, we have experienced extended sales
and receivable cycles, and reduced trade credit availability.
Cash used in investing activities was $1.3 million and $120,000 for the quarters
ended March 31, 2000 and 1999, respectively. Net cash used for investing
activities for these periods consisted primarily of capital expenditures for
computer equipment, software and furniture and fixtures.
Cash provided by financing activities was $591,000 and $5.8 million for the
quarters ended March 31, 2000 and 1999, respectively. Net cash provided by
financing activities resulted primarily from proceeds from the issuance of stock
under our employee stock purchase plan and the exercise of stock options. The
$5.8 million in proceeds received during the first three months of 1999 was from
the issuance of preferred stock and convertible notes payable.
As of March 31, 2000, our primary source of liquidity was the $23.9 million of
cash and cash equivalents on hand. As of March 31, 2000 we had no bank credit
facilities.
We expect a significant use of cash during the Year 2000 as we continue the
procurement of content and continuation of marketing efforts for the drkoop.com
Web site. We are actively pursuing other sources of new cash financing.
Additionally, we have retained the investment-banking firm of Bear, Stearns &
Co., Inc. to explore available strategic alternatives which may include a
business combimation. If additional funds are raised through the issuance of
equity securities, our stockholders may experience significant dilution.
Furthermore, there can be no assurance that additional financing will be
available when needed or that if available, such financing will include terms
favorable to our stockholders or us. If such financing is not available when
required or is not available on acceptable terms, we may be unable to develop or
enhance our products and services, take advantage of business opportunities,
respond to competitive pressures, or meet operating obligations, any of which
could have a material adverse effect on our business,
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financial condition and results of operations. See "Risk Factors That May Affect
Future Results and Safe Harbor Statement" below.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements".
In SAB 101, the SEC staff expresses its view regarding the appropriate
recognition of revenue with regard to a variety of circumstances, some of which
are of particular relevance to us. The adoption of SAB 101 is not expected to
have a material impact on us.
Impact of the Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
In preparation for the year 2000, we conducted a comprehensive review of both
information technology and non-information systems to ensure that they were Year
2000 compliant. Significant information technology systems include its
production system, composed of the servers, networks and software that comprise
the underlying technical infrastructure that runs our business, and various
internal office systems. Significant non-information technology systems include
the telephone systems. Because we are a relatively new business, the majority
of our own hardware and software has been acquired or developed within the last
two years, during which time there was a high awareness of Year 2000 issues.
We have operated and evaluated our internal IT and non-IT systems since January
1, 2000, and have not identified any errors or experienced any system
malfunctions. We have not been informed of any Year 2000 problems experienced by
any of our vendors or other third parties on whom our operations rely. We will
continue to monitor our systems to assess whether we are at risk for any Year
2000 compliance issues. The costs associated with correcting our non-compliant
IT systems and non-IT systems have not been material.
However, it is our opinion that it is too soon to conclude that there will not
be any problems arising from the Year 2000 problem, particularly with respect to
third parties. We are continuing to monitor our operations, our significant
vendors and other third parties for Year 2000 problems. We do not believe at
this time that potential Year 2000 issues will materially affect the our
business, although no assurance can be given that this will be the case.
Risk Factors That May Affect Future Results and Safe Harbor Statement
Investors are cautioned that this Form 10-Q contains forward-looking statements
that involve risks and uncertainties, including the following: (i) the
Company's plans, strategies, objectives, expectations and intentions are subject
to change at any time at the discretion of management and the Board of
Directors; (ii) the Company's plans and results of operations will be affected
by the Company's ability to manage its growth and working capital and its
ability to finance future operations; (iii) the Company's business is highly
competitive and the entrance of new competitors or the expansion of the
operations by existing competitors in the Company's markets could adversely
affect the Company's plans and results of operations; and (iv) the risk factors
identified below are not represented to be a comprehensive list. In addition,
the Company identifies the risk factors discussed below which may affect the
Company's actual results and may cause actual results to differ materially from
those contained in forward looking statements.
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Risks Related to Our Business
Limited Operating History and Lack of Profitability
Since inception, we have incurred significant losses and negative cash flow, and
as of March 31, 2000 we had an accumulated deficit of $100 million. We have not
achieved profitability and expect to continue to incur operating losses for the
foreseeable future as we fund operating and capital expenditures in the areas of
expansion of our network, advertising, brand promotion, content development,
sales and marketing, and operating infrastructure. Our business model assumes
that consumers will be attracted to and use health information and related
content available on our on-line network which will, in turn, allow us the
opportunity to sell advertising designed to reach those consumers. Our business
model also assumes that those users will access important healthcare needs
through electronic commerce and that local healthcare participants will
affiliate with us. This business model is not yet proven and we cannot assure
you that we will ever achieve or sustain profitability or that our operating
losses will not increase in the future. We also cannot assure you that we can
obtain the financing necessary to execute on this plan. See "Quantitative and
Qualitative Disclosure About Market Risk" elsewhere in this Report on Form 10-Q
and in our Form 10-K for the year ended December 31, 1999.
Our business is difficult to evaluate because we have an extremely limited
operating history.
We were incorporated in July 1997 and launched our Internet operations in July
1998. Accordingly, we have an extremely limited operating history. An investor
in our common stock must consider the risks, uncertainties, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets,
including the Internet market. These risks and difficulties include our ability
to:
. attract a larger audience of users to our Internet-based consumer
health network;
. increase awareness of our brand;
. strengthen user loyalty and increase the number of registered users;
. offer compelling on-line content, services and e-commerce
opportunities;
. maintain our current, and develop new, affiliate relationships;
. attract a large number of advertisers who desire to reach our users;
. respond effectively to the offerings of competitive providers of
health information on the Internet;
. continue to develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We also depend on the growing use of the Internet for advertising, commerce and
communication, and on general economic conditions. We cannot assure you that our
business strategy will be successful or that we will successfully address these
risks or difficulties. If we fail to address adequately any of these risks or
difficulties our business would likely suffer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above and our
financial statements for detailed information on our extremely limited operating
history.
Our ability to raise further financing is uncertain.
We need to raise additional funds to finance continued business operations
including to:
. fund operations, including marketing expenditures;
. develop new or enhance existing editorial content, features or
services;
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. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders. The market for securities of consumer-
oriented Internet companies is presently very depressed. Thus, we cannot assure
you that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance editorial content, features or services, or
otherwise respond to competitive pressures would be significantly limited. See
above for "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. If we
have a shortfall in revenues in relation to our expenses, or if our expenses
precede increased revenues, then our business would be materially adversely
affected. This would likely affect the market price of our common stock in a
manner which may be unrelated to our long-term operating performance.
Important factors which could cause our results to fluctuate materially include:
. our ability to attract and retain users;
. our ability to attract and retain advertisers and sponsors and
maintain advertiser and sponsor satisfaction;
. traffic levels on our Internet site;
. our ability to attract and retain customers and maintain customer
satisfaction for our existing and future e-commerce offerings;
. new Internet sites, services or products introduced by us or our
competitors;
. the level of Internet and other on-line services usage;
. our ability to upgrade and develop our systems and infrastructure
and attract new personnel in a timely and effective manner;
. our ability to successfully integrate operations and technologies from
any acquisitions, joint ventures or other business combinations or
investments; and
. technical difficulties or system downtime affecting the operation of
our Web site.
Our revenues for the foreseeable future will remain dependent on user traffic
levels, advertising and e-commerce activity on drkoop.com and the level of
affiliate subscriptions. Such future revenues are difficult to forecast. In
addition, we plan to increase our sales and marketing operations, obtain broader
distribution for our service, expand and develop content and upgrade and enhance
our technology and infrastructure development in order to support our growth.
Many of the expenses associated with these activities--for example, personnel
costs, portal fees, and technology and infrastructure costs--are relatively
fixed in the short-term. We may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall, in which case our results of operations
would suffer. We experienced such an unexpected shortfall in the first quarter.
We must establish, maintain and strengthen our brand in order to attract users
to our network and generate advertising, sponsorship and e-commerce revenue.
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In order to expand our audience of users and increase our on-line traffic, we
must establish, maintain and strengthen our brand. For us to be successful in
establishing our brand, healthcare consumers must perceive us as a trusted
source of health information, and advertisers, merchants and manufacturers must
perceive us as an effective marketing and sales channel for their products and
services. We expect that we will need to increase substantially our marketing
budget in our efforts to establish brand recognition and brand loyalty. Our
business could be materially adversely affected if our marketing efforts are not
productive or if we cannot strengthen our brand.
In addition, a key element of our strategy to establish, maintain and strengthen
our brand is to encourage consumers to associate us with Dr. C. Everett Koop.
We believe that consumers consider Dr. C. Everett Koop to be a trustworthy and
credible leader in the healthcare field. We cannot assure you, however, that
Dr. C. Everett Koop will maintain this reputation, any damage to which could
materially adversely impact our business. In addition, if our relationship with
Dr. C. Everett Koop terminates for any reason, we would need to change the name
of our website and devote substantial resources towards building anew marketing
and brand strategy.
Key elements of our marketing and brand building strategies are dependent on our
relationship with Dr. C. Everett Koop.
A key element of our strategy is to associate our company with former U.S.
Surgeon General C. Everett Koop, Chairman of the Board of our company and a
person who we believe is viewed by consumers as a trustworthy and credible
leader in the healthcare field. We are a party to an amended and restated
agreement, dated August 30, 1999, with Dr. C. Everett Koop which permits us to
use his image, name and likeness in connection with health-related services and
products. Under this agreement, our use of Dr. C. Everett Koop's name, image or
likeness is subject to his prior written approval of the resulting products,
which may not be unreasonably withheld. As consideration for the amendment and
extension of the Koop agreement, we granted Dr. C. Everett Koop options to
purchase 214,400 shares of common stock for an exercise price of $17.88 per
share. The Koop agreement is exclusive and for a term of five years, subject to
automatic renewal for additional five-year terms unless it is terminated by
either party within 120 days of the end of each term. If the Koop Agreement is
terminated other than due to a breach or default by us, we will have the right
on a non- exclusive basis for three years following the end of the term to
rebrand and sell approved products bearing the name, image or likeness of Dr. C.
Everett Koop. If we default in our obligations and do not promptly cure the
default, Dr. C. Everett Koop may terminate the Koop agreement, no rebranding
period will apply and we would lose all rights to use Dr. C. Everett Koop's name
and likeness on the 90th day after such termination. Dr. C. Everett Koop may
also terminate the Koop agreement upon a change in control of our company. Thus,
he will have significant influence over any such transaction.
If our agreement with Dr. C. Everett Koop were terminated prior to the end of
its current term or not renewed at the end of its current term, we would need to
change the name of our website and devote substantial resources towards building
a new marketing and brand strategy. Without our ability to use Dr. C. Everett
Koop's name and likeness or Dr. C. Everett Koop's participation in our business,
we may not be able to continue to attract a significant amount of user traffic
and advertisers to our Web site. If Dr. C. Everett Koop ends his affiliation
with our company, we could suffer a significant loss of credibility and trust
with health consumers as a result. Any development that would cause Dr. C.
Everett Koop to exercise his right to terminate his relationship with our
company or which otherwise would cause us to lose the benefits of our
affiliation with him would have a material adverse effect on our business,
results of operation and financial condition. We do not maintain "key person"
life insurance for Dr. C. Everett Koop or any of our personnel.
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In order to attract and retain our audience of users, we must provide health
content, tools and other features which meet the changing demands of those
users.
One of our fundamental business objectives is for drkoop.com to be a trusted
source for health information and services. As with any form of consumer-
oriented media, we have to provide editorial content and other features such as
interactive tools, that consumers demand in order to continue to attract and
retain our audience of users. We expect that competitive factors will create a
continuing need for us to retain, improve and add to our editorial content,
interactive tools and other features. We will not only have to expend
significant funds and other resources to continue to improve our network, but we
must also properly anticipate and respond to consumer preferences and demands.
Competition for content will likely increase the fees charged by high quality
content providers. The addition of new features will also require that we
continue to improve the technology underlying our Web site. These requirements
are significant, and we may fail to execute on them quickly and efficiently. If
we fail to expand the breadth of our offerings quickly, or these offerings fail
to achieve market acceptance, our business will suffer significantly.
Our business model relies on Internet advertising and sponsorship activities
which may not be effective or profitable marketing media.
Our future is highly dependent on increased use of the Internet as an
advertising medium. We expect to derive a substantial portion of our revenues
from advertising and sponsorships. To date, this revenue has not been adequate
to fund our operations. The Internet advertising market is new and
rapidly evolving, and we cannot yet predict its effectiveness as compared to
traditional media advertising. As a result, demand and market acceptance for
Internet advertising solutions is uncertain. Most of our current or potential
advertising customers have little or no experience advertising over the Internet
and have allocated only a limited portion of their advertising budgets to
Internet advertising. The adoption of Internet advertising, particularly by
those entities that have historically relied upon traditional media for
advertising, requires the acceptance of a new way of conducting business,
exchanging information and advertising products and services. Such customers may
find Internet advertising to be less effective for promoting their products and
services relative to traditional advertising media. We cannot assure you that
the market for Internet advertising will continue to emerge or become
sustainable. If the market for Internet advertising fails to develop or develops
more slowly than we expect, then our ability to generate advertising revenues
would be materially adversely affected. The longer it takes for this market to
develop, the more financing we will require.
Various pricing models are used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard,
thereby making it difficult to project our future advertising rates and
revenues. Our advertising revenues could be adversely affected if we are unable
to adapt to new forms of Internet advertising. Moreover, "filter" software
programs are available that limit or prevent advertising from being delivered to
an Internet user's computer. Widespread adoption of this software could
adversely affect the commercial viability of Internet advertising.
In order to execute our growth plan we must attract, retain and motivate highly
skilled employees, and we face significant competition from other Internet and
new media companies in doing so.
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Our ability to execute our growth plan and be successful also depends on our
continuing ability to attract, retain and motivate highly skilled employees. In
addition to Dr. C. Everett Koop, Chairman of the Board, we depend on the
continued services of key board members, our senior management and other
personnel, particularly Donald W. Hackett, President and Chief Executive
Officer. As we continue to grow, we will need to hire additional personnel in
all operational areas. Competition for personnel throughout the Internet and
related new-media industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected. These challenges have been amplified by our
recent financial performance and low stock price.
Due to the factors noted above and the other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance. It is possible that in some
future periods our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
underperform or fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We depend on third-party relationships, many of which are short-term or
terminable, to generate advertising and provide us with content.
We depend, and will continue to depend, on a number of third-party relationships
to increase traffic on drkoop.com and generate advertising and other revenues.
Outside parties on which we depend include unrelated Web site operators that
provide links to drkoop.com, providers of health content and portals which
provide us with carriage and ad serving. Many of our arrangements with third-
party Internet sites and other third-party service providers are not exclusive
and are short-term or may be terminated at the convenience of either party. We
cannot assure you that third parties regard our relationship with them as
important to their own respective businesses and operations. They may reassess
their commitment to us at any time in the future and may develop their own
competitive services or products.
We intend to produce only a portion of the health content that will be found on
the drkoop.com network. We will rely on third-party organizations that have the
appropriate expertise, technical capability, name recognition, reputation for
integrity and willingness to syndicate product content for branding and
distribution by others. As health-related content grows on the Internet, we
believe that there will be increasing competition for the best product
suppliers, which may result in a competitor acquiring a key supplier on an
exclusive basis, or in significantly higher content prices. Such an outcome
could make the drkoop.com network less attractive or useful for an end user
which could reduce our advertising and e-commerce revenues.
We cannot assure you that we will be able to maintain relationships with third
parties that supply us with content, carriage, software or related products or
services that are crucial to our success, or that such content, software,
products or services will be able to sustain any third-party claims or rights
against their use. Also, we cannot assure you that the content, software,
products or services of those companies that provide access or links to our Web
site will achieve market acceptance or commercial success. Accordingly, we
cannot assure you that our existing relationships will result in sustained
business partnerships, successful product or service offerings or the generation
of significant revenues for us.
We have recently experienced and are currently experiencing rapid growth in our
business, and our inability to manage this growth could harm our business.
We have experienced and are currently experiencing a period of significant
growth. This growth has placed, and the future growth we anticipate in our
operations will continue to place, a significant strain on our resources. As
part of this growth, we will have to implement new operational and financial
systems and procedures and controls, expand, train and manage our employee base,
and maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial staffs. If we are unable to manage
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our growth effectively, our business, results of operations and financial
condition could be adversely affected.
Any future acquisitions we make of companies or technologies may result in
disruptions to our business and/or the distraction of our management, due to
difficulties in assimilating acquired personnel and operations.
We may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise. From time to time we
engage in discussions and negotiations with companies regarding our acquiring or
investing in such companies' businesses, products, services or technologies, and
we regularly engage in such discussions and negotiations in the ordinary course
of our business. Some of those discussions also contemplate the other party
making an investment in our company. We cannot assure you that we will be able
to identify future suitable acquisition or investment candidates, or if we do
identify suitable candidates, that we will be able to make such acquisitions or
investments on commercially acceptable terms or at all. If we acquire or invest
in another company, we could have difficulty in assimilating that company's
personnel, operations, technology and software. In addition, the key personnel
of the acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in integrating the acquired products,
services or technologies into our operations. These difficulties could disrupt
our ongoing business, distract our management and employees, increase our
expenses and adversely affect our results of operations. Furthermore, we may
incur indebtedness or issue equity securities to pay for any future
acquisitions. The issuance of equity securities would be dilutive to our
existing stockholders.
If our ability to expand our network infrastructure is constrained in any way we
could lose customers and suffer damage to our operating results.
Presently, a relatively limited number of consumers use our Web site. We must
continue to expand and adapt our network infrastructure to accommodate
additional users, increase transaction volumes and change consumer and
customer requirements. We may not be able to accurately project the rate or
timing of increases, if any, in the use of our Web site or to expand and upgrade
our systems and infrastructure to accommodate such increases. Our systems may
not accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to instead use the on-line services of our
competitors.
Many of our service agreements, such as those with our Community Partners,
contain performance standards. If we fail to meet these standards, our customers
could terminate their agreements with us or require that we refund part or all
of the license fees. The loss of any of our service agreements and/or associated
revenues would directly and significantly impact our business. We may be unable
to expand or adapt our network infrastructure to meet additional demand or our
customers' changing needs on a timely basis, at a commercially reasonable cost,
or at all.
We may have liability for information we provide on our Web site or which is
accessed from our Web site.
Because users of our Web site access health content and services relating to a
condition they may have or may distribute our content to others, third parties
may sue us for defamation, negligence, copyright or trademark infringement,
personal injury or other matters. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against on-line services in the past. Others
could also sue us for the content and services that are accessible from our Web
site through links to other Web sites or through content and materials that may
be posted by our users in chat rooms or bulletin boards. While our agreements,
including those with content providers, in some cases provide that we will be
indemnified against such liabilities, such indemnification, if available, may
not be adequate. Our insurance may not adequately protect us against these types
of claims. Further, our business is based on establishing the drkoop.com network
as a trustworthy and dependable provider of health information and services.
Allegations of impropriety, even if unfounded, could therefore have a material
adverse effect on our reputation and our business.
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Any failure or inability to protect our intellectual property rights could
adversely affect our ability to establish our brand.
Our intellectual property is important to our business. We rely on a combination
of copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property. Federal
registrations are pending for the trademark "drkoop.com," as well as other
servicemarks and trademarks which incorporate the Dr. Koop name. Our right to
use the Dr. Koop name is granted to us under an agreement with Dr. C. Everett
Koop. If we lose our right to use the Dr. Koop name, we would be forced to
change our corporate name and adopt a new domain name. These changes could
confuse current and potential customers and would adversely impact our business.
We also rely on a variety of technologies that are licensed from third parties,
including our database and Internet server software, which is used in the
drkoop.com Web site to perform key functions. These third-party licenses may not
be available to us on commercially reasonable terms in the future.
We do not expect to pay dividends, and investors should not buy our common stock
expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. Investors should not purchase our common stock with the expectation of
receiving cash dividends.
We are subject to anti-takeover provisions in our charter and in our contracts
that could delay or prevent an acquisition of our company, even if such an
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our bylaws, Delaware law
and material contracts to which we are party could make it more difficult for a
third party to acquire us, even if doing so might be beneficial to our
stockholders.
Our business may face additional risks and uncertainties not presently known to
us which could cause our business to suffer.
In addition to the risks specifically identified in this section or elsewhere in
this report, we may face additional risks and uncertainties not presently known
to us or that we currently deem immaterial which ultimately impair our business,
results of operations and financial condition.
Risks Related to Our Industry
Consumers and the healthcare industry must accept the Internet as a source of
health content and services for our business model to be successful.
To be successful, we must attract to our network a significant number of
consumers as well as other participants in the health industry. To date,
consumers have generally looked to healthcare professionals as their principal
source for health and wellness information. Our business model assumes that
consumers will use health information available on our network, that consumers
will access important health needs through electronic commerce using our Web
site, and that local healthcare organizations and other participants in the
healthcare industry will affiliate with us. Our business model also assumes that
the services provided by our network will be supported in part by advertising,
sponsorship and similar activities purchased by companies with commercial
interests in the healthcare industry and that this practice will be accepted by
consumers. Our business model is not yet proven, and if we are unable to
successfully implement our business model, our business will be materially
adversely affected and we may not be able to obtain additional financing.
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The Internet industry is highly competitive and changing rapidly, and we may not
have the resources to compete adequately.
The number of Internet Web sites offering users health content, products and
services is vast and increasing at a rapid rate. These companies compete with us
for users, advertisers, e-commerce transactions and other sources of on-line
revenues. In addition, traditional media and healthcare providers compete for
consumers' attention both through traditional means as well as through new
Internet initiatives. We believe that competition for health consumers will
continue to increase as the Internet develops as a communication and commercial
medium.
We compete directly for users, advertisers, e-commerce merchants, syndication
partners and other affiliates with numerous Internet and non-Internet
businesses, including:
. health-related on-line services or Web sites targeted at consumers,
such as accesshealth.com, ahn.com, betterhealth.com, drweil.com,
healthcentral.com, healthgate.com, intelihealth.com, mayohealth.org;
mediconsult.com, onhealth.com, thriveonline.com and webmd.com;
. on-line and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite, Inc.; Lycos Corporation and GO
which commonly distribute multiple sources of health data;
. electronic merchants and conventional retailers that provide health
goods and services competitive to those available from links on our
Web site;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors which offer healthcare
information through the Internet; and
. other consumer affinity groups, such as the American Association of
Retired Persons, SeniorNet and ThirdAge Media, Inc. which offer
health-related content to specific demographic groups.
Many of these potential competitors are likely to enjoy substantial competitive
advantages compared to our company, including:
. the ability to offer a wider array of on-line products and services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger customer and user bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must respond promptly and effectively to the challenges of
technological change, evolving standards and our competitors' innovations by
continuing to enhance our products and services, as well as our distribution,
sales and marketing channels. We must also meet or exceed evolving consumer
expectations and competitive standards regarding medical ethics, Internet ethics
and privacy concerns. Increased competition could result in a loss of our
market share or a reduction in our prices or margins. Competition is likely to
increase significantly as new companies enter the market and current competitors
expand their services.
Since we operate an Internet-based network, our business is subject to
government regulation relating to the Internet which could impair our
operations.
Because of the increasing use of the Internet as a communication and commercial
medium, the government has adopted and may adopt additional laws and regulations
with respect to the Internet covering such areas as user privacy, pricing,
content, taxation, copyright protection, distribution and characteristics and
quality of production and services.
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Since we operate a health network over the Internet, our business is subject to
government regulation specifically relating to medical devices, the practice of
medicine and pharmacology, healthcare regulation, insurance and other matters
unique to the healthcare area.
Laws and regulations have been or may be adopted with respect to the provision
of health-related products and services on-line, covering areas such as:
. the regulation of medical devices;
. the practice of medicine and pharmacology and the sale of controlled
products such as pharmaceuticals on-line;
. the regulation of government and third-party cost reimbursement; and
. the regulation of insurance sales.
FDA Regulation of Medical Devices. Some computer applications and software are
considered medical devices and are subject to regulation by the United States
Food and Drug Administration. We do not believe that the FDA will regulate our
current applications or services; however, our applications and services may
become subject to FDA regulation. Additionally, we may expand our application
and service offerings into areas that subject us to FDA regulation. We have no
experience in complying with FDA regulations. We believe that complying with FDA
regulations would be time consuming, burdensome and expensive and could delay or
prevent our introduction of new applications or services.
Regulation of the Practice of Medicine and Pharmacology. The practice of
medicine and pharmacology requires licensing under applicable state law. We have
endeavored to structure our Web site and affiliate relationships to avoid
violation of state licensing requirements, but a state regulatory authority may
at some point allege that some portion of our business violates these statutes.
Any such allegation could result in a material adverse effect on our business.
Further, any liability based on a determination that we engaged in the practice
of medicine without a license may be excluded from coverage under the terms of
our current general liability insurance policy.
Federal and State Healthcare Regulation. We earn a service fee when users on our
Web site purchase prescription pharmacy products from certain of our e-commerce
partners. The fee is not based on the value of the sales transaction. Federal
and state "anti-kickback" laws prohibit granting or receiving referral fees in
connection with sales of pharmacy products that are reimbursable under federal
Medicare and Medicaid programs and other reimbursement programs. Although there
is uncertainty regarding the applicability of these regulations to our e-
commerce revenue strategy, we believe that the service fees we receive from our
e-commerce partners are for the primary purpose of marketing and do not
constitute payments that would violate federal or state "anti-kickback" laws.
However, if our program were deemed to be inconsistent with federal or state
law, we could face criminal or civil penalties. Further, we would be required
either not to accept any transactions which are subject to reimbursement under
federal or state healthcare programs or to restructure our compensation to
comply with any applicable anti-kickback laws or regulations. In addition,
similar laws in several states apply not only to government reimbursement but
also to reimbursement by private insurers. If our activities were deemed to
violate any of these laws or regulations, it could cause a material adverse
affect on our business, results of operations and financial condition.
State Insurance Regulation. In addition, we market insurance on-line, offered by
unrelated third parties, and receive referral fees from those providers in
connection with this activity. The use of the Internet in the marketing of
insurance products is a relatively new practice. It is not clear whether or to
what extent state insurance licensing laws apply to our activities. If we were
required to comply with such licensing laws, compliance could be costly or not
possible. This could have a material adverse effect on our business.
There is no established market for the consumer health e-commerce transactions
we facilitate.
We plan to develop relationships with retailers, manufacturers and other
providers to offer health products and services through direct links from our
Web site to their Web site. Such a strategy involves numerous risks and
uncertainties. There is no established business model for the sale of health
products or services
24
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over the Internet. Accordingly, we have limited experience in the sale of
products and services on-line and the development of relationships with
retailers, manufacturers or other providers of such products and services, and
we cannot predict the rate at which consumers will elect to engage in this form
of commerce or the compensation that we will receive for enabling these
transactions.
Consumers may sue us if any of the products or services that are sold through
our Web site are defective, fail to perform properly or injure the user, even if
such goods and services are provided by unrelated third parties. Some of our
agreements with manufacturers, retailers and other providers contain provisions
intended to limit our exposure to liability claims. These limitations may not
however prevent all potential claims, and our insurance may not adequately
protect us from these types of claims. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages. As
a result, any such claims, whether or not successful, could seriously damage our
reputation and our business.
Internet capacity constraints may impair the ability of consumers to access our
Web site, which could hinder our ability to generate advertising revenues.
Our success will depend, in large part, upon a robust communications industry
and infrastructure for providing Internet access and carrying Internet traffic.
The Internet may not prove to be a viable commercial medium because of:
. inadequate development of the necessary infrastructure such as a
reliable network backbone;
. timely development of complementary products such as high speed
modems;
. delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
. increased government regulation.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it.
Our business is dependent on the continuous, reliable and secure operation of
our Web site and related tools and functions we provide.
We rely on the Internet and, accordingly, depend upon the continuous, reliable
and secure operation of Internet servers and related hardware and software.
Recently, several large Internet commerce companies have suffered highly
publicized system failures which resulted in adverse reactions to their stock
prices, significant negative publicity and, in certain instances, litigation. We
have also suffered service outages from time to time, although to date none of
these interruptions has materially adversely affected our business operations or
financial condition. To the extent that our service is interrupted, our users
will be inconvenienced, our commercial customers will suffer from a loss in
advertising or transaction delivery and our reputation may be diminished. Some
of these outcomes could directly result in a reduction in our stock price,
significant negative publicity and litigation. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not have full
redundancy for all of our computer and telecommunications facilities and do not
maintain a back-up data facility. Our business interruption insurance may be
inadequate to protect us in the event of a catastrophe. We also depend on third
parties to provide potential users with web browsers and Internet and on-line
services necessary for access to our Web site. In the past, our users have
occasionally experienced difficulties with Internet and other on-line services
due to system failures, including failures unrelated to our systems. Any
sustained disruption in Internet access provided by third parties could
adversely impact our business.
We retain confidential customer information in our database. Therefore, it is
critical that our facilities and infrastructure remain secure and are perceived
by consumers to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
25
<PAGE>
programming errors or similar disruptive problems. A material security breach
could damage our reputation or result in liability to us.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are not subject to any meaningful market risks related to currency, commodity
prices or similar matters. We are sensitive to short-term interest rates
fluctuations to the extent that such fluctuations impact the interest income we
receive on the investment of the remaining proceeds from our June 1999 initial
public offering.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Condensed Financial Statements contained herein.
In the general course of business, we may become involved in claims and
disputes which are incidental to the regular conduct of our business and are not
presently believed to be material.
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds
The effective date of our first registration statement, filed on Form S-1 under
the Securities Act of 1933 (File No. 333-73459) relating to an initial public
offering of our common stock, was June 8, 1999. A total of 10,781,250 shares of
our common stock were sold to an underwriting syndicate, including the exercise
of the 15% over allotment. The managing underwriters were Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC, and Wit Capital Corporation. The offering commenced
and completed on June 8, 1999, at an initial public offering price of $9.00 per
share. The initial public offering resulted in gross proceeds of $97.0 million,
$6.8 million of which was applied to the underwriting discount and approximately
$1.7 million of which was applied to related expenses. As a result, net proceeds
of the offering to us were approximately $88.5 million. From the date of receipt
through March 31, 2000, the net proceeds of the initial public offering were
used to fund operating losses and for general corporate purposes, including
expansion of our network, advertising, brand promotion, content development and
working capital or invested in an interest bearing money market account. None of
the net proceeds of the offering were paid, directly or indirectly, to any
director, officer or general partner of drkoop.com, Inc., or any of their
associates, or to any persons owning ten percent or more of any class of our
equity securities, or any affiliates.
Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Mr. Donald Hackett, our Chief Executive Officer and President, is obligated to
reimburse us for $600,000 in connection with the settlement of a third party
litigation in February 2000, based on a cost splitting arrangement between us
and him.
26
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended March 31, 2000.
None.
27
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
drkoop.com, Inc.
Date: May 15, 2000 /s/ Susan M. Georgen Saad
----------------------------------
Name Susan M. Georgen Saad
Title: Chief Financial Officer
28
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONATINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM drkoop.com,
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