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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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-27329
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CYBERGOLD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3212392
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1330 Broadway, 12th Floor, Oakland, California 94612
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(Address of principal executive offices including zip code)
510-836-8700
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report)
Yes [X] No [ ],
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Although the registrant has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the period that the
registrant was required to file such reports, the registrant did not become
subject to such filing requirements until the registration of certain shares of
its common stock pursuant to a Registration Statement on Form S-1 which was
declared effective by the Securities and Exchange Commission on
September 22, 1999.
There were 19,340,420 shares of the Registrant's Common Stock outstanding as of
October 31, 1999.
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Cybergold, Inc.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets as of December 31, 1998 and September 30, 1999............................ 3
Statements of Operations for the three months and nine months
ended September 30, 1998 and 1999...................................................... 4
Statements of Cash Flows for the nine months ended September 30, 1998
and 1999............................................................................... 5
Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 29
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................................................ 29
Item 2: Changes in Securities and Use of Proceeds................................................ 29
Item 3: Defaults Upon Senior Securities.......................................................... 30
Item 4: Submission of Matters to a Vote of Security Holders...................................... 30
Item 5: Other Information........................................................................ 30
Item 6. Exhibits and Reports on Form 8-K......................................................... 30
Signatures.......................................................................................... 31
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CYBERGOLD, INC.
BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,175 $ 25,184
Short-term investments 0 23,984
Accounts receivable, net 391 1,371
Prepaid expenses and other current assets 26 49
-------- --------
Total current assets 3,592 50,588
Property and equipment, net 407 615
Deposits and other assets 41 41
-------- --------
TOTAL ASSETS $ 4,040 $ 51,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 257 $ 1,724
Current maturities of long term obligations 137 176
Members payable 800 1,646
Membership acquisition payable 176 908
Accrued liabilities 167 265
Deferred revenue 176 632
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Total current liabilities 1,713 5,351
Long-term obligations, net of current maturities 225 290
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Total liabilities 1,938 5,641
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Convertible redeemable preferred stock, Series C $0.00015
par value: 5,333 shares authorized, 4,189 and 0
issued and outstanding shares respectively 6,379 0
-------- --------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.00015 par value:
Authorized shares -- 2,123
Issued and outstanding shares --
2,000 and 0 shares respectively 0 0
Series B convertible preferred stock, $0.00015 par value:
Authorized shares -- 1,430
Issued and outstanding shares --
1,395 and 0 shares respectively 0 0
Common stock, $.00015 par value:
Authorized shares -- 75,000
Issued and outstanding shares --
4,048, and 19,326 respectively 1 3
Additional paid-in capital 8,611 67,645
Deferred compensation (767) (1,484)
Retained deficit (12,122) (20,561)
-------- --------
Total stockholders' equity (deficit) (4,277) 45,603
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,040 $ 51,244
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- --------------------
1998 1999 1998 1999
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Transaction $ 175 $ 1,083 $ 437 $ 1,964
Custom marketing services & other 108 295 116 691
-------- -------- -------- --------
Total revenues 283 1,378 553 2,655
Cost of revenues:
Transaction 105 509 202 924
Custom marketing services & other 37 46 41 204
-------- -------- -------- --------
Total cost of revenues 142 555 243 1,128
-------- -------- -------- --------
Gross margin 141 823 310 1,527
Operating expenses:
Product development 430 745 1,220 1,812
Sales and marketing 563 2,529 1,991 4,925
General and administrative 244 434 558 1,178
Amortization of deferred compensation 30 118 57 609
-------- -------- -------- --------
Total operating expenses 1,267 3,826 3,826 8,524
-------- -------- -------- --------
Loss from operations (1,126) (3,003) (3,516) (6,997)
Interest income, net 16 84 23 129
-------- -------- -------- --------
Net loss ($ 1,110) ($ 2,919) ($ 3,493) ($ 6,868)
Dividend attributable to
Preferred stockholders (283) (751) (377) (1,570)
-------- -------- -------- --------
Net loss attributable to
common stockholders ($ 1,393) ($ 3,670) ($ 3,870) ($ 8,438)
======== ======== ======== ========
Net loss per common share,
basic and diluted ($ 0.35) ($ 0.67) ($ 0.97) ($ 1.83)
======== ======== ======== ========
Pro forma basic and diluted ($ 0.15) ($ 0.38)
======== ========
Weighted average common shares,
outstanding, basic and diluted 4,025 5,509 4,010 4,600
======== ======== ======== ========
Pro forma basic and diluted 19,297 18,140
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,493) $ (6,868)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 195 235
Amortization of deferred compensation 57 609
Imputed compensation 113 83
Changes in assets and liabilities:
Accounts receivable 80 (980)
Prepaid expenses and other current assets (42) (23)
Accounts payable 0 1,467
Members payable 367 846
Membership acquisition payable 119 732
Accrued liabilities (39) 98
Deferred revenue 40 456
-------- --------
Net cash used in operating activities (2,603) (3,345)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (148) (447)
Purchases of short-term investments 0 (23,984)
-------- --------
Net cash used in investing activities (148) (24,431)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (69) (110)
Proceeds from equipment financing 0 218
Proceeds from issuance of preferred stock 5,718 8,000
Proceeds from exercise of Series D warrants 0 989
Proceeds from sale of common stock, net 0 40,642
Proceeds from exercise of stock options
net of repurchases 6 46
-------- --------
Net cash provided by financing activities 5,655 49,785
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,904 22,009
CASH AND CASH EQUIVALENTS
Balance at beginning of period 1,240 3,175
======== ========
Balance at end of period $ 4,144 $ 25,184
======== ========
Supplemental Cash Flow Information:
Cash paid for interest $ 55 $ 67
Acquisition of property and equipment
using capital leases 152 0
</TABLE>
The accompanying notes are an integral part of these statements.
5
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CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed financial statements of Cybergold, Inc. (the Company) are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
unaudited financial statements include all adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation of
the Company's financial position as of September 30, 1999 and the results of
operations for the three and nine months ended September 30, 1998 and 1999 and
cash flows for the nine months ended September 30, 1998 and 1999.
The unaudited interim condensed financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto included in the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on September 15, 1999, as amended. The
results of operations for the three and nine months ended September 30, 1999 are
not necessarily indicative of the results to be expected for any subsequent
quarter or the entire year ending December 31, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Cost of Revenues
The Company earns revenue from certain member transactions and from custom
marketing and other services. Transaction revenues are earned each time a member
earns or spends incentive rewards within the system and for micropayment
transactions. Transaction revenues are recognized as revenue upon completion of
the specific action related to the transaction fee. Custom marketing services
and other revenues include production and development fees received for
customization of marketing programs, fees received for delivering targeted
e-mail to the Company's members and fees received for other advertising and
marketing services. Revenue is recognized as these services are performed.
Prepayments by advertising or marketing clients for transaction fees or custom
marketing services are included in deferred revenue on the accompanying balance
sheets.
The cost of revenues associated with our transaction revenues represent cash
rewards paid to our members for completing transactions. The cost of revenues
associated with custom advertising and marketing services and other revenues
primarily consist of costs for production and development personnel and
independent contractors.
Any unpaid rewards due to members are recorded in members payable in the
accompanying balance sheets.
Short-term Investments
Short-term investments consist primarily of government and fixed-income
securities which the Company plans to hold to maturity. These investments
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are reported at amortized cost in the accompanying balance sheets. The total
market value of these securities as of September 30, 1999 was not materially
different from their carrying value.
3. INITIAL PUBLIC OFFERING
On September 23, 1999, the Company closed its initial public offering of
5,000,000 shares of the Company's common stock at $9.00 per share. Total net
proceeds were $40.6 million. Upon the closing of the initial public offering,
the Company's convertible preferred stock converted into 9.9 million shares of
common stock.
4. BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per share is computed by dividing the loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted loss per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Common stock equivalents are excluded from the
computation in loss periods, as their effect would be antidilutive.
The following is a reconciliation of the denominators used in calculating basic
and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares(denominator)
Weighted average common shares
outstanding 4,025 4,347 4,012 4,048
Weighted conversion of preferred
shares and warrants 0 1,150 0 387
Weighted options exercised less
repurchases 0 12 (2) 165
------ ------ ----- ------
Shares used in computation, basic
and diluted 4,025 5,509 4,010 4,600
====== ====== ===== ======
</TABLE>
5. PRO FORMA LOSS PER COMMON SHARE
Pro forma basic and diluted loss per common share is computed by dividing loss
attributable to common stockholders by the pro forma weighted average number of
common shares outstanding for the period. The pro forma weighted average number
of common shares assumes that the shares issued in connection with the
Company's initial public offering and the conversion of the outstanding
redeemable preferred stock occurred at the beginning of the period presented.
The following is a reconciliation of the denominators used in calculating pro
forma basic and diluted net loss per share (in thousands):
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<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1999
------- -------
<S> <C> <C>
Shares(denominator)
Weighted average common shares
outstanding 4,347 4,048
Conversion of all preferred
shares and warrants 14,938 13,927
Weighted options exercised less
repurchases 12 165
------ ------
Shares used in computation, pro
forma basic and diluted 19,297 18,140
</TABLE> ====== ======
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve risks and uncertainties. The
Company's actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, but not limited to, those set forth under
the caption "Risk Factors that May Affect Future Results" elsewhere in this
report.
OVERVIEW
Cybergold is a leading provider of Internet-based direct marketing and
advertising solutions. We combine Internet-based direct marketing and
advertising services with programs that reward consumers with cash when they
perform actions desired by our advertising and marketing clients. These
cash-based online incentive programs are designed to improve advertisement
response rates and reduce the cost of acquiring new customers for our clients.
Our business revolves around what we call the Earn & Spend Community - a place
on the Internet where consumers can earn cash incentives for responding to
online marketing offers presented by our advertising and marketing clients and
then spend the cash with merchants. By opening a Cybergold account, a consumer
can become a member of the Earn & Spend Community. The cash earned by our
consumer members can be credited to either their VISA or bank accounts from
their Cybergold account or be used to purchase content, services and products,
including software, music, games, credit reporting services and original
artistic works and publications through our Earn & Spend Community. We currently
have more than 3.4 million members through October 31, 1999.
The Company closed its initial public offering of 5,000,000 shares of Common
Stock, at a price of $9.00 per share on September 28, 1999. The net proceeds of
approximately $40.6 million from the initial public offering were added to the
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working capital of the Company. Pending use of the net proceeds, the Company has
invested such funds in short-term, interest bearing investment grade
obligations.
We were incorporated in October 1994 and from inception through the second
quarter of 1996, we were in an early stage of development, and had no sales and
limited operating activities. From the second quarter of 1996 through the first
quarter of 1997, operating activities related primarily to developing necessary
infrastructure, recruiting personnel, raising capital, initial strategic
planning and developing our Web site. In March 1997, we launched our initial
service and enrolled our first Cybergold members. In March 1999, we introduced
our micropayments system, and launched our Earn & Spend Community. Our
membership base increased from approximately 250,000 at December 31, 1997 to
approximately 1.0 million at December 31, 1998 and to approximately 3.2 million
at September 30, 1999. Although our membership has grown in prior periods, we
cannot be certain that our membership growth will continue at current rates or
increase in the future.
Our revenues consist of transaction revenues and custom marketing services and
other revenues. Transaction revenues represent fees paid to us each time a
member earns incentive rewards within our system and for micropayments
transactions. Our members earn rewards by responding to online advertisements
with a specific action such as filling out a survey or registering for services.
We are paid a transaction fee by advertisers or marketers and we pay a portion
of this fee to our members as a cash reward. We also earn a transaction fee when
our members spend their cash rewards or use cash transferred to their account
from a VISA card to purchase inexpensive digital content, services or products
through our site or other sites using our system. These transaction revenues are
not recognized until the transaction has been completed. In the case of
prepayments by the advertising or marketing client, amounts not yet recognized
are included in deferred revenue on the balance sheet. To date, our transaction
revenues have been primarily generated from per-transaction fees received from
our advertising and marketing clients for incentive programs. Revenues from
micropayment transactions have not been material.
Our transaction revenues are driven by a number of factors, including:
- the number of our advertising and marketing clients;
- the size of our membership base;
- the number of transactions performed by each member; and
- the average revenue per transaction.
Custom marketing services and other revenues include production and development
fees received for customization of marketing programs, fees received for
delivering targeted e-mail to our members and fees received for other
advertising and marketing services. Production and development fees represent
HTML design services, graphic services, engineering and database development and
related services. We charge clients for production and development fees on
either a fixed price or time and materials basis. Revenue is recognized as these
services are performed. These revenues fluctuate based on the number of new
programs initiated, type of services, and scope and complexity of each program.
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The cost of revenues associated with our transaction revenues represent cash
rewards paid to our members for completing transactions or actions. We pay our
members a portion of the amount received from the advertiser or marketer in
return for completing a specified response or action. Cash rewards to our
members are recorded as a current liability in the members payable account of
the balance sheet until transferred by a member to a bank account or a VISA card
or spent in a micropayment transaction. Gross margin on transaction revenues may
fluctuate based on the nature of the incentive programs and the advertisers and
marketers in any given period.
The cost of revenues associated with custom marketing services and other
revenues primarily consist of costs for production and development personnel and
independent contractors, including associated payroll tax, benefits and other
indirect costs. Gross margin associated with these revenues varies from contract
to contract depending on the specific terms of the individual contract, and may
also fluctuate significantly based on the number and size of fixed price
contracts that we undertake in any period and our ability to complete them
within the anticipated budget.
We have incurred net losses since inception and had an accumulated deficit
through September 30, 1999 of $20.6 million. Our losses have resulted primarily
from technology, systems and Web site development and launch, sales and
marketing, and general operations. We expect to continue to incur operating
losses through at least the year 2002. We plan to increase our operating
expenses as we continue to build brand and infrastructure, including expenses
for online and offline advertising, expanding programs for membership
recruitment, and for additional computer hardware and software, and
consequently, our losses will increase in the future. Our limited operating
history makes it difficult to forecast future operating results. Although we
have experienced revenue growth in recent quarters, we cannot be certain that
revenues will increase at a rate sufficient to achieve and maintain
profitability. Even if we were to achieve profitability in any period, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS
REVENUES
To date, our revenue is derived primarily from our online incentive programs.
Our revenues increased 387% from $283,000 for the three months ended September
30, 1998 to approximately $1.4 million for the three months ended September 30,
1999 and 380% from $553,000 for the nine months ended September 30, 1998 to
approximately $2.7 million for the nine months ended September 30, 1999.
Transaction Revenues. Transaction revenues increased 519% from $175,000 for the
three months ended September 30, 1998 to approximately $1.1 million for the
three months ended September 30,1999 and 349% from $437,000 for the nine months
ended September 30, 1998 to $2.0 million for the nine months ended September 30,
1999. The increase in transaction revenues is primarily the result of an
increased number of transactions driven by growth in our membership base. Total
membership grew to approximately 3.2 million as of September 30, 1999 from 2.2
million as of June 30, 1999 and 842,000 as of September 30, 1998, an increase of
42% and 278% respectively.
Custom Marketing Services and Other Revenues. Custom marketing services and
other revenues increased 173% from $108,000 for the three months ended September
30, 1998 to $295,000 for the three months ended September 30,1999 and
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496% from $116,000 for the nine months ended September 30, 1998 to $691,000 for
the nine months ended September 30, 1999. Qwest Communications Corporation,
which retained us to perform non-recurring software engineering services,
accounted for $250,000 of these revenues, all during the first six months of
1999. For the three months ended September 30, 1999, this revenue was comprised
of $240,000 in fees for the transmission of e-mails to our members, $29,000 for
placement fees and $26,000 for custom engineering fees. The increase in custom
marketing services and other revenues is the result of increasing demand for the
transmission of e-mails to our membership. We expect that custom marketing
services and other revenues will fluctuate from period to period.
COST OF REVENUES
Cost of revenues represents the cash incentives paid to members for performing
specified actions in response to advertisements and the personnel costs
associated with custom marketing services and other revenues. Cost of revenues
increased 291% from $142,000 for the three months ended September 30, 1998 to
$555,000 for the three months ended September 30, 1999 and 364% from $243,000
for the nine months ended September 30, 1998 to $1.1 million for the nine months
ended September 30, 1999.
The cost of transaction revenues increased 385% from $105,000 for the three
months ended September 30, 1998 to $509,000 for the three months ended September
30, 1999 and 357% from $202,000 for the nine months ended September 30, 1998 to
$924,000 for the nine months ended September 30, 1999. The increase in cost of
transaction revenues resulted primarily from an increase in the number of
transactions.
The cost of custom marketing services and other revenues increased 24% from
$37,000 for the three months ended September 30, 1998 to $46,000 for the three
months ended September 30, 1999 and 398% from $41,000 for the nine months ended
September 30, 1998 to $204,000 for the nine months ended September 30, 1999. The
increase resulted primarily from related growth in custom marketing services and
other revenues.
Gross margin increased to 60% for the three months ended September 30, 1999 from
50% for the three months ended September 30, 1998 and to 58% for the nine months
ended September 30, 1999 from 56% for the nine months ended September 30, 1998.
This increase in gross margin was primarily due to improved volume of high
margin services, namely e-mail transmissions, in custom marketing services. We
expect overall gross margin to fluctuate as a result of the overall variation in
the mix of services we provide, as well as from fluctuations in gross margin for
transaction revenue.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Our product development costs primarily consist of
compensation for technology personnel, fees for outside technology consultants,
and an allocation of overhead costs. Product development costs increased from
$430,000, or 152% of revenue, for the three months ended September 30, 1998 to
$745,000, or 54% of revenue, for the three months ended September 30, 1999.
Product development costs also increased from $1.2 million, or 221% of revenue,
for the nine months ended September 30, 1998 to $1.8 million, or 68% of revenue,
for the nine months ended September 30, 1999. The increase in absolute dollars
was due primarily to increased personnel and consulting expenses. The decrease
in product development costs as a percent of revenues is primarily attributable
to an increase in revenues. In addition, the fixed nature of some of our
development costs also contributed to the decrease in expense as a
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percentage of revenues. We believe that continued investment in product
development is critical to attaining our strategic objectives and, as a result,
we expect product development expenses to increase significantly on an absolute
dollar basis in the future. Product development expenses may fluctuate as a
percentage of revenue over time depending on the projects we undertake from time
to time.
SALES AND MARKETING. Our sales expenses consist primarily of compensation for
sales personnel, expenses for trade shows and an allocation of overhead costs.
Marketing expenses consist primarily of member acquisition expenses, promotions
directed towards new and existing incentives-based advertisers and marketers,
compensation for marketing personnel and an allocation of overhead costs. Sales
and marketing expenses increased from $563,000, or 199% of revenue, for the
quarter ended September 30, 1998 to $2.5 million, or 184% of revenue, for the
quarter ended September 30, 1999. Sales and marketing expenses also increased
from $2.0 million, or 360% of revenue, for the nine months ended September 30,
1998 to $4.9 million, or 185% of revenue, for the nine months ended September
30, 1999. The increase in absolute dollars was primarily attributable to
additional hiring of sales and marketing personnel, increased sales commissions
resulting from higher revenues, increased expenses associated with membership
acquisition, and increased advertising and promotional expenses. The decrease in
sales and marketing expenses as a percentage of revenues is attributable
primarily to an increase in revenues. We expect sales and marketing expenses to
increase on an absolute dollar basis in future periods as we hire additional
personnel in sales and marketing, expand into new markets and continue to
promote our advertising solutions.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include
compensation for administrative personnel, fees for outside professional
advisors and an allocation of overhead costs. General and administrative
expenses increased from $244,000, or 86% of revenue, for the quarter ended
September 30, 1998, to $434,000, or 31% of revenue, for the quarter ended
September 30, 1999. General and administrative expenses also increased from
$558,000, or 101% of revenue, for the nine months ended September 30, 1998 to
$1.2 million, or 44% of revenue, for the nine months ended September 30, 1999.
The increase in absolute dollars was due to the growth in staffing and related
expenses subsequent to our initial public offering. The decrease in general and
administrative expenses as a percentage of revenues is primarily attributable to
an increase in revenues. In addition, the fixed nature of a portion of our
general and administrative costs also contributed to the decrease in expenses as
a percentage in revenues. We expect general and administrative expenses to
increase on an absolute dollar basis in future periods as we hire additional
personnel and incur additional costs related to the growth of our business and
our operations as a public company.
AMORTIZATION OF DEFERRED COMPENSATION. In connection with the granting of
options to purchase our common stock to employees, directors and consultants, we
recorded deferred compensation representing the difference between the exercise
price of options granted and the deemed fair market value of our common stock at
the time of the grant. Amortization of deferred compensation of $30,000 and
$118,000 was amortized during the quarters ended September 30, 1998 and 1999.
Amortization of deferred compensation of $57,000 and $609,000 was amortized
during the nine months ended September 30, 1998 and 1999. Amortization of
deferred compensation of $1,484,000 will be amortized over the remaining vesting
periods of the related options, including $117,000 in the remainder of the year
ending December 31, 1999.
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INTEREST INCOME, NET. Interest income, net, consists of interest earned on cash
balances, including balances in Cybergold member accounts, offset by interest
expense incurred with respect to our capital leases and equipment financing
obligations. Interest income, net increased from $16,000 in the quarter ended
September 30, 1998 to $84,000 in the quarter ended September 30, 1999 and
increased from $23,000 for the nine months ended September 30, 1998 to $129,000
for the nine months ended September 30, 1999. The increase in interest income,
net, was due to interest earned on the proceeds from our sale of Series D
preferred stock in May of 1999 and our initial public offering in September of
1999.
INCOME TAXES. No income tax benefits have been recorded for any of the periods
presented due to the company's current loss position.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 we had $25.2 million of cash and cash equivalents and
$24.0 million in short-term investments and had borrowings of $466,000 under
capital leases and notes payable.
Net cash used in operating activities was $2.6 million and $3.3 million for the
nine months ended September 30, 1998 and 1999, respectively. Cash used in
operating activities for both periods resulted from net losses and increases in
accounts receivable, which were offset by increases in accounts payable, members
payable, membership acquisition payable, accrued liabilities and deferred
revenues.
Net cash used in investing activities was $148,000 and $24.0 million for the
nine months ended September 30, 1998 and 1999, respectively. Cash used in
investing activities consisted primarily of acquisitions of property and
equipment in the nine months ended September 30, 1998, and the investment of
proceeds in short-term investments from our initial public offering for the nine
months ended September 30, 1999.
Net cash provided by financing activities was $5.7 million and $49.8 million for
the nine months ended September 30, 1998 and 1999, respectively. Cash provided
by financing activities resulted primarily from the sale of preferred stock in
1998 and from the sale of preferred stock in May 1999 and the sale of common
stock in our initial public offering in September 1999 in 1999.
While we do not have any material commitments for capital expenditures, we
anticipate that we will experience a substantial increase in our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We plan to incur between $500,000 and $750,000 in
capital expenditures during the fourth quarter of 1999. We currently anticipate
that we will continue to experience significant growth in our operating expenses
for the foreseeable future and that our operating expenses will be a material
use of our cash resources. We believe that our existing cash, cash equivalents
and short-term investments and available credit facilities, will be sufficient
to meet our anticipated cash needs for working capital, repayment of debt and
capital expenditures through the end of 2000. However, we may need to raise
additional funds sooner to fund more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If adequate funds are not
available on acceptable terms, our business, results of operations and financial
condition could be harmed.
YEAR 2000 COMPLIANCE
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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
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
We have made an assessment of the Year 2000 readiness of all our relevant
operating, financial and administrative systems. Our assessment plan consists
of:
- quality assurance testing of our internally developed proprietary
software;
- contacting third-party vendors and licensors of material hardware and
software that are both directly and indirectly related to the delivery of
our services to users;
- appointing a Year 2000 compliance team composed of a cross-section of
our employees and appointing a manager of the team;
- assessing repair or replacement;
- implementation of the plan; and
- creating contingency plans in the event of Year 2000 failures.
We designed the software underlying our Web-based programs as well as our Web
site and related technology infrastructure to be Year 2000 compliant. However,
we rely on third-party hardware and software in the operation of our business.
We believe we have identified all of the major information systems used in our
internal operations, including operating systems, databases and the
software residing between databases and the user interface, and have
substantially completed all modifications, upgrades or replacements to minimize
the possibility of a material disruption of our business. These remediation
activities include updating these systems to the newest versions, which are
claimed to be Year 2000 compliant, and applying patches to current versions. The
expenditures that we have incurred to date and the expenditures we expect to
incur in this regard have not been and are not expected to be material to our
business, results of operations and financial condition.
We have also contacted the vendors of third-party hardware and software we use
in order to gauge their Year 2000 compliance. Based on these vendors'
representations and the activities we have conducted, we believe that the
third-party hardware and software we use are Year 2000 compliant. We cannot
assure you, however, that we will not experience unanticipated negative
consequences, including material costs caused by undetected errors or defects in
the technology used in our internal systems. If, in the future, it comes to our
attention that the software underlying our e-mail or Web-based programs requires
modification, or that any of our third-party hardware and software are not Year
2000 compliant, then we will seek to make modifications to our systems. In such
case, we expect such modifications will not have a material effect on our
results of operations. There can be no assurance, however, that we will be able
to modify such systems in a timely and successful manner to comply with the Year
2000 requirements. Any failure to do so could have a material adverse effect on
our business, results of operations and financial
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<PAGE> 16
conditions. The worst case scenario for Year 2000 problems for us if the
third-party hardware and software we use in our service were to prove not to be
Year 2000 compliant would be the need to cease normal operations for an
indefinite period of time if our web site were to become inoperative and the
need to remediate transactions that were incorrectly processed or recorded.
We do not currently have any information concerning the Year 2000 compliance
status of our advertising and marketing clients. We plan to contact advertising
and marketing clients to remind them of the Year 2000 problem and its potential
effects on their systems and to gauge their Year 2000 compliance. However, to
the extent that our advertising and marketing clients are no longer able to
process transactions, process them incorrectly, or transmit incorrect date to
our systems, our business could be adversely affected. If our current or future
advertising and marketing clients fail to achieve Year 2000 compliance or if
they divert expenditures, especially technology expenditures that were reserved
for promotional products, to address Year 2000 compliance problems, our
business, results of operations, or financial condition could be materially
adversely affected.
We are also vulnerable to systemic failures resulting from Year 2000 problems.
These failures could include prolonged data communications, telecommunications
or electrical failures. A failure of this type could prevent members from
accessing our Web site or prevent us from operating our business. As a result,
we could experience lost revenues, increased operating expenses and loss of
members. Any of these eventualities could have a material adverse effect on our
business, results of operations and financial condition.
We have developed a contingency plan to address Year 2000 problems that are not
detected and corrected prior to their occurrence. However, the contingency plan
notes high reliance on auxiliary, third-party platforms and systems. The
implementation of the contingency plan depends on cooperation and support from
these vendors.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE
We have not achieved profitability in any previous quarter, and given our
planned level of operating expenses, we expect to continue to incur operating
losses for the foreseeable future. We incurred net losses of $2.7 million for
the year ended December 31, 1996, $3.9 million for the year ended December 31,
1997, $4.8 million for the year ended December 31, 1998 and $6.9 million for the
nine months ended September 30, 1999. Our retained deficit as of September 30,
1999 was approximately $20.6 million. We plan to increase our operating expenses
as we continue to build brand and infrastructure and consequently, our losses
will increase in the future. Although we have experienced revenue growth in
recent quarters, we cannot be certain that revenues will increase at a rate
sufficient to achieve and maintain profitability. If our revenue growth is
slower than we anticipate or our operating expenses exceed our expectations, our
losses will significantly increase. We may never achieve profitability. Even if
we were to achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE OPERATED OUR
BUSINESS ONLY FOR A SHORT PERIOD OF TIME AND HAVE ONLY A LIMITED OPERATING
HISTORY UPON WHICH TO EVALUATE OUR BUSINESS
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We were incorporated in October 1994 but did not begin to generate meaningful
revenues until March 1997. Accordingly, we have only a limited operating history
upon which to evaluate our business and prospects. The revenues and income
potential of our business and the markets for online incentives-based direct
marketing programs and for making small payments over the Internet are unproven.
We will encounter risks and difficulties that are frequently encountered by
early stage companies in new and rapidly evolving markets. Many of these risks
are described in more detail in this "Risk Factors That May Affect Future
Results" section.
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition may be harmed.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS OF OPERATIONS MAKES IT DIFFICULT
TO PREDICT OUR FINANCIAL PERFORMANCE AND MAY ADVERSELY AFFECT THE TRADING PRICE
OF OUR COMMON STOCK
Our quarterly results of operations have varied in the past and are likely
to vary significantly from quarter to quarter. A number of factors are likely to
cause these variations, some of which are outside of our control. These factors
include:
- changes in revenue levels resulting from the advertising and marketing
budget cycles of individual advertisers and marketers;
- changes in advertising and marketing costs that we incur to attract and
retain members;
- changes in our pricing policies, the pricing policies of our competitors
or the pricing policies for Internet advertising and marketing generally;
- our rate of member acquisition and the level of activity of new and
existing members;
- the number and type of programs and development contracts established
with our advertising and marketing clients as well as the impact of the
fixed price portion of development contracts, which accounted for 17%
and three percent of total revenues in the year ended December 31, 1998
and the nine months ended September 30, 1999, respectively, on gross
margin;
- the introduction of new products and services by us or by our
competitors;
- unexpected costs and delays resulting from the expansion of our
operations; and
- the occurrence of technical difficulties or unscheduled system downtime.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising and marketing and consumer
purchasing, which are typically higher during the fourth calendar quarter and
lower in the following quarter. In addition, expenditures by advertisers and
marketers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns. Consequently, our results of operations could be
harmed by a downturn in the general economy or a shift in consumer buying
patterns.
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Due to these and other factors, we believe that quarter-to-quarter comparisons
of our operating results may not be meaningful and you should not rely upon them
as an indication of our future performance. Our operating expenses are based on
expected future revenues and are relatively fixed in the short term. If our
revenues are lower than expected, we would incur greater than expected losses.
In addition, during future periods our operating results likely will fall below
the expectations of public market analysts and investors. In this event, the
market price of our common stock likely would decline.
IF ONLINE INCENTIVES-BASED DIRECT MARKETING PROGRAMS DO NOT GAIN INCREASED
ACCEPTANCE BY MEMBERS, ADVERTISING AND MARKETING CLIENTS AND MERCHANTS, WE WOULD
HAVE SLOWER REVENUE GROWTH THAN EXPECTED AND WOULD INCUR GREATER THAN EXPECTED
LOSSES
Our success depends in part on the increased acceptance of online
incentives-based direct marketing programs. Although incentive programs have
been used extensively in traditional marketing and sales channels, they have
only recently begun to be used online.
The success of online incentives-based direct marketing programs will depend on
the ability of these programs to attract and retain members, advertising and
marketing clients and merchants. Our ability to attract and retain members,
clients and merchants will depend on our marketing efforts and on the quality of
each member, client or merchant experience with our system. The number and
relevance of the direct marketing offers we provide and the perceived value of
the incentives we offer will be necessary to achieve future success. Our ability
to generate revenue from clients and merchants will depend on our ability to
differentiate ourselves through the services we provide and technology solutions
we offer, as well as our success in generating adequate participation from
consumers in our online incentives-based direct marketing programs. The
attractiveness of our program to consumers depends in large part on the
attractiveness of the incentives we offer. To the extent that our online
incentives-based direct marketing program does not achieve market acceptance
among members, clients and merchants, we would have slower revenue growth than
expected and would incur greater than expected losses, and our business, results
of operations and financial condition would be harmed.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND AN ACTIVE MEMBERSHIP
BASE
Our success largely depends on our ability to maintain and expand an active
membership base. Although we currently have approximately 3.4 million members
through October 31, 1999, we generate the majority of our revenues from a small
percentage of our members, and we cannot assure you that the percentage of
active members will increase. In addition, approximately 720,000 of our members
have requested not to receive e-mail from us. Because our revenues are primarily
driven by commissions paid by advertisers and direct marketers based on specific
actions taken by our members, if we are unable to induce existing and new
members to actively participate in the Cybergold Earn & Spend Community, our
business, results of operations and financial condition will be harmed. Although
our membership has grown in prior periods, we cannot be certain that our
membership growth will continue at current rates or increase in the future.
Currently, we attract the majority of our members through co-registration
agreements with online partners, whereby registrants for those sites have the
option to concurrently sign up for the Cybergold Earn & Spend Community. We
believe that the convenience afforded by this co-registration capability is a
significant factor in attracting new members. If we were to lose these
relationships with our online co-registration partners, we would
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lose a significant source of new members, and our business, results of
operations and financial condition would be harmed.
IF OUR RELATIONSHIP WITH THE FIRST NATIONAL BANK OF OMAHA WERE TO DETERIORATE OR
TERMINATE OR IF THE FIRST NATIONAL BANK OF OMAHA WERE TO ENTER INTO SIMILAR
RELATIONSHIPS WITH OUR COMPETITORS, OUR ABILITY TO DEPOSIT TO AND TRANSFER FUNDS
FROM VISA ACCOUNTS COULD BE DISCONTINUED OR WE COULD FACE INCREASED COMPETITION
Cybergold has a relationship with the First National Bank of Omaha, an acquiring
bank for VISA, that enables the transfer of funds from individual Cybergold
member accounts to their VISA accounts, as well as from their VISA accounts to
their Cybergold accounts. This transaction processing capability required
re-engineering of the First National Bank of Omaha's VISA transaction processing
system, and would be difficult to replicate with another financial service
provider if our relationship with the First National Bank of Omaha were to
deteriorate or terminate. The First National Bank of Omaha can terminate the
contract at any time with 30 days notice. Currently, under the conditions of our
contract, we cannot enter into similar relationships with other credit card
providers such as MasterCard, American Express or Discover. However, the First
National Bank of Omaha can at its own discretion freely offer similar services
to our existing and potential competitors. If we were to lose this relationship
with the First National Bank of Omaha, or if they were to extend similar
services to our competitors, our business, results of operations and financial
condition would be harmed.
IF WE ARE UNABLE TO ESTABLISH THE CYBERGOLD BRAND, OUR ABILITY TO ATTRACT
ADVERTISING AND MARKETING CLIENTS, MEMBERS AND MERCHANTS WOULD BE HARMED
Developing a strong brand is critical to our business. The reputation of
the Cybergold brand will largely depend on our ability to provide a high-quality
experience for our clients, members and merchants. We cannot assure you that we
will be successful in developing our brand. Any client, member or merchant
dissatisfaction with the quality of an experience with our company for reasons
within or outside of our control could damage our reputation. Any damage to our
reputation could have a material adverse effect on our business, results of
operations and financial condition. We intend to spend a portion of the proceeds
of this offering to further develop our brand. If we expend additional resources
to build the Cybergold brand and do not generate a corresponding increase in
revenues as a result of our branding efforts, or if we otherwise fail to promote
our brand successfully, our business, results of operations and financial
condition would be harmed.
IF THE INTERNET FAILS TO GAIN FURTHER ACCEPTANCE AS A MEDIUM FOR ADVERTISING AND
MARKETING, WE WOULD HAVE SLOWER REVENUE GROWTH THAN EXPECTED AND WOULD INCUR
GREATER THAN EXPECTED LOSSES
Our business depends on market acceptance of the Internet as a medium for
advertising and marketing. Advertisers, marketers and advertising and marketing
agencies that have historically relied on traditional forms of advertising and
marketing may be reluctant or slow to adopt online advertising and marketing.
Many advertisers and marketers have limited or no experience using the Internet
as an advertising and marketing medium. In addition, these advertisers and
marketers may have allocated only a limited portion of their budgets to online
advertising and marketing, or may find online advertising and marketing to be
less effective for promoting their products and services than traditional
advertising and marketing media, including television, radio and print.
Advertisers, marketers, and advertising and marketing agencies that have
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invested substantial resources in traditional methods of advertising and
marketing may also be reluctant to reallocate their resources to online
advertising and marketing. The market for online advertising and marketing also
depends on the overall growth and acceptance of electronic commerce. If the
markets for online advertising and marketing and electronic commerce fail to
develop or develop more slowly than we expect, we would have slower revenue
growth than expected and would incur greater than expected losses, and our
business, results of operations and financial condition would be harmed.
THE MARKET FOR MAKING SMALL PAYMENTS OVER THE INTERNET IS NEW AND WE CANNOT BE
CERTAIN THAT A VIABLE MARKET FOR OUR PRODUCTS WILL EMERGE OR BE SUSTAINABLE
We cannot assure you that the demand for and market acceptance of Internet
micropayment services will develop to a sufficient level to support our
continued operations or planned expansion, and we also cannot assure you that
consumers, Web sites or merchants will utilize a system for micropayment
transactions over the Internet. Currently, Internet content and service
providers typically use a subscription model to charge for content or services
they provide, if they charge consumers directly for their content or services at
all. We cannot assure you that these entities will ever adopt a method for
accepting small payments for their content or services over the Internet. In
addition, the development of a market for micropayments on the Internet may
depend on the eventual adoption of a standard micropayment system. There can be
no assurance that our micropayment system will be the system adopted by
consumers, Web sites, or merchants. If a widespread demand for micropayments
does not develop or if another method for micropayments is adopted as a
standard, our business, results of operations and financial condition will be
harmed.
WE FACE SIGNIFICANT COMPETITION FROM ONLINE INCENTIVES-BASED ADVERTISING AND
MARKETING PROGRAMS AND PROVIDERS OF MICROPAYMENT SYSTEMS
We face significant competition from online incentives-based advertising and
marketing programs and providers of micropayment systems. We expect competition
to increase due to the lack of significant barriers to entry for online business
generally and for online incentives programs and micropayment transactions in
particular. Currently, several companies offer competitive online incentives
programs, including MyPoints.com, Inc. and Netcentives, Inc.
We may also face competition from established Internet portals and community Web
sites that engage in direct marketing, as well as from traditional advertising
agencies and direct marketing companies that may seek to offer online products
or services. In addition, financial service organizations, such as banks and
credit card companies, or other large organizations may develop competitive
micropayment systems and incentives-based advertising and marketing programs.
Some of our current and potential competitors have longer operating histories,
greater brand recognition, larger client and member bases and significantly
greater financial, technical and marketing resources than we do. These
advantages may enable them to respond more quickly to new or emerging
technologies and changes in customer preferences. These advantages may also
allow them to engage in more extensive research and development, undertake
extensive far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, strategic
partners and advertisers. As a result, it is possible that our existing
competitors or new competitors may rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margin and
loss of market share. We may not be able to compete successfully, and
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competitive pressures may adversely affect our business, results of operations
and financial condition.
A SIGNIFICANT PORTION OF OUR QUARTERLY REVENUES IS RECOGNIZED FROM A LIMITED
NUMBER OF ADVERTISING AND MARKETING CLIENTS
A significant portion of our revenues to date have been recognized from a
limited number of advertising and marketing clients. Our five largest clients
accounted for approximately 65% and 37% of our revenues for the year ended
December 31, 1998 and the nine months ended September 30, 1999, respectively and
our ten largest clients accounted for approximately 84% and 56% of our revenues
for the year ended December 31, 1998 and the nine months ended September 30,
1999, respectively. We generally do not have long-term contracts with any of our
clients, and clients can generally terminate their relationships with us upon
specified notice and without penalties. Our client base fluctuates significantly
from quarter to quarter primarily as a result of the advertising and marketing
budget cycles of individual clients. In addition, to date this fluctuating
client base has been drawn from a concentrated group of companies. Revenues from
significant clients as a percentage of total revenues are as follows:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31, 1998
Qwest Communications International, Inc................... 22%
Interactive Coupon Network (Cool Savings)................. 16%
NINE MONTHS ENDED SEPTEMBER 30, 1999
Qwest Communications International, Inc................... 9%
autobytel.com inc......................................... 9%
</TABLE>
We expect that the majority of our revenues will continue to depend on sales to
a relatively small number of clients and that our client base will continue to
vary significantly from quarter to quarter. Any negative change in our
relationship with or downturn in the business of clients or any general downturn
in the businesses of the concentrated group of companies from which our client
base is drawn could seriously harm our results of operations.
IF WE FAIL TO ADAPT TO RAPID CHANGE IN OUR INDUSTRY OR OUR INTERNALLY DEVELOPED
SYSTEMS CANNOT BE MODIFIED PROPERLY FOR INCREASED TRAFFIC OR VOLUME, OUR
PRODUCTS AND SERVICES MAY BECOME OBSOLETE
Our industry is characterized by rapid change. The introduction of products
and services embodying new technologies, the emergence of new industry standards
and changing consumer needs and preferences could render our existing services
obsolete and unmarketable. Our future success will depend in part on our ability
to respond effectively to rapidly changing technologies, industry standards and
customer requirements by adapting and improving the performance features and
reliability of our services. We may experience technical difficulties that could
delay or prevent the successful development, introduction or marketing of new
products and services. In addition, any new enhancements to our products and
services must meet the requirements of our current and prospective users. We
could incur substantial costs to modify our services or infrastructure to adapt
to rapid change in our industry.
We internally developed our systems for maintaining our Web site processing
transactions and maintaining member accounts. If, in the future, we cannot
modify these systems to accommodate increased traffic and an increased volume of
transactions and orders, we could suffer slower response time, problems with
customer service and delays in reporting accurate financial information. During
the first six months of 1999, we experienced instances of unscheduled system
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downtime, which resulted in our Web site being inaccessible for periods ranging
from several minutes to several hours and could experience such unscheduled
system downtime in the future.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND IF WE ARE UNABLE TO PROTECT
THESE RIGHTS, WE MAY FACE INCREASED COMPETITION OR GREATER DIFFICULTY IN
SUCCESSFULLY ESTABLISHING THE CYBERGOLD BRAND
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our technology or business model.
Monitoring unauthorized use of our technology and business model is difficult
and we cannot be certain that the steps we have taken will prevent unauthorized
use of our technology and business model. In addition, our business activities
may infringe upon the proprietary rights of others, and, from time to time, we
have received and may continue to receive, claims of infringement against us.
In July 1999, Cybergold received a letter from TechSearch L.L.C. claiming
that Cybergold infringes on U.S. patent 5,253,341. TechSearch initially offered
to grant to Cybergold a perpetual license to the patent and grant a full release
for any past infringement in exchange for the payment of $150,000. This offer
expired on August 1999. TechSearch states that its patent claims methods and
systems for retrieving graphical and/or audio data from a remote server in
response to a query and for then presenting the information to an end user, and
that Cybergold infringes on TechSearch's patent by providing audio/visual and
graphical presentations to end users. Cybergold is assessing the validity of
TechSearch's claim, and upon the completion of such assessment, will evaluate
the merits of entering into a license or other similar arrangement.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time consuming and
expensive to resolve and would divert management's time and attention away from
our business. Any potential intellectual property litigation could also force us
to do one or more of the following:
- make significant changes to the structure and operation of our business;
- attempt to design around a third party's patent; or
- license alternative technology from another party.
Implementation of any of these alternatives could be costly and time consuming,
and may not be possible. Accordingly, an adverse determination in any litigation
that we are a party to would have a material adverse effect on our business,
results of operations and financial condition.
Cybergold has two issued U.S. Patents covering its business model and software
architecture. We also have U.S. and foreign pending patent applications.
Cybergold is our only registered trademark, although we have applied to register
additional trademarks in the United States. We cannot assure you that our
patents or trademarks will not be successfully challenged by others or
invalidated. As in the case of any patent covering a business method, it is
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possible that, unknown to Cybergold, some third party was using business methods
the same as or similar to those claimed in Cybergold's patents before
Cybergold's patent applications were filed, which might render Cybergold's
patents invalid. In addition, we cannot assure you that our pending patents will
be issued or that our trademark registrations will be approved. If our trademark
registrations are not approved because third parties own these trademarks, our
use of these trademarks would be restricted unless we entered into arrangements
with the third-party owners, which might not be possible on reasonable terms.
We generally enter into confidentiality or license agreements with our employees
and consultants, and control access to and distribution of our technologies,
documentation and other proprietary information. Despite our efforts to protect
our proprietary rights from unauthorized use or disclosure, unauthorized parties
may attempt to disclose, obtain or use our solutions or technologies. We cannot
assure you that the steps we have taken will prevent misappropriation of our
solutions or technologies, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD AFFECT OUR ABILITY TO OPERATE
OUR WEB SITE AND OUR BUSINESS
Our success depends on the capacity, reliability and security of our networking
hardware, software and telecommunications infrastructure. We use network servers
that are housed at an Internet co-location service provider's data center in San
Jose, California. Despite precautions taken by us and the host of our Web site,
our system is susceptible to natural and man-made disasters such as earthquakes,
fires, floods, power loss and vandalism. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of our systems. In addition, any technical
failure or security problems at our Internet service provider and co-location
facility could harm our business, financial condition and results of operations.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any damages or interruptions in our systems. Accordingly, we could
be required to make capital expenditures in the event of unanticipated damage.
We do not currently have redundant systems or a formal disaster recovery plan.
In addition, our members depend on Internet service providers for access to our
Web site. Internet service providers and Web sites have experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. These problems could harm our
business, results of operations and financial condition.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE HARMED
Our success will depend in part on our ability to manage our growth and
expansion effectively. We plan to expand our technology, sales, administrative
and marketing organizations. Our anticipated future expansion may place a
significant strain on our management systems and resources. We will need to
continue to improve our financial and managerial controls and reporting systems
and procedures and to expand, train and manage our workforce.
MANY OF OUR KEY PERSONNEL ARE NEW TO CYBERGOLD AND MAY NOT WORK TOGETHER
SUCCESSFULLY
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A number of people on our management team and sales force have joined Cybergold
in the last 12 months. Our management team has limited experience
working together. Our future performance will depend, in part, on our ability to
integrate successfully our newly hired executive officers into our management
team, and our ability to develop an effective working relationship among
management. Our executive officers, who have worked together for only a short
time, may not be successful in working together or managing our company. Any
dissent among executive officers, or between our officers and our board of
directors, could affect our ability to make strategic decisions. In addition,
the majority of our sales force has joined Cybergold in the last nine months and
they have limited experience marketing our services and working together. If our
key personnel are unable to market our services and work together successfully,
our business, results of operations and financial condition could be harmed.
COMPETITION FOR EMPLOYEES IN OUR INDUSTRY AND IN OUR GEOGRAPHIC REGION IS
INTENSE, AND WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY EMPLOYEES
Our future success will depend, in part, on our ability to attract and retain
highly skilled employees, particularly management, sales and technical
personnel. Competition for employees in our industry and in our geographic
region is intense. We may be unable to retain our key employees or to attract
other highly qualified employees in the future. We have experienced difficulty
from time to time in retaining and attracting the personnel necessary to support
the growth of our business, particularly engineering and sales personnel, and we
may experience similar difficulty in the future. If we are unable to hire or
retain key employees, our business, results of operations and financial
condition will be harmed.
POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO ASSIMILATE INTO OUR OPERATIONS, USE A
SIGNIFICANT AMOUNT OF OUR AVAILABLE CASH, RESULT IN DILUTION TO OUR STOCKHOLDERS
AND ADVERSELY AFFECT OUR REPORTED RESULTS OF OPERATIONS
We may acquire or make investments in businesses, products, services, or
technologies to carry out our business strategy. We have not made a significant
acquisition or investment to date. If we acquire businesses, products, services
or technologies, we could have difficulty in assimilating them into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. In addition, effecting
acquisitions could require use of a significant amount of our available cash.
Furthermore, we may have to issue equity or equity-linked securities to pay for
future acquisitions, and any of these issuances could be dilutive to existing
and future stockholders. In addition, acquisitions and investments may have
negative effects on our reported results of operations due to
acquisition-related charges and amortization of acquired technology and other
intangibles. Any of these acquisition-related risks or costs could harm our
business, financial condition and operating results.
IF WE EXPAND OUR BUSINESS INTERNATIONALLY WE MAY BE SUBJECT TO FOREIGN
GOVERNMENT REGULATION AND TAXATION, CURRENCY ISSUES, DIFFICULTIES IN MANAGING
FOREIGN OPERATIONS AND FOREIGN POLITICAL AND ECONOMIC INSTABILITY
An element of our growth strategy is to introduce our services in international
markets. Our participation in international markets will be subject to a number
of risks, including foreign government regulations, export license requirements,
tariffs and taxes, fluctuations in currency exchange rates, introduction of the
European Union common currency, difficulties in managing foreign operations and
political and economic instability. To the extent our
24
<PAGE> 25
potential international members are impacted by currency devaluations, general
economic crises or other macroeconomic events, the ability of our members to
utilize our services could be diminished. In order to help us address some of
the risks associated with introducing our services internationally, we believe
it will be necessary to establish strategic relationships with international
partners. To date, we have not entered into any strategic relationship with any
international partners. We cannot assure you that we will be able to establish
international relationships, or that if established, they will be successful. In
addition, we cannot assure you that electronic commerce will develop
successfully in international markets or that potential members in these foreign
markets will utilize incentives-based marketing programs. Furthermore, we cannot
assure you that we will be able to develop banking relationships with foreign
banks or overcome any legal restrictions related to offering cash rewards and
incentives that exist in foreign jurisdictions. Any failure to develop our
business internationally may harm our competitive position and consequently our
business.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN
We currently anticipate that our available cash resources combined with the net
proceeds from this offering will be sufficient to meet our anticipated capital
expenditures and working capital requirements through the end of 2000. However,
we may need to raise additional funds sooner to fund more rapid expansion, to
develop new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary products, businesses, or technologies. If
additional funds are raised through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced. In
addition, these securities may have rights, preferences or privileges senior to
those of our stockholders. 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
expansion, take advantage of potential opportunities, develop or enhance
services or products, or otherwise respond to competitive pressures would be
significantly limited. Our business, results of operations
and financial condition could be harmed by this limitation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for a discussion of working capital and capital
expenditures.
RISKS RELATED TO THE INTERNET INDUSTRY
IF WE ARE UNABLE TO SECURELY MAINTAIN OUR MEMBERSHIP DATABASE, MEMBERS MAY BE
DETERRED FROM USING OUR SERVICES
An important feature of our program is our ability to develop and maintain
individual member profiles. Security and privacy concerns may cause consumers to
resist providing the personal data necessary to support this profiling
capability. As a result of these security and privacy concerns, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Use of our Cybergold Earn & Spend
Community could decline if any compromise of security occurred. In addition, if
unauthorized third parties gain access to our system and alter or destroy
information in our database, our ability to target direct marketing offers to
members would be harmed. We could also be subject to legal claims from members.
Any public perception that we engaged in unauthorized release of member
information would adversely affect our ability to attract and retain members.
Any of these events could have a material adverse effect on our business,
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<PAGE> 26
results of operations and financial condition.
We maintain a database containing information on our members, including
their account balances. Our database may be accessed by unauthorized users
accessing our systems remotely. If we experience a security breach, the
integrity of our database may be jeopardized. Any breach of this type could lead
to financial losses through the unauthorized redemption of monies.
WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY
OUR INSURANCE
The nature and breadth of information disseminated on our Web site could expose
us to liability in various areas, including claims relating to:
- programs and promotions we offer;
- content and publication of various materials posted on our Web site
based on defamation, libel, negligence, personal injury and other legal
theories; and
- copyright or trademark infringement and wrongful action due to the
actions of third parties.
Claims of these kind against us would result in our incurring substantial costs
and would have a negative impact on our financial and other resources. If there
were numerous claims, or if the claims were severe, we would need to implement
measures to reduce our exposure and potential liability. Accordingly, we may be
required to change our services in such a way that would be less attractive to
our advertisers, marketers, merchants and members. This in turn could reduce
traffic to our Web site, negatively impact our membership or reduce our revenue
from electronic commerce or advertising and marketing. Our general liability
insurance may be insufficient to cover expenses and losses in connection with
any claims against us. To the extent our insurance coverage does not cover
liability or expenses we incur, our business, financial condition and results of
operations would be harmed.
IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR
BUSINESS WOULD BE HARMED BECAUSE MEMBERS MAY NOT BE ABLE TO ACCESS OUR SERVICES
We depend on the Internet infrastructure to provide the performance, capacity
and reliability needed to support the anticipated expansion of electronic
commerce on the Internet. If Internet usage grows, the Internet infrastructure
may not be able to support the demands placed on it by this growth, and its
performance and reliability may decline. Among other things, continued
development of the Internet infrastructure will require a reliable network
backbone with necessary speed, data capacity and security. Currently, there are
regular failures of the Internet network infrastructure, and there are likely to
be more in the future. These failures may undermine our marketing clients' and
our members' confidence in the Internet as a viable commercial medium. Any
actual or perceived degradation in the performance of the Internet as a whole
could undermine the benefits of our services. In addition, the Internet could
lose its viability as a commercial medium due to delays in the development or
adoption of new technology required to accommodate increased levels of Internet
activity or due to government regulation. If outages or delays occur frequently
in the future, electronic commerce and the use of our services could grow more
slowly or decline, which could harm our business, results of operations and
financial condition.
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<PAGE> 27
WE MAY BE VULNERABLE TO UNAUTHORIZED ACCESS, COMPUTER VIRUSES AND OTHER
DISRUPTION PROBLEMS THAT COULD REQUIRE INTERRUPTIONS, DELAYS OR CESSATION OF
SERVICE TO USERS ACCESSING OUR WEB SITE
Despite the implementation of security measures, our networks may be vulnerable
to unauthorized and illegal access, computer viruses and other disruptive
problems. Eliminating computer viruses and alleviating other security problems
may require interruptions, delays or cessation of service to users accessing our
Web site, which could have a material adverse effect on our business, results of
operations and financial condition. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
our Internet operations. Internet service providers and online service providers
have in the past experienced, and may in the future experience, interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. We may be required to expend significant
capital or other resources to protect against the threat of security breaches or
to alleviate problems caused by breaches. Although we intend to continue to
implement security measures, we cannot be certain that measures implemented by
us will not be circumvented in the future.
INCREASED SECURITY RISKS OF TRANSMISSION OF CONFIDENTIAL INFORMATION OVER PUBLIC
NETWORKS MAY DETER USE OF OUR SERVICES
A necessity of online commerce and communications is the secure transmission of
confidential information over public networks. Our security measures may not
prevent security breaches. Any failure to prevent security breaches could harm
our business. We rely on encryption and authentication technology licensed from
third parties to provide the security and authentication technology to effect
secure transmission of confidential information, including customer credit card
numbers. Advances in computer capabilities, new discoveries in the field of
cryptography, or other developments may result in a compromise or breach of the
technology used by us to protect customer transaction data. Any compromise of
our security could harm our reputation and, therefore, our business.
FUTURE REGULATION OF THE INTERNET COULD RESTRICT THE OPERATION AND GROWTH OF OUR
BUSINESS
Any new regulation of the Internet could inhibit growth of the Internet and
decrease the acceptance of the Internet as a communications and commercial
medium, which could have a material and adverse effect on our business. The laws
governing the Internet and e-mail services remain largely unsettled. There is no
single governmental body overseeing our industry, and many state laws enacted in
recent years have different and sometimes inconsistent application to our
business.
In addition, industry standards and practices by e-mail providers, including
Internet service providers and other third-party e-mail providers, vary. Some of
these providers have blocked in the past and, at their discretion, may in the
future elect to block, all e-mails coming from a specific domain, such as
Cybergold. We have experienced limited blockages by some e-mail providers of
e-mail correspondence from us. These blockages have not had a material effect on
our business, results of operations or financial condition. However, because our
revenues are driven in part by the number of members to whom we are able to
deliver targeted e-mails, any blockage of e-mails by a significant e-mail
provider, or by a significant number of e-mail providers in the aggregate, of
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<PAGE> 28
e-mails coming from us could harm our business, results of operations and
financial condition.
POTENTIAL PRIVACY REGULATION
In addition, the Federal Trade Commission is considering the adoption of
regulations regarding the collection and use of personal information obtained
from individuals, especially children, when accessing Web sites. These
regulations could restrict our ability to provide demographic data to our
advertising and marketing clients. At the international level, the European
Union has adopted a directive that will impose restrictions on the collection
and use of personal data. This directive could affect U.S. companies that
collect information over the Internet from individuals in European Union member
countries and may impose restrictions that are more stringent than current
Internet privacy standards in the United States. These developments could have
an adverse effect on our business, results of operations and financial
condition.
POTENTIAL CURRENCY REGULATION
Our online incentive program rewards are not currently subject to currency
regulation in any jurisdiction. If any governmental agency deemed that our
rewards are subject to currency regulation, our business, financial condition
and results of operations could be harmed.
POTENTIAL FOREIGN REGULATION
Governments of foreign countries may also attempt to regulate electronic
commerce. New laws could stall the growth of the Internet and decrease the
acceptance of the Internet as a commercial medium. In addition, existing laws
such as those governing intellectual property and privacy may be interpreted to
apply to the Internet. In the event that foreign governments, the federal
government, state governments or other governmental authorities adopt, modify or
re-interpret laws or regulations relating to the Internet, our business, results
of operations and financial condition could be harmed.
POTENTIAL ELECTRONIC COMMERCE REGULATION
In 1998, the United States government enacted a three-year moratorium
prohibiting states and local governments from imposing new taxes on electronic
commerce transactions. Upon expiration of this moratorium, if it is not
extended, states or other governments may levy sales or use taxes on electronic
commerce transactions. An increase in the taxation of electronic commerce
transactions may make the Internet less attractive for consumers and businesses
which would harm our business.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM, ANY OF
WHICH MAY HARM OUR BUSINESS
Many currently installed computer systems and software products are coded
to accept only two digit entries in their date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software products used by many companies may need to be upgraded to
comply with these Year 2000 requirements.
The costs we have incurred and expect to incur related to Year 2000 compliance
have not been material to our business, results of operations or financial
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<PAGE> 29
condition. In the event that our assessment of our Year 2000 readiness is
inaccurate, we could be required to expend substantial resources to remedy any
unanticipated Year 2000 problems. Costs associated with unanticipated Year 2000
problems and difficulties in remedying these problems by year-end could have a
material adverse effect on our business, results of operations and financial
condition.
The most likely Year 2000 failure scenario attributable to a supplier or
customer is a systematic failure beyond our control or the supplier's or
customer's immediate control, such as a prolonged data communication,
telecommunications or electrical failure. A failure of this sort could prevent
members from accessing our Web site and prevent us from operating our business.
The primary business risks in the event of such a failure would include lost
revenues, increased operating expenses and loss of members. Any of these risks
could have a material adverse effect on our business, results of operations and
financial condition.
We have developed a contingency plan to address Year 2000 problems that are not
detected and corrected prior to their occurrence. However, the contingency plan
notes high reliance on auxiliary, third-party platforms and systems. The
implementation of the contingency plan depends on cooperation and support from
these vendors.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. At September 30, 1999, $49.2 million of our cash, cash
equivalents and short-term investments portfolio carried maturities of less than
one year. Cybergold has the ability to hold the portfolio to maturity, if deemed
necessary. The effect of changes in interest rates of +/- 10% over a six month
horizon would not have a material effect on the fair market value of the
portfolio.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 1999 and prior to the closing of our
initial public offering, we granted options to purchase 226,727 shares of common
stock to employees, consultants and other service providers of the Company under
our 1996 Stock Option Plan. During the three months ended September 30, 1999 and
prior to the closing of our initial public offering, employees, consultants and
other service providers of the Company exercised options for 29,504 shares of
common stock.
The sale of the above securities was deemed to be exempt from registration under
the Securities Act of 1933 ("the Act") in reliance upon Section 4(2) of the Act
or Rule 701 promulgated under Section 3(b) of the Act.
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<PAGE> 30
The effective date of the Registration Statement for the Company's initial
public offering filed on Form S-1 under the Securities Act of 1933 (File No.
333-79067) was September 22, 1999. The class of securities registered was common
stock. The offering commenced on September 22, 1999 and was terminated on
September 28, 1999. The managing underwriters for the offering were SG Cowen
Securities Corporation, CIBC World Markets Corp., Volpe Brown Whelan & Company
and E*OFFERING Corp. Pursuant to the Registration Statement, 5,000,000 shares of
the Company's Common Stock were sold. The Company estimated expenses of
approximately $4.2 million, of which $3.2 million represented underwriting
discounts and commissions and approximately $1.0 million represented other
expenses related to the offering. None of the expenses incurred in the offering
were direct or indirect payments to directors, officers, general partners of the
issuer or their associates, to persons owning ten percent or more of any class
of equity securities of the issuer or to affiliates of the issuer. The net
proceeds to the Company after total expenses were approximately $40.6 million.
On September 20, 1999, the Company effected a three-for-two reverse stock split
of its shares of preferred stock and common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the three months ended September 30, 1999, the following matters were
submitted to the security holders of the Company:
In September 1999, prior to the Company's initial public offering, the Company
solicited and obtained the approval of its stockholders through a Written
Consent of Stockholders to amend and restate its Certificate of Incorporation,
amend and restate it Bylaws, and adopt the Company's 1999 Omnibus Equity
Incentive Plan, 1999 Employee Stock Purchase Plan, and a form of
Indemnification Agreement for indemnification of the Company's directors and
executive officers. The number of votes cast for such matter was 10,839,803,
representing 75.4% of the 14,368,590 shares outstanding at that time.
In July 1999, the Company's predecessor corporation,CyberGold,Inc., a
California corporation, solicited and obtained the approval of its shareholders
through a Written Consent of Shareholders to adopt and approve a Plan of
Reorganization pursuant to which the Company changed its state of incorporation
from California to Delaware, its current state of incorporation. The number of
votes cast for such matter was 13,372,289,representing 95.6% of the 13,983,940
shares outstanding at the time.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1999.
30
<PAGE> 31
CYBERGOLD, INC.
FORM 10-Q
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.
Cybergold, Inc.
Date: November 15, 1999 By: /s/ John D. Steuart
----------------------- ----------------------------
John D. Steuart
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,184
<SECURITIES> 23,984
<RECEIVABLES> 1,444
<ALLOWANCES> 73
<INVENTORY> 0
<CURRENT-ASSETS> 50,588
<PP&E> 615
<DEPRECIATION> 235
<TOTAL-ASSETS> 51,244
<CURRENT-LIABILITIES> 5,351
<BONDS> 0
0
0
<COMMON> 67,645
<OTHER-SE> (1,484)
<TOTAL-LIABILITY-AND-EQUITY> 51,244
<SALES> 0
<TOTAL-REVENUES> 2,655
<CGS> 1,128
<TOTAL-COSTS> 8,524
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> (6,868)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,868)
<EPS-BASIC> (1.83)
<EPS-DILUTED> (1.83)
</TABLE>
