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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-27329
CYBERGOLD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3212392
(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)
510-302-3000
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(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 [X] No [ ]
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 21,721,953 shares of the Registrant's Common Stock outstanding as of
May 12, 2000.
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Cybergold, Inc.
FORM 10-Q
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000............................ 3
Consolidated Statements of Operations for the three months ended March 31, 1999 and 2000.......... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 2000.......... 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 8
Item 3. Qualitative and Quantitative Disclosures About Market Risk........................................ 19
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................................................................. 19
Item 2: Changes in Securities and Use of Proceeds......................................................... 19
Item 3: Defaults Upon Senior Securities................................................................... 19
Item 4: Submission of Matters to a Vote of Security Holders............................................... 19
Item 5: Other Information................................................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................................................. 19
Signatures..................................................................................................... 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CYBERGOLD, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 17,265 $ 16,107
Short-term investments in marketable securities 27,822 23,442
Accounts receivable, net of allowance for doubtful accounts of
$171 and $294 at December 31, 1999 and March 31, 2000 1,799 3,233
Prepaid expenses and other current assets 709 1,061
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Total current assets 47,595 43,843
Property and equipment, net 1,307 1,475
Intangible assets, net 317 176
Deposits and other assets 134 147
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TOTAL ASSETS $ 49,353 $ 45,641
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,308 $ 1,820
Current maturities of long-term obligations 201 213
Members payable 2,201 2,853
Membership acquisition payable 625 591
Accrued liabilities 1,526 2,789
Deferred revenue 643 666
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Total current liabilities 6,504 8,932
Long-term obligations, net of current maturities 389 331
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Total liabilities 6,893 9,263
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Stockholders' equity:
Common stock, $.00015 par value:
Authorized shares 75,000
Issued and outstanding shares 21,175 and 21,407 respectively 3 3
Additional paid-in capital 69,647 71,485
Deferred compensation (1,313) (1,200)
Retained deficit (25,877) (33,793)
Unrealized loss on marketable securities 0 (117)
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Total stockholders' equity 42,460 36,378
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,353 $ 45,641
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</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
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1999 2000
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Revenues:
Transaction $ 333 $ 2,269
Custom marketing services & other 170 2,021
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Total revenues 503 4,290
Cost of revenues:
Transaction 159 1,094
Custom marketing services & other 85 78
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Total cost of revenues 244 1,172
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Gross margin 259 3,118
Operating expenses:
Product development 513 1,630
Sales and marketing 1,024 5,410
General and administrative 307 2,302
itarget.com acquisition costs 0 2,142
Amortization of deferred compensation 327 113
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Total operating expenses 2,171 11,597
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Loss from operations (1,912) (8,479)
Interest income, net 11 563
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Net loss $(1,901) $(7,916)
Other comprehensive loss 0 (117)
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Comprehensive loss $(1,901) $(8,033)
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Net loss per common share,
basic and diluted $ (0.37) $ (0.38)
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Weighted average common shares,
outstanding, basic and diluted 5,175 20,642
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
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1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,901) $ (7,916)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 83 205
Amortization of deferred compensation 327 113
Imputed compensation 83 0
Changes in assets and liabilities:
Accounts receivable 261 (1,434)
Prepaid expenses and other assets 32 (365)
Accounts payable (64) 512
Members payable 794 652
Membership acquisition payable (535) (34)
Accrued liabilities (88) 1,263
Deferred revenue 163 23
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Net cash used in operating activities (845) (6,981)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (104) (232)
Proceeds from sale of short-term investments 0 5,880
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Net cash (used in) provided by investing activities (104) 5,648
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (234) (46)
Proceeds from equipment financing 115 0
Proceeds from exercise of stock options
net of repurchases 168 221
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Net cash provided by financing activities 49 175
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NET DECREASE IN CASH AND CASH EQUIVALENTS (900) (1,158)
CASH AND CASH EQUIVALENTS
Balance at beginning of period 3,181 17,265
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Balance at end of period $ 2,281 $ 16,107
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Supplemental Cash Flow Information:
Cash paid for interest $ 19 $ 30
Non-Cash Transactions
In March 2000, the Company issued approximately 1.83 million
shares in exchange for the entire capital stock of
itarget.com in an acquisition accounted for as a pooling.
In January 2000, the Company entered into a stock swap agreement with
Quintel Communications whereby Quintel issued 229,862 shares of its common
stock to the Company in exchange for 213,258 shares of the Company's stock.
</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated 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 March 31, 2000 and the
results of its operations and cash flows for the three months ended March 31,
1999 and 2000.
The unaudited interim condensed consolidated 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 and the annual
report on Form 10-K for the fiscal year 1999. The results of operations for the
three months ended March 31, 2000 are not necessarily indicative of the results
to be expected for any subsequent quarter or the entire year ending December 31,
2000.
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 are
reported at amortized cost in the accompanying balance sheets.
3. MERGER WITH ITARGET.COM
On March 29, 2000, the Company issued approximately 1.83 million shares of its
common stock for the entire common stock of itarget.com. This acquisition was
accounted for under the pooling-of-interests method of accounting. The financial
statements reflect this acquisition as if Cybergold, Inc. and itarget.com had
always been members of the same operating group. The financial statements are
combined and all significant intercompany amounts have been eliminated.
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The separate results of operations of Cybergold, Inc. and itarget.com, Inc. for
periods prior to the merger are presented below (in thousands):
<TABLE>
<CAPTION>
CYBERGOLD, INC. iTARGET.COM, INC.
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<S> <C> <C>
For the three months ended March 31, 1999
Revenues $ 503 $ 0
Net loss $ (1,786) $ (115)
For the three months ended March 31, 2000
Revenues $ 3,649 $ 641
Net loss $ (4,175) $ (3,741)
</TABLE>
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.
5. NEW ACCOUNTING PRONOUNCEMENTS
Cybergold continually assesses the effects of recently issued accounting
standards.The impact of all recently adopted and issued accounting standards
has been disclosed in the Financial Statements.
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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
We were incorporated under the name Cyber-Bucks, Inc. in California in October
1994. We subsequently changed our name to CyberGold, Inc. and reincorporated
under the name Cybergold, Inc. in Delaware in August 1999. Reference in this
Report to "Cybergold", "we", "our", and "us" refer to Cybergold, Inc.
Cybergold's principal offices are located at 1330 Broadway, 12th Floor, Oakland,
California 94612, and its telephone number at that location is (510) 302-3000.
We are a leading provider of online 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 incentives
programs are intended to provide flexible, incentive-marketing solutions for our
clients. For our incentive program, our advertising and marketing clients are
only charged when our members execute specific predefined actions, providing
these clients with a known cost to achieve the desired response to their
advertising campaigns. By leveraging our member database and our targeting
capabilities, we are able to offer our clients customized, targeted advertising
solutions designed to improve advertisement response rates and reduce the cost
of acquiring new customers.
We serve three main constituencies: advertising and marketing clients, consumer
members and merchants. Advertising and marketing clients use Cybergold to
cost-effectively acquire new customers with offers and cash incentives. Consumer
members use Cybergold to earn cash rewards for responding to offers on our Web
site, on third-party Web sites and through e-mail campaigns. Merchants use
Cybergold as a cost-effective means to sell inexpensive digital content,
services and products on a pay-per-transaction basis to the Cybergold membership
base.
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.
On March 29, 2000, the Company issued approximately 1.83 million shares of its
common stock for the entire common stock of itarget.com. This acquisition was
accounted for under the pooling-of- interests method of accounting. The
financial statements reflect this acquisition as if Cybergold, Inc. and
itarget.com had always been members of the same operating group. The financial
statements are consolidated and all significant intercompany amounts have been
eliminated.
Effective April 17, 2000, the Company entered into a definitive agreement to
merge with Mypoints.com, Inc. The merger is expected to be completed as a
tax-free stock-for-stock fixed-share exchange wherein each share of the
Company's stock will be exchanged for 0.48 shares of MyPoints.com. The merger
is expected to be completed during the third quarter of 2000.
RESULTS OF OPERATIONS
REVENUES
To date, our revenue is derived from our online incentive and e-mail lead
generation programs. Our revenues increased 753% from $503,000 for the three
months ended March 31, 1999 to approximately $4.3 million for the three months
ended March 31, 2000.
Transaction Revenues. Transaction revenues increased 590% from $333,000 for the
three months ended March 31, 1999 to approximately $2.3 million for the three
months ended March 31, 2000. The increase in transaction revenues is primarily
the result of an increased number of transactions driven by growth in our
membership base. Total membership, including 5.49 million Cybergold members and
1.81 million itarget.com, Inc. members, grew to approximately 7.3 million as of
March 31, 2000 from 2.2 million as of March 31, 1999.
Custom Marketing Services and Other Revenues. Custom marketing services and
other revenues increased 1,080% from $170,000 for the three months ended March
31, 1999 to $2.0 million for the three months ended March 31, 2000. For the
three months ended March 31, 2000, this revenue was comprised of $1.8 million in
fees for the transmission of e-mails to our members, $158,000 for placement fees
and $45,000 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 base. We expect that custom marketing
services and other revenues will fluctuate from period to period.
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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 380% from $244,000 for the three months ended March 31, 1999 to
approximately $1.2 million for the three months ended March 31, 2000.
The cost of transaction revenues increased 588% from $159,000 for the three
months ended March 31, 1999 to approximately $1.1 million for the three months
ended March 31, 2000. The increase in cost of transaction revenues resulted
primarily from an increase in the number of transactions completed by our
membership base.
The cost of custom marketing services and other revenues decreased 8% from
$85,000 for the three months ended March 31, 1999 to $78,000 for the three
months ended March 31, 2000. The decrease resulted primarily as a result of
higher costs of revenues last year in connection with custom engineering
development and marketing services versus the much lower costs associated with
email campaigns. Gross margin increased to 73% for the three months ended March
31, 2000 from 52% for the three months ended March 31, 1999. 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
$513,000, or 102% of revenue, for the three months ended March 31, 1999 to
approximately $1.6 million, or 38% of revenue, for the three months ended March
31, 2000. 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 for
the quarter ended March 31, 2000. In addition, the fixed nature of some of our
development costs also contributed to the decrease in expense as a 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 approximately $1.0 million, or 204% of
revenue, for the quarter ended March 31, 1999 to approximately $5.4 million, or
126% of revenue, for the quarter ended March 31, 2000. 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 transaction
revenues as the result of an increased number of transactions driven by growth
in our membership base and an increase in custom marketing revenue due to
increasing demand for transmission of e-mails to our membership base. 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 $307,000, or 61% of revenue, for the quarter ended
March 31, 1999, to approximately $2.3 million, or 54% of revenue, for the
quarter ended March 31, 2000. The increase in absolute dollars was due to the
growth in staffing, legal,accounting, and other professional services. The
decrease in general and administrative expenses as a percentage of revenues is
primarily attributable to an increase in transaction revenues as the result of
an increased number of transactions driven by growth in our membership base and
an increase in custom marketing revenue due to increasing demand for
transmission of e-mails to our membership base. 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.
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iTARGET.COM ACQUISITION COSTS. The itarget.com merger costs of $2.1 million in
the quarter ended March 31, 2000 consisted of payments made to itarget.com
management in connection with employment agreements as well as legal, accounting
and investment banking fees.
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 $327,000 and
$113,000 was recorded during the quarters ended March 31, 1999 and 2000,
respectively.
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 $11,000 in the quarter ended
March 31, 1999 to $563,000 in the quarter ended March 31, 2000. The increase in
interest income, net, was due primarily to interest earned on the proceeds from
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.
OTHER COMPREHENSIVE INCOME(LOSS). The Company's other comprehensive
income(loss) represents any unrealized gains or losses on its marketable
securities.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000 we had approximately $16.1 million of cash and cash
equivalents and approximately $23.4 million in short-term investments and had
borrowings of $544,000 under capital leases and notes payable.
Net cash used in operating activities was approximately $845,000 and $7.0
million for the three months ended March 31, 1999 and 2000, respectively. Cash
used in operating activities for both periods resulted primarily from net losses
and fluctuations in accounts receivable, accounts payable, members payable,
membership acquisition payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $104,000 for the three months ended
March 31, 1999. Cash used in investing activities consisted primarily of
acquisitions of property and equipment during the three months ended march 31,
1999. Net cash provided by investing activities was approximately $ 5.6 million
for the three months ended March 31, 2000. Cash provided by investing activities
consisted primarily of proceeds from the sale of short-term investments.
Net cash provided by financing activities was $49,000 and $175,000 for the three
months ended March 31, 1999 and 2000, respectively. Cash provided by financing
activities resulted primarily from the proceeds received from the exercise of
stock options and proceeds received in connection with equipment financing.
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 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.
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, $11.6 million for the
year ended December 31, 1999 and $7.9 million for the three months ended March
31, 2000. Our retained deficit as of March 31, 2000 was approximately $33.8
million. We plan to increase our operating expenses as we continue to build
brand and infrastructure and
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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
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;
- 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.
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.
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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 7.3 million members
through March 31, 2000, we generate the majority of our revenues from a smaller
percentage of our members, and we cannot assure you that the percentage of
active members will increase. In addition, certain 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 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
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our business, results of operations and financial condition. We intend 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
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
competitive pressures may adversely affect our business, results of operations
and financial condition.
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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
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.
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
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
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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
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 have acquired or made investments in businesses, products, services, or
technologies to carry out our business strategy. After our acquisition of
itarget.com, Inc. we are still in the process of assimilating itarget.com into
our operations. Unforeseen difficulties in the assimilation process could
disrupt our ongoing business, distract our management and employees and increase
our expenses. In
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addition, effecting future 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 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 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.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK MAY RESULT IN A REDUCTION IN
OUR STOCK PRICE
As of May 12, 2000, 21,721,953 shares of common stock were outstanding. Of these
shares, a total of 5,487,498 shares, are freely tradable without restriction
under the Securities Act, unless they are held by "affiliates" as defined under
the Securities Act. Sales of a large number of shares of common stock in the
public market, or the belief that such sales could occur, could cause a drop in
the market price of our common stock. Of the remaining shares of common stock,
16,234,455 shares are "restricted securities" within the meaning of Rule 144
under the Securities Act.
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
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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, 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.
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
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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
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
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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.
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 March 31, 2000, $39.5 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
Effective April 17, 2000, the Company entered into a definitive agreement to
merge with MyPoints.com, Inc. The merger is expected to be completed as a
tax-free stock-for-stock fixed-share exchange wherein each share of the
Company's stock will be exchanged for 0.48 shares of MyPoints.com. The merger is
expected to be completed during the third quarter of 2000.
Prior to closing the merger, it is expected that the Company will execute a
spin-off of 80.1 percent of its separate payment technology business
("Paytime.com") which accounted for less than $10,000 in revenues during the
three months ended March 31, 2000.
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2000, we granted options to purchase
175,500 shares of common stock to employees of the Company under our 1999
Omnibus Equity Incentive Plan. During the three months ended March 31, 2000,
employees, consultants and other service providers of the Company exercised
options for 161,083 shares of common stock.
NEW ACCOUNTING PRONOUNCEMENTS
Cybergold continually assesses the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in the Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
In March 2000, Company completed a merger with itarget.com, Inc. ("itarget.com")
by exchanging 1,829,841 shares of its common stock for all of the outstanding
common and preferred stock of itarget.com. The merger constituted a tax-free
reorganization and was accounted for using the pooling of interests method
of accounting under Accounting Principles Board Opinion No. 16 ("APB No. 16").
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 file a Form 8-K during the three months ended March 31, 2000
regarding the acquisition of itarget.com.
19
<PAGE> 20
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: May 15, 2000 By: /s/ John D. Steuart
------------ -----------------------------------------
John D. Steuart
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,107
<SECURITIES> 23,442
<RECEIVABLES> 3,527
<ALLOWANCES> 294
<INVENTORY> 0
<CURRENT-ASSETS> 43,843
<PP&E> 2,532
<DEPRECIATION> 1,057
<TOTAL-ASSETS> 45,641
<CURRENT-LIABILITIES> 8,932
<BONDS> 0
0
0
<COMMON> 71,488
<OTHER-SE> (1,317)
<TOTAL-LIABILITY-AND-EQUITY> 45,641
<SALES> 0
<TOTAL-REVENUES> 4,290
<CGS> 1,172
<TOTAL-COSTS> 11,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 563
<INCOME-PRETAX> (7,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,916)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
