FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-266932
PHOTOLOFT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0431036
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 Orchard City Drive, Suite 142
Campbell, CA 95008
(Address of Principal Executive Offices)
Issuer's telephone number: (408) 364-8777
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 October 31, 2000, the issuer had 51,589,524 shares of common stock,
$.001 par value per share, outstanding.
<PAGE>
PHOTOLOFT, INC.
CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PHOTOLOFT, INC.
BALANCE SHEETS
====================================================================================
SEPTEMBER 30, DECEMBER 31,
2000 1999
====================================================================================
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,495,800 $ 175,300
Accounts receivable, net of allowance for doubtful
accounts of $16,900 at each period 215,300 60,100
Notes receivable -- 250,000
Prepaid expenses and other current assets 125,000 49,500
------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,836,100 534,900
PROPERTY AND EQUIPMENT, NET 807,800 418,000
OTHER ASSETS 25,800 17,200
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TOTAL ASSETS $ 8,669,700 $ 970,100
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable to shareholders $ 95,000 $ --
Accounts payable 658,100 906,800
Accrued expenses 694,900 263,500
Deferred revenue 15,400 15,200
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TOTAL CURRENT LIABILITIES 1,463,400 1,185,500
Commitments, Contingencies and Subsequent Events
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.001 par value; 500,000 shares
authorized; 0 shares issued and outstanding -- --
Common stock, $0.001 par value; 200,000,000 shares
authorized; 51,551,930 and 12,881,875 shares issued
and outstanding, respectively 51,600 12,900
Additional paid in capital 19,851,100 4,904,500
Deferred compensation ( 39,200) (481,200)
Accumulated deficit (12,657,200) (4,651,600)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 7,206,300 (215,400)
------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 8,669,700 $ 970,100
====================================================================================
</TABLE>
See accompanying notes to financial statements.
3
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<TABLE>
<CAPTION>
PHOTOLOFT, INC.
STATEMENTS OF OPERATIONS
=================================================================================
THREE MONTHS ENDED SEPT.30, NINE MONTHS ENDED SEPT.30,
-------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 180,400 $ 39,300 $ 403,600 $ 124,800
Cost of Revenues 107,700 36,500 247,900 88,500
---------------------------------------------------------------------------------
GROSS PROFIT 72,700 2,800 155,700 36,300
---------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 317,200 485,500 458,500 516,600
General and
administrative 2,856,900 666,900 7,796,400 1,732,500
---------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,174,100 1,152,400 8,254,900 2,249,100
---------------------------------------------------------------------------------
LOSS FROM OPERATIONS (3,101,400) (1,149,600) (8,099,200) (2,212,800)
OTHER INCOME
(EXPENSE):
Loss on settlement of note (108,100) (108,100)
Interest income 113,400 69,700 113,300 110,200
Interest & other expense (13,900) 500 (18,900) (200)
---------------------------------------------------------------------------------
TOTAL OTHER INCOME
(EXPENSE) 99,500 (37,900) 94,400 1,900
---------------------------------------------------------------------------------
LOSS BEFORE INCOME
TAXES (3,001,900) (1,187,500) (8,004,800) (2,210,900)
INCOME TAX (BENEFIT)
EXPENSE -- (337,700) 800 (745,300)
---------------------------------------------------------------------------------
NET LOSS (3,001,900) (849,800) (8,005,600) (1,465,600)
Deemed dividend on
conversion of
preferred stock -- -- -- (934,000)
Deemed dividend on
Redemption of Series
A Preferred Stock
including value
ascribed to warrants
of $145,000 -- -- (357,000) --
---------------------------------------------------------------------------------
Net loss allocable to
common shareholders $(3,001,900) $ (849,800) $(8,362,600) $(2,399,600)
=================================================================================
Basic and diluted
loss per share $ (0.06) $ (0.07) $ (0.32) $ (0.21)
=================================================================================
Basic and diluted
weighted-average
common shares
outstanding 48,693,700 12,454,300 25,808,000 11,327,200
=================================================================================
</TABLE>
See accompanying notes to financial statements.
4
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<TABLE>
<CAPTION>
PHOTOLOFT, INC.
STATEMENTS OF CASH FLOWS
===============================================================================
NINE MONTHS ENDED SEPT 30,
------------ ------------
2000 1999
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,005,600) $(1,465,600)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 157,200 27,900
Compensation relating to stock options and
warrants issued 3,437,800 24,900
Accrued interest on notes receivable (32,900)
Loss of settlement of note receivable 108,100
Issuance of stock for services -- 42,500
Changes in operating assets and liabilities:
Accounts receivable (155,200) --
Prepaid expenses and other current assets (75,500) (75,800)
Deferred income taxes -- (747,200)
Accounts payable (248,700) 269,400
Accrued expenses 431,400 45,800
Deferred revenue 200 (35,500)
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NET CASH USED IN OPERATING ACTIVITIES (4,458,400) (1,838,400)
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal received under note receivable 250,000 434,800
Purchase of property and equipment (547,000) (204,500)
Other assets (8,600) (5,000)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (305,600) 225,300
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit 409,700
Proceeds from issuance of notes payable to
shareholders 440,000 --
Repayment of notes payable to shareholders (345,000) --
Proceeds from issuances of stock 14,420,200 1,120,900
Payment for redemption of stock (1,272,000) --
Proceeds from issuance of warrants 10,000 --
Payment of stock issuance costs (1,168,700) (44,000)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 12,084,500 1,486,600
-------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,320,500 (126,500)
CASH AND CASH EQUIVALENTS, beginning of period 175,300 370,000
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CASH AND CASH EQUIVALENTS, end of period $ 7,495,800 $ 243,500
===============================================================================
</TABLE>
See accompanying notes to financial statements.
5
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PHOTOLOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
PhotoLoft, Inc. (formerly AltaVista Technology, Inc.) (the Company), a
California corporation, was incorporated on November 17, 1993. The Company
provides users with advanced, easy-to-use technology to instantly create, share
and print Internet photo albums. The Company provides turnkey B2B web-based
infrastructure for rapidly producing websites that can be integrated with client
companies' websites in co-branded, private label and customized installations
for imaging infrastructure businesses.
On March 1, 1999, 100% of the Company's outstanding common stock was acquired by
PhotoLoft.com (formerly Data Growth, Inc., a publicly traded shell corporation)
PhotoLoft, a Nevada Corporation, in exchange for 9,579,268 shares of PhotoLoft's
$.001 par value common stock. For accounting purposes, the acquisition has been
treated as the acquisition of PhotoLoft, with the Company as the acquiror
(reverse acquisition).
The shares held by the shareholders of PhotoLoft prior to the acquisition
(625,000 shares after reflecting a 2.46 to 1 reverse stock split effected by
PhotoLoft immediately prior to the acquisition) have been recognized as if they
were issued in connection with the acquisition of PhotoLoft by the Company.
Since PhotoLoft prior to the reverse acquisition was a public shell corporation
with no significant operations, pro forma information giving effect to the
acquisition is not presented. All shares and per share data prior to the
acquisition have been restated to reflect the stock issuance as a
recapitalization of the Company. The historical information prior to March 1,
1999 is that of the Company.
On June 8, 2000, pursuant to a Stock Purchase Agreement dated as of April 18,
2000 (the "Agreement"), the Company issued and sold 900 shares of its Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to Intellect
Capital Group, LLC, a Delaware limited liability company ("ICG"). ICG is a Los
Angeles-based firm that provides investment and intellectual capital to
developmental and emerging growth stage technology companies and takes an active
role to assist them to realize their full potential. The consideration for the
Series B Preferred Stock consisted of $9,000 in cash. In conjunction with the
Agreement, ICG has become an active shareholder of the company and is assisting
the Company with the creation and execution of its strategic plan, building a
management team and Board of Directors, identifying and consummating strategic
relationships, and advising on merger and acquisition activities, the capital
formation process and corporate finance and corporate communications. The
Series B Preferred Stock was convertible, on or before July 8, 2000, into 50% of
the Company's then-outstanding common stock following the conversion (on a
fully-diluted basis). On July 8, 2000, the Company had 33,825,266 shares of
common stock outstanding on a fully-diluted basis, and therefore, if ICG had
converted all of the Series B Preferred Stock on that date, it would have owned
and controlled 50% of the Company's fully-diluted common stock. However, on
July 8, 2000, the Company did not have enough shares of authorized common stock
to convert all of the Series B Preferred Stock. On that date, the Company
issued 27,914,023 shares of common stock in partial conversion of the Series B
Preferred Stock. Pursuant to the terms of May 22, 2000 letter of agreement
between the holder of the Series B Preferred Stock and the company, the Company
incurred penalties of $13,122,959 as a result of the inability to convert the
remainder of the Series B Preferred Stock. These penalties have been waived by
the holder and the holder has waived its right to receive the additional
5,911,243 shares it was entitled to on July 8, 2000, in exchange for the
issuance of warrants to purchase an aggregate of 11,900,000 shares of our common
stock at an exercise price of $1.65 per share. The warrants are not exercisable
before December 8, 2000; after that date they may be exercised or exchanged on a
two-for one basis for shares of common stock. This transaction will be recorded
as a stock issuance cost for the subsequent private placement of common stock.
Pursuant to the Agreement, the Company elected Terren S. Peizer, the ICG
Chairman and Chief Executive Officer, as the Company's Chairman and a member of
the Company's Board of Directors.
6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial
statements have been included.
Operating results for the nine-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999. In addition, please refer to the Registration
Statement on Form SB-2 (File No. 333-42672) filed with the Securities and
Exchange Commission on July 31, 2000.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
During each of the nine months ended September 30, 2000 and 1999, the Company
paid $800 for income taxes. During the nine months ended September 30, 2000
and 1999, the Company paid $10,200 and $0 of interest, respectively.
Non-cash financing activities for the nine months ended September 30, 2000
consisted of the following; the issuance of 32,500 shares of common stock in
exchange for accrued expenses totaling $15,600; the issuance of warrants to
purchase an aggregate of 11,900,00 shares of common stock exchangeable on a two
for one basis for common stock; the issuance of 28,000 shares of common stock
and warrants to purchase 1,221,000 shares of common stock for fees relating to
the private placement of common stock; and a deemed dividend of $357,000 on the
redemption of Series A Preferred Stock.
Non-cash financing activities for the nine month period ended September 30, 1999
included the issuance of 85,011 shares of common stock for services aggregating
approximately $42,500, the issuance of 25,000 shares of common stock for the
payment of stock issuance costs totaling $12,500, and a deemed dividend of
$934,000 relating to the beneficial conversion of its preferred stock into
common stock.
4. PRIVATE EQUITY PLACEMENT
From May 2000 through July 2000, the Company issued 10,646,600 shares in a
private placement of common stock and three-year warrants to purchase
5,323,300 shares of common stock at an exercise price of $1.65 for proceeds of
$12,218,800, net of stock issuance costs of $1,089,200. A value of $5,354,400
has been ascribed to the warrants and is considered a stock issuance cost. In
connection with the private placement, 28,000 shares of common stock and
three-year warrants to purchase 1,221,000 shares of common stock at an exercise
price of $1.65 per share were issued as investor referral fees. The 28,000
shares of common stock and the 1,221,000 three-year warrants issued as fees have
an aggregate value of $1,263,000 and are considered a stock issuance cost.
5. INTERIM PERIOD INFORMATION
In March 2000, we issued options to purchase up to 378,344 shares of our common
stock to one of our officers pursuant to the terms of our employment agreement
with the officer. The exercise price for the options was $3.44 per share, which
was not less than the fair market value of the shares on the date of grant.
In March 2000, we issued 106 shares of preferred stock, designated series A
preferred stock, in exchange for $1,060,000 to investors in a private placement.
We subsequently redeemed the series A preferred stock in June, 2000. In
consideration for services in connection with the sale of our Series A Preferred
Stock in March 2000 we issued 185,500 warrants to purchase shares of our common
stock. These warrants may be exercised at any time during the five-year period
following their issuance at an exercise price of $3.30 per share. The number of
shares issuable upon exercise of the warrants is subject to adjustment upon the
occurrence of stock splits, dividends or reclassifications. The warrants do not
carry registration rights. In connection with the June 2000 redemption of our
Series A Preferred Stock, we issued warrants to purchase an additional 80,140
shares of common stock with the same terms and conditions; provided that we are
obligated to register the shares of common stock underlying the June 2000
warrants.
7
<PAGE>
In March 2000 we entered into a new employment agreement with Jack Marshall in
which he will receive 250,000 bonus options, granted under the Employee Stock
Option Plan, upon acceptance by the Board of a term sheet for a sale of
PhotoLoft, Inc. or a major financing. Employee will receive 500,000 bonus
options, granted under the Employee Stock Option Plan, on the Effective Date of
a sale of PhotoLoft, Inc. or major financing. In June, 2000 Jack Marshall
entered into a new employment agreement which replaced the March 15, 2000
agreement. The new employment agreement did not include the 750,000 bonus
options provision for the boards acceptance of a term sheet or major financing.
In March 2000, we sold 400,000 warrants with an exercise price of $0.10 to an
investor for proceeds of $10,000. The warrants expire March 2005, and are
exercisable as soon as the investor provides a term sheet to assist us in
locating financing of at least $15 million, regardless of whether the financing
is successfully completed. In May 2000, the investor provided a termsheet for
assisting us in locating financing. The warrants were issued and are
subsequently exercisable.
In April 2000 the Company repriced 500,000 warrants, originally granted with an
exercise price of $1.01, to $0.10 and recorded the related compensation
expense.
In April 2000, the Company granted warrants to purchase 200,000 shares of common
stock to a consultant at an exercise price of $0.10, and granted warrants to
purchase 100,000 shares of common stock to the same consultant at an exercise
price of $1.00. The warrants expire in April 2005 and were immediately
exercisable.
In May 2000, the Company received a loan of $50,000 from an officer,
which was repaid in June, 2000.
In May 2000, the Company entered into an agreement in which it issued warrants
to purchase 200,000 shares of common stock at exercise prices ranging from $2.75
to $4.50 in exchange for services. Fifty percent of the warrants vested upon
execution of the agreement, and the remaining fifty percent will vest if the
agreement is renewed after 6 months.
From May 2000 through July 2000, the Company issued 10,646,600 shares in a
private placement of common stock and three-year warrants to purchase 5,323,300
shares of common stock at an exercise price of $1.65 for net proceeds of
$12,218,800,
In June 2000, the Company issued 900 shares of Series B convertible preferred
stock to an investor for proceeds of $9,000. See explanation in Note 1.
In July 2000, our Board of Directors and shareholders approved an increase in
the number of authorized shares of common stock to 200,000,000.
In July 2000, the Company issued three year warrants to purchase 300,000 shares
of common stock at an exercise price of $1.65 in settlement of a dispute
relating to a binding letter of intent for an equity financing. The $378,000
fair value of the warrant have been recorded as stock based compensation expense
in the accompanying financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE
STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS",
"BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND
SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED ELSEWHERE IN THIS
REPORT ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS.
8
<PAGE>
The following discussion should be read in conjunction with the financial
statements and notes thereto and "Factors That Could Affect Our Financial
Condition and Results of Operations", both of which are included elsewhere in
this quarterly report.
General
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As an early player in the online imaging market, PhotoLoft established
itself as a business to business ("B2B") website. At the same time, we
established a consumer photosharing web site that served as a prototype for our
private label and co-brand partner sites. As the marketplace for our services
evolved over the ensuing years, we utilized this time to educate the marketplace
and build our consumer site. Now that the B2B marketplace has become much more
sophisticated and we have honed our products, we are looking to become a leader
in the nascent Internet digital imaging infrastructure(B2B) market.
We provide turnkey B2B web-based infrastructure for rapidly producing
websites that can be integrated seamlessly with client companies websites in
co-branded, private label and customized installations for consumer oriented
photosharing communities and digital imaging businesses. Designed for B2B
backbone purposes, and easy scaling, the PhotoLoft solution is mated to a
powerful e-commerce engine that automates purchases of prints and other photo
related merchandise and integrates seamlessly with the client website and with
diverse product fulfillers and distributors. We intend to leverage our
technology to power the sites of others and garner fees and revenue split from
sharing print, e-commerce and advertising revenue, and from the sale of these
products on our own site. We adopted our current business model in April 2000.
Accordingly, we are very much like a start-up company and have generated minimal
revenues since the adoption of this model.
Results of Operations
-----------------------
Three and Nine Months Ended September 30, 2000 and 1999
----------------------------------------------------------------
REVENUES. Revenues for the quarter ended September 30, 2000, increased
359% to $180,400 from $39,300 reported in the same quarter in 1999. Revenues
for the current nine month period increased 223% to $403,600 from $124,800
reported for the nine month period ended September 30, 1999. The increase in
revenues in both periods was due to the increased number of users on the
Photoloft platform, both co-brand and private label, generating e-commerce and
advertising revenue. In addition, for the current three and nine-month periods,
we earned development fee revenue for development and professional services.
9
<PAGE>
GROSS MARGIN. Gross Margin percentage for the quarter ended September
30, 2000 increased to 40% from 7% reported in the same quarter in 1999. Gross
Margin percentage for the nine months ended September 30, 2000 increased to 39%
from 29% reported in the same quarter in 1999. The increase in the gross margin
percentage was due to higher network hosting, development and professional
service revenue and was also affected by the product mix.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter
ended September 30, 2000, decreased to $317,200 from $485,500 reported in the
same quarter in 1999. Sales and marketing expenses for the nine months ended
September 30, 2000, decreased to $458,500 from $516,600 reported in the same
period in 1999. Expenses decreased due to lower advertising expenses.
Substantially all of the selling and marketing expenses in 2000 were derived
from a shift in our primary target customers from consumers to organizations
(both traditional and online) that service the consumers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended September 30, 2000, increased to $2,856,900 from $666,900
reported in the same quarter in 1999. General and administrative expenses for
the nine months ended September 30, 2000, increased to $7,796,400 from
$1,732,500 in the same periods in 1999. The increase in general and
administrative expenses during the three and nine month periods ended September
30, 2000 is due to non-cash compensation expense relating to stock option and
warrant grants and increased hiring as the company further develops its product
offerings and services.
NET LOSS. Net loss allocable to common shareholders for the quarter ended
September 30, 2000, increased to $3,001,900 from $849,800 reported in the same
quarter in 1999. Net loss allocable to common shareholders for the nine months
ended September 30, 2000 increased to $8,362,600 from $2,399,600 in the period
in 1999. The net loss increase in both periods is due primarily to non-cash
compensation relating to stock option and warrant grants during the periods and
an increase in the number of employees, which increased from twenty-seven at
September 30, 1999 to fifty at September 30, 2000.
Liquidity and Capital Resources
----------------------------------
During the nine months ended September 30, 2000 the Company issued $440,000
in notes payable, raised $1.1 million in Series A preferred stock and completed
a private placement of common stock that raised gross proceeds of $13.3 million.
The Series A preferred stock was redeemed in the amount of $1.3 million,
payments of $345,000 were made on notes payable and stock issuance costs of $1.2
million were incurred.
At September 30, 2000 we had cash and cash equivalents of $7,495,800 as
compared to $175,300 at December 31, 1999. We currently anticipate that our
available funds will be sufficient to meet our anticipated needs for working
capital, capital expenditures and business operations through the end of
September 2001. Thereafter, we will need to raise additional funds either
through equity or debt financing. There can be no assurance that additional
financing will be available on acceptable terms.
Factors That Could Affect Our Financial Condition and Results of Operations
--------------------------------------------------------------------------------
You should carefully consider the risk described below before making an
Investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business could be
harmed.
WE ARE MUCH LIKE A START UP COMPANY AND HAVE A LIMITED OPERATING HISTORY.
We launched our current business model in April 2000 and therefore are
much like a start-up company. We have only a limited operating history upon
which you can evaluate our business and prospects, and have yet to develop
sufficient experience regarding actual revenues to be received from such
products and services. You must consider the risks and uncertainties frequently
encountered by early stage companies in new and rapidly evolving markets, such
as e-commerce. If we are unsuccessful in addressing these risks and
uncertainties, our business, results of operations and financial condition will
be materially and adversely affected.
10
<PAGE>
WE EXPECT LOSSES FOR THE FORESEEABLE FUTURE, AND OUR OPERATING RESULTS MAY
FLUCTUATE FROM QUARTER TO QUARTER.
Since 1997, we have incurred losses from operations, resulting primarily
from costs related to developing our web site, attracting users to our web site,
and establishing our brand. Because of our plans to invest heavily in marketing
and promotion, to hire additional employees, and to enhance our web site and
operating infrastructure, we expect to incur net losses for the foreseeable
future. We believe these expenditures are necessary to build and maintain the
technical infrastructure necessary to host multiple images and to strengthen our
brand recognition, attract more users to our web site and ultimately, generate
greater online revenues. If our revenue growth is slower than we anticipate or
our operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability. We note that our independent
certified public accountants modified their opinion to include an explanatory
paragraph relative to a going concern uncertainty.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY.
We have no significant revenue history with respect to our recently
launched products and services. Our revenues for the foreseeable future will
remain primarily dependent on the number of private label, co-branded and
customized companies to whom we provide solutions, and the revenue sharing and
fees generated from our B2B partners. We cannot forecast with any degree of
certainty the number of visitors to the sites of our partners, or the revenue
sharing and fees.
We expect our operating results to fluctuate from quarter to quarter. We
believe that some of the revenue streams that we share in with our customers and
partners, including e-commerce and advertising vary from quarter to quarter.
While fluctuations in the revenues streams may be offset by other revenue
streams that we earn, such as set up fees, our operating results may fluctuate
significantly from quarter to quarter.
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat customers;
- our customers' ability to attract new and repeat customers
and sell product through e-commerce channels;
- our ability to keep current with the evolving tastes
of our target market;
- our ability to manage the number of services we offer;
- our ability to protect our proprietary technology;
- the ability of our competitors to offer new or enhanced web
site features, products or services;
- the growth of the digital photosharing market as projected;
- the level of use of the Internet and online services;
- consumer confidence in the security of transactions over the
Internet;
- unanticipated delays or cost increases with respect to product and
service
introductions; and
- the costs, timing and impact of our marketing and promotion
initiatives.
11
<PAGE>
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE.
We are authorized to issue up to 200,000,000 shares of common stock. To
the extent of such authorization, our Board of Directors will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
in the future for such consideration as our Board of Directors may consider
sufficient. The issuance of additional common stock in the future will reduce
the proportionate ownership and voting power of our common stock held by
existing stockholders. We are also authorized to issue up to 500,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by our Board of Directors. To the extent of such authorization, such
designations may be made without stockholder approval.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION
To date, we have relied to a significant extent on outside parties to
develop new customer opportunities. We believe that the growth of partner and
shared revenues will depend on our ability to establish an aggressive and
effective internal sales organization. We will need to increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected.
WE ARE GROWING RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management systems and resources. To manage
our growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. We cannot be certain that we will be
able to integrate new executives and other employees into our organization
effectively. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees. The loss of
the services of any of our executive officers could materially and adversely
affect our business. We currently do not hold "key person" insurance on any of
our executive officers or key employees. Additionally, we believe we will need
to attract, retain and motivate talented management and other highly skilled
employees to be successful. Competition for employees that possess knowledge of
both the Internet industry and our target market is intense. We may be unable
to retain our key employees or attract, assimilate and retain other highly
qualified employees in the future. See "Description of Business-Employees."
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WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future. We
currently or potentially compete with a number of other companies, including
some large photography equipment and service providers that have existing photo
lab customers and expertise in selling services to these customers, and a number
of other small services, including those that serve specialty markets. In
addition, companies that currently provide other digital imaging services or
online photo sharing communities may migrate into our markets, thus increasing
competition. Competitive pressures created by any one of these companies, or by
our competitors collectively, could have a material adverse effect on our
business, results of operations and financial condition. A potential competitor
could develop a technology that is competitive or superior to ours.
WE WILL NEED FURTHER CAPITAL.
We currently anticipate that our available funds will be sufficient to meet
our anticipated needs for working capital, capital expenditures and business
operation through the end of September 2001. Thereafter, we will need to raise
additional funds. If additional funds are raised through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders
will be reduced, stockholders may experience additional dilution and such
securities may have rights, preferences and privileges senior to those of our
common stock. There can be no assurance 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, we may not be able to fund
expansion, take advantage of unanticipated acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such
inability could have a material adverse effect on our business, results of
operations and financial condition.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We have in the past, and intend in the future to establish strategic
alliances with photo finishing equipment providers, photo lab retailers and
popular web sites to increase the number of customers using our infrastructure.
In the future, we may not be able to enter into these relationships on
commercially reasonable terms or at all. Even if we enter into strategic
alliances, our partners may not attract significant numbers of users.
Therefore, our infrastructure may not generate the anticipated level of revenue
sharing. Our inability to enter into new distribution relationships or
strategic alliances and expand our existing ones could have a material and
adverse effect on our business.
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ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions
has-been a successful strategy used by other Internet companies. If we buy a
company, then we could have difficulty in assimilating that company's personnel
and operations. In addition, the key personnel of the acquired company may
decide not to work for us. An acquisition could distract our management and
employees and increase our expenses. Furthermore, we may have to incur debt or
issue equity securities to pay for any future acquisitions, the issuance of
which could be dilutive to our existing shareholders.
UNFORESEEN DEVELOPMENTS MAY OCCUR WITH RESPECT TO DIGITAL IMAGING TECHNOLOGY.
Digital imaging is a relatively new phenomenon and the slower than expected
acceptance of the new technology could affect our ability to grow as rapidly as
we need to in order to meet our financial targets. Digital camera manufacturers
have made great strides in the past two years improving the functionality of
their cameras and pricing them in a range that is attractive to many consumers.
The continued refinement of the technology and commoditization of the price will
help to move acceptance of the technology along. Full acceptance of digital
imaging technology will require a move on the part of the photographic
population away from traditional chemical-based photo processing to the new
paradigm of home printed photos. The costs remain competitive for digital
imaging, however, there is no guarantee the general population will make this
shift rapidly, if at all.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE.
Our industry is new and rapidly evolving. Our business would be adversely
affected if web usage and e-commerce does not continue to grow. Web usage may be
inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- failure to develop successful internet business models;
- security concerns;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, web sites have experienced a variety of interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, web usage, including usage of our web site, could grow slowly or
decline.
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OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS UNCERTAIN.
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the web as an effective medium of commerce by consumers.
Rapid growth in the use of the web and commercial online services is a recent
phenomenon. Demand for recently introduced services and products over the web
and online services is subject to a high level of uncertainty. The development
of the web and online services as a viable commercial marketplace is subject to
a number of factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- adverse publicity and consumer concerns about the security of
commerce transactions on the Internet could discourage its
acceptance and growth.
WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION OF AND LEGAL UNCERTAINTIES
SURROUNDING THE INTERNET.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad. See
"Description of Business - Government Regulation."
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
To date, we have had a very limited trading volume in our common stock. As
long as this condition continues, the sale of a significant number of shares of
common stock at any particular time could be difficult to achieve at the market
prices prevailing immediately before such shares are offered. In addition,
sales of substantial amounts of common stock, including shares issued upon the
exercise of outstanding options and warrants, under Securities and Exchange
Commission Rule 144 or otherwise could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities. In addition, we are obligated to
register additional securities for immediate resale under the Securities Act
and, upon completion of such registration, a substantial number of additional
securities will be placed into the public market with the potential adverse
consequences described above.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our Board of Directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock.
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OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The market price of our common stock is likely to be, highly volatile as
the stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Investors may not be able to
resell their shares of our common stock following periods of volatility because
of the market's adverse reaction to volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected valuations substantially above
historical levels. During the same period, these companies' stocks have also
been highly volatile and have recorded lows well below historical highs. We
cannot assure you that our stock will trade at the same levels of other Internet
stocks or that Internet stocks in general will sustain their current market
prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
In addition, our stock is currently traded on the NASD O-T-C Market. We
have applied for listing on the AMEX; however it is uncertain that we will be
able to successfully receive approval for this listing on the AMEX, or apply for
or receive approval for a listing on the NASDAQ National Market or SmallCap
market in the foreseeable future due to the trading price for our common stock,
our working capital and revenue history. Failure to list our shares on the AMEX,
NASDAQ National or SmallCap Markets will impair the liquidity for our common
stock.
OPERATIONS DEPENDANT ON ABILITY TO PROTECT OUR OPERATING SYSTEMS.
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. Its operations are dependent in part on its ability to
protect its operating systems against physical damage from fire, floods,
earthquakes, power loss, telecommunications failures, break-ins or other similar
events. Furthermore, despite its implementation of network security measures,
its servers are also vulnerable to computer viruses, break-ins and similar
disruptive problems. The occurrence of any of these events could result in
interruptions, delays or cessations in service to its users, which could have a
material adverse effect on our business, results of operations and financial
condition.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 7, 2000 Gale Drive LLC filed an action against us in the Santa
Clara County Superior Court of California (Case Number CV 787055) alleging
breach of contract arising out of a lease agreement for office space located in
Campbell, California. We are currently involved in mediation discussions
with Gale Drive LLC.
In April 2000 Expert Connection dba Kinetic Tec filed an action against us
in the Santa Clara County Superior Court alleging breach of contract arising out
of an alleged fee agreement. Kinetic Tec claims it submitted the resume of a
potential employee to us and we hired the employee and thus owe Kinetic Tec
according to a fee agreement. We intend to vigorously oppose these claims.
To the best of our knowledge, there are presently no other pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of our knowledge, no such actions
against us are contemplated or threatened.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the three months ended September 30, 2000. Also included is the
consideration, if any, received by us for such shares and options and
information relating to the section of the Securities Act, or rule of the SEC
under which exemption from registration was claimed.
From May 2000 through July 2000, we issued 10,646,600 shares of common
stock and warrants to purchase 5,323,300 shares of common stock at an exercise
price of $1.65 for proceeds of $12,218,800, net of stock issuance costs of
$1,089,200. We also issued 28,000 shares of common stock and 1,221,000 warrants
at an exercise price of $1.65 per share as a referral fee. The issuance of the
common stock and warrants was made in reliance upon Section 4(2) and Rule 506 of
Regulation D under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchasers were sophisticated, with access to
all relevant information necessary to evaluate the investment, and who
represented to us that the securities were being acquired for investment.
In July 2000, our Board of Directors and our shareholders approved an
increase number of authorized shares of common stock to 200,000,000.
In July 2000, we issued warrants to purchase 300,000 shares of common stock
at an exercise price of $1.65 in settlement of a dispute. The issuance of the
warrants was made in reliance on Section 4(2) of the Securities Act of 1933 and
was made without general solicitation or advertising. The investor was
sophisticated, with access to all relevant information necessary to evaluate the
investment, and who represented to us that the warrants were being acquired for
investment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is filed as part of this report:
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K.
A Report on Form 8-K was filed on June 23, 2000, and subsequently
amended on July 31, 2000 pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 related to the June 8, 2000 sale of our Series B Preferred
Stock to Intellect Capital Group, LLC.
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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.
PHOTOLOFT.COM
Date: November 13, 2000 By: /s/ Brian P. Dowd
----------------------------
Brian P. Dowd
Chief Financial Officer
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