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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
Commission File Number: 000-27601
MEDIAPLEX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7372 94-3295822
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code) Identification No.)
177 STEUART STREET, SUITE 200, SAN FRANCISCO, CALIFORNIA 94105
(415) 808-1900
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 27, 2000
Common stock, par value $0.0001 per share 32,987,886 Shares
====================================================================================================================================
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TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999...................................... 3
Statements of Operations for the three months ended March 31, 2000 and
1999 (unaudited)........................................................................................... 4
Statements of Cash Flows for the three months ended March 31,2000 and 1999
(unaudited)................................................................................................ 5
Notes to Interim Financial Statements (unaudited).......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 23
Item 2. Changes in Securities and Use of Proceeds............................................................ 23
Item 3. Defaults Upon Senior Securities...................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 23
Item 5. Other Information.................................................................................... 23
Item 6. Exhibits and Reports on Form 8-K..................................................................... 23
Item 7. Signatures........................................................................................... 23
</TABLE>
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MEDIAPLEX, INC.
BALANCE SHEETS
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<S> <C> <C>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Cash and cash equivalents........................................................ $ 52,007,000 $ 78,052,000
Short-term investments........................................................... 30,184,000 9,913,000
------------ ------------
Total cash, cash equivalents, and short-term investments........................ 82,191,000 87,965,000
Accounts receivable, net......................................................... 9,751,000 7,629,000
Other current assets............................................................. 1,485,000 940,000
------------ ------------
Total current assets.......................................................... 93,427,000 96,534,000
Property and equipment, net...................................................... 5,611,000 4,039,000
Goodwill and intangible assets, net.............................................. 2,007,000 2,257,000
Other assets..................................................................... 605,000 612,000
------------ ------------
Total assets.................................................................. $101,650,000 $103,442,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 2,409,000 $ 2,030,000
Accrued liabilities............................................................. 11,337,000 9,222,000
Deferred revenue................................................................ 539,000 1,087,000
Notes payable to stockholders, current portion.................................. 110,000 110,000
------------ ------------
Total current liabilities..................................................... 14,395,000 12,449,000
Notes payable to stockholders.................................................... 176,000 280,000
------------ ------------
Total liabilities............................................................. 14,571,000 12,729,000
Commitments (Note 6)
Stockholder's Equity:
Preferred stock, $0.0001 par value; authorized 10,000,000 shares................ -- --
Common stock, $0.0001 par value; authorized 150,000,000 shares; 32,442,397
and 31,690,855 shares issued and outstanding as of March 31, 2000 and
December 31, 1999, respectively................................................ 3,000 3,000
Additional paid-in capital...................................................... 143,370,000 134,325,000
Warrants........................................................................ 2,472,000 2,472,000
Deferred stock compensation..................................................... (3,743,000) (6,521,000)
Accumulated other comprehensive loss............................................ (70,000) --
Accumulated deficit............................................................. (54,953,000) (39,566,000)
------------ ------------
Total stockholders' equity................................................... 87,079,000 90,713,000
------------ ------------
Total liabilities and stockholders' equity.................................... $101,650,000 $103,442,000
------------ ------------
The accompanying notes are an integral part of these financial statements
</TABLE>
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MEDIAPLEX, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
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Three Months Ended March 31,
------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues......................................................................... $ 16,227,000 $ 1,634,000
Cost of revenues................................................................. 11,849,000 1,340,000
------------ -----------
Gross profit................................................................... 4,378,000 294,000
Operating expenses:
Sales and marketing............................................................ 5,481,000 543,000
Research and development....................................................... 1,825,000 308,000
General and administrative..................................................... 1,979,000 456,000
Stock-based compensation....................................................... 11,480,000 1,953,000
Amortization of goodwill and intangibles....................................... 250,000 --
------------ -----------
Total operating expenses.................................................... 21,015,000 3,260,000
Loss from operations........................................................ (16,637,000) (2,966,000)
Interest income, net............................................................. 1,251,000 1,000
------------ -----------
Net loss......................................................................... $(15,386,000) $(2,965,000)
============ ===========
Net loss per share--basic and diluted............................................ $(0.48) $(0.32)
============ ===========
Weighted average shares used to compute net loss per share--
basic and diluted............................................................... 31,771,245 9,280,470
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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MEDIAPLEX, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
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Three Months Ended March 31,
------------------------------
2000 1999
------------ -----------
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Cash flows from operating activities:
Net loss.................................................................... $(15,386,000) $(2,965,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 647,000 29,000
Allowance for sales credits and doubtful accounts.......................... (541,000) 93,000
Stock-based compensation expense........................................... 11,480,000 1,953,000
Accretion of short-term investments........................................ (281,000) --
Amortization of debt discount.............................................. 6,000 --
Changes in assets and liabilities..........................................
Accounts receivable....................................................... (1,580,000) (363,000)
Other assets.............................................................. (535,000) (85,000)
Accounts payable.......................................................... 45,000 790,000
Accrued liabilities....................................................... 2,999,000 5,000
Deferred revenue.......................................................... (548,000) 92,000
Other liabilities......................................................... -- 9,000
------------ -----------
Net cash used in operating activities.................................... (3,694,000) (442,000)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment......................................... (2,518,000) (573,000)
Purchase of short-term investments......................................... (30,007,000) --
Sale of short-term investments............................................. 9,981,000 --
Unrealized loss on cash equivalents........................................ (34,000) --
------------ -----------
Net cash used in investing activities........................................ (22,578,000) (573,000)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock.............................. -- 1,198,000
Proceeds from exercise of stock options.................................... 337,000 9,000
Payment of notes payable--stockholders..................................... (110,000) --
------------ -----------
Net cash provided by financing activities.................................... 227,000 1,207,000
------------ -----------
Net (decrease) / increase in cash and cash equivalents....................... (26,045,000) 192,000
Cash and cash equivalents at beginning of period............................. 78,052,000 375,000
------------ -----------
Cash and cash equivalents at end of period................................... $ 52,007,000 $ 567,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MEDIAPLEX, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. Business Activities and Summary of Significant Accounting Policies
Nature of Business
Mediaplex, Inc. provides technology-based advertising and marketing services
for companies and advertising agencies that seek to optimize their internet
marketing campaigns. The Company's service offerings include planning and
execution of online media and marketing campaigns, proprietary third-party ad
serving to advertisers, and tracking and reporting of an advertiser's return on
investment ("ROI"), including evaluation of online transactions. The Company's
technology-based services enable companies to deliver customized online
advertising messages in response to changes in their underlying business
variables, such as inventory levels, product pricing and customer data.
Reincorporation
In August 1999, the Company approved reincorporating in Delaware and changing
its name to Mediaplex, Inc. In connection with the reincorporation, the Company
authorized (i) an increase in the number of authorized shares of common stock to
150,000,000 and (ii) 10,000,000 shares of undesignated preferred stock. All
share data and stock option plan information has been restated to reflect the
reincorporation.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of shares of
Common Stock outstanding during the period. The calculation of diluted net loss
per share gives effect to common stock equivalents; however, potential common
shares are excluded if their effect is antidilutive. Potential common shares
are composed of Common Stock subject to repurchase rights and incremental shares
of Common Stock issuable upon the exercise of stock options and warrants.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
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Three Months Ended March 31,
------------------------------
2000 1999
------------ -----------
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Numerator:
Net loss available to common stockholders....................................... $(15,386,000) $(2,965,000)
------------ -----------
Denominator:
Weighted average common shares.................................................. 31,867,213 9,280,470
Weighted average unvested common shares subject to repurchase................... (95,968) --
------------ -----------
Denominator for basic and diluted calculation................................... 31,771,245 9,280,470
============ ===========
Net loss per share--basic and diluted............................................ $ (0.48) $ (0.32)
============ ===========
</TABLE>
The following table sets forth common stock equivalents (potential common
stock) that are not included in the diluted net loss per share calculation above
because to do so would be antidilutive for the periods indicated:
<TABLE>
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Three Months Ended March 31,
----------------------------
2000 1999
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Weighted average effect of Common Stock equivalents:
Stock options.................................................................. 8,429,000 3,660,000
Warrants....................................................................... 863,000 --
Unvested Common Stock subject to repurchase.................................... 95,968 --
Convertible preferred stock.................................................... -- 442,000
----------- ----------
9,387,968 4,102,000
=========== ==========
</TABLE>
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MEDIAPLEX, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS--(Continued)
Interim Results and Basis of Presentation
The unaudited financial statements as of March 31, 2000 and for the three
month periods ended March 31, 2000 and 1999 have been prepared by us and are
unaudited. In our opinion, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and reflect
all adjustments, which include only normal recurring adjustments, necessary
to present fairly the financial position as of March 31, 2000 and the
results of our operations and cash flows for the three month periods ended
March 31, 2000 and 1999. The financial data and other information disclosed
in these notes to the interim financial statements related to these periods
are unaudited. The results for the three month period ended March 31, 2000
are not necessarily indicative of the results to be expected for any
subsequent quarter or the entire fiscal year ending December 31, 2000. The
balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. It is suggested
that these unaudited financial statements be read in conjunction with our
audited financial statements and notes thereto for the year ended December 31,
1999 as included in our report on Form 10-K as filed on March 30, 2000.
2. Recently Issued Accounting Standards
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation--an interpretation of Accounting Principles Board (APB)
Opinion No. 25." FIN No. 44 clarifies the application of APB Opinion No.
25 regarding the definition of employee for purposes of applying Opinion No.
25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000. The Company does not anticipate
that this interpretation will have a material impact on its financial
position, results of operations or cash flows.
In November 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment
Charges." In December 1999, the SEC issued SAB No. 101, "Revenue Recognition
in Financial Statements." SAB No. 100 expresses the views of the SEC staff
regarding the accounting for and disclosure of certain expenses not commonly
reported in connection with exit activities and business combinations. This
includes the accrual of exit and employee termination costs and the
recognition of impairment charges. SAB No. 101 expresses the views of the
SEC staff in applying accounting principles generally accepted in the United
States to certain revenue recognition issues. Although the Company has not
fully assessed the implications of SAB No. 100 and SAB No. 101, the Company
does not believe the adoption of this statement will have a material effect
on the Company's financial position, results of operations or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which defines derivatives, requires that all derivatives be
carried at fair value, and provides for hedge accounting when certain
conditions are met. SFAS No. 133 is effective for the Company in fiscal
2000. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe the adoption of this statement will
have a material effect on the Company's financial position, results of
operations or cash flows.
3. Amended and Restated 1999 Stock Plan
For the three month period ended March 31, 2000, the Company granted
approximately 1.3 million stock options under the Amended and Restated 1999
Stock Plan at exercise prices ranging from $12.00 to $102.00 per share,
based on the fair market value of the underlying common stock at the
respective times of grant.
4. Subsequent Events
In April 2000, the Company issued and sold 43,000 shares of the Company's
common stock at $10.20 per share to employees under the Employee Stock
Purchase Plan.
In March 2000, in connection with the termination of an officer of the
Company, the Company entered into a severance agreement, which provided that
the Company would accelerate the vesting of options to purchase 125,000
shares of common stock held by such former officer. Accordingly, the Company
recorded $6.0 million in stock compensation expense in March 2000.
In March 2000, in connection with the hiring and expected retention of a
certain person as its chief financial officer, the Company entered into an
employment agreement, which provided that the officer, subject to Board
approval and other conditions, would receive an option to purchase 293,385
shares of common stock, 75,000 of which would vest on the commencement of his
employment with the Company. This officer terminated employment with the
Company in March 2000, and the Company disputes that he is entitled to receive
any options under his employment agreement. Accordingly, the Company recorded
$4.6 million in stock compensation expense in March 2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO SUCH
STATEMENTS INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT. THIS DISCUSSION
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,
THAT INVOLVE RISKS AND UNCERTAINTIES, THESE FORWARD-LOOKING STATEMENTS ARE
TYPICALLY DENOTED IN THIS QUARTERLY REPORT BY WORDS SUCH AS "ANTICIPATES,"
"BELIEVES," "PLANS," "EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS.
THIS QUARTERLY REPORT ALSO CONTAINS FORWARD-LOOKING STATEMENTS ATTRIBUTED TO
CERTAIN THIRD-PARTIES RELATING TO THEIR ESTIMATES REGARDING THE GROWTH OF ONLINE
SPENDING, ONLINE USE AND ONLINE ADVERTISING SPENDING. PROSPECTIVE INVESTORS
SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY
ONLY AS OF THE DATE OF THIS QUARTERLY REPORT. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES. MEDIAPLEX'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION
ON PAGE 11 AND ELSEWHERE IN THIS QUARTERLY REPORT. WE UNDERTAKE NO OBLIGATION
TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
OVERVIEW
We provide technology-based advertising and marketing services for companies
and advertising agencies that seek to optimize their Internet marketing
campaigns. In the second quarter of 1998, we began generating revenues from our
advertising campaign management services. Our campaign management services
include online media planning and buying, and tracking, analyzing and reporting
the results of the media campaign. In the second quarter of 1999, we began
utilizing our mobile Java objects, or MOJO, architecture to enhance our service
offerings and expand our business. We plan to broaden our revenue sources by
leveraging the capabilities of our MOJO architecture to offer message management
services, which enable advertisers to integrate their internal business
information into an online advertising campaign and to tailor their advertising
messages or offers in real time. To date, we have not generated significant
revenues from message management services.
We currently provide advertising campaign management services for a fixed fee,
which varies from client to client. This fee is principally based on the extent
of services provided and the direct cost of media placement. This cost of
purchasing advertising space on an Internet site is typically determined by the
cost per thousand impressions. Revenues from advertising campaign management
services are recognized in the period that advertising impressions are
delivered, or placed on an Internet site, provided that no significant
obligations on our part remain at the end of the period and the collection of
the resulting receivable is probable. Our obligations often include, for
instance, guarantees of a minimum number of impressions. To the extent that
significant obligations remain, we defer recognition of the corresponding
portion of the revenues until these obligations are met.
In addition, we may generate revenues from clients obtained through or
referred to us by an ad agency. If an ad agency is used, we will usually bill
the ad agency for work done on behalf of the agency's clients, and the ad agency
will then be responsible for obtaining full payment from the client. We expect
the percentage of our total revenues that we obtain from clients referred to us
by ad agencies to increase in future periods. To date, we have paid no referral
fees to any ad agencies, nor have any ad agencies paid referral fees to us, for
referring clients. However, we expect to pay referral fees to ad agencies in a
limited number of cases. In addition, we may receive referral fees in the
future.
Cost of revenues consists primarily of the cost of procuring advertising space
on third-party Internet sites and, to a lesser extent, of the telecommunications
and other costs related to maintaining our ad servers at third-party locations.
These costs are recorded in the period that the advertising impressions are
delivered and the related
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revenues are recorded. Currently, we purchase advertising space on Internet
sites for a particular media campaign. In the future, we may enter into
purchase commitments to obtain advertising space in bulk without a particular
media campaign identified in order to obtain more favorable pricing.
Until December 31, 1999, we expensed all of our research and development costs
in the period in which we incur these costs, since the period from achievement
of technological feasibility to the general availability of our software to
clients has been short, and therefore software development costs qualifying for
capitalization have been insignificant. For the quarter ended March 31, 2000,
we capitalized $60,000 in software development costs.
In March 1999, we acquired Netranscend Software, Inc., a Java-based business
automation solutions software company, for a note payable of $430,000, due in
four annual installments beginning in March 2000, and 1,979,000 shares of common
stock, with an estimated fair value of $1.29 per share. This acquisition was
accounted for under the purchase method of accounting. We recorded $3.0 million
of goodwill and other identifiable intangible assets in connection with this
acquisition, which are being amortized over a three-year period.
We have a limited operating history upon which you may evaluate our business
and prospects. We incurred net losses of $2.0 million in 1998, $21.8 million in
1999, and $15.4 million for the three month period ended March 31, 2000. At
March 31, 2000, our accumulated deficit was $55.0 million, which includes $14.4
million related to the beneficial conversion feature incurred for the issuance
of our Series C preferred stock. We anticipate that we will incur additional
operating losses for the foreseeable future.
Results of Operations
Revenues. Revenues increased to $16.2 million for the three months ended
March 31, 2000 from $1.6 million for the three months ended March 31, 1999. The
period-to-period increase was primarily due to the growth of our of selling
advertising campaign management services to a broad set of advertisers,
including advertising agencies, which we began in April 1999.
Cost of Revenues. Cost of revenues increased to $11.9 million, or 73.5% of
revenues, for the three months ended March 31, 2000 from $1.3 million, or 81.3%
of revenues, for the three months ended March 31, 1999. The increase in cost of
revenues in 2000 was primarily due to the increase in our revenues.
Gross Profit. Gross profit increased to $4.4 million, or 27.0% of revenues,
for the three months ended March 31, 2000 from $294,000, or 18.0% of revenues,
for the three months ended March 31, 1999. The increase in the gross profit in
2000 was due to a greater increase in our revenues than the increase in our cost
of revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation expenses, including salaries, commissions and related payroll
expenses, recruiting costs, and marketing expenses, including those expenses
associated with customer service and support. Sales and marketing expenses
increased to $5.5 million, or 34.0% of revenues, for the three months ended
March 31, 2000 from $543,000, or 33.2% of revenues, for the three months ended
March 31, 1999. The increase in sales and marketing expenses during 2000 was
primarily due to the significant growth of our sales and marketing organization
as we focused on selling advertising campaign management services. The number
of sales and marketing personnel increased from 23 as of March 31, 1999 to 92 as
of March 31, 2000. We expect that sales and marketing expenses will continue to
increase.
Research and Development. Research and development expenses consist primarily
of compensation and related expenses for our internal development staff and fees
for contractor services. Research and development expenses increased to $1.8
million, or 11.1% of revenues, for the three months ended March 31, 2000 from
$308,000, or 18.8% of revenues, for the three months ended March 31, 1999. This
increase in research and development expenses was due primarily to an increase
in the number of development engineers in our research and development
organization. The number of development engineers increased from twelve as of
March 31, 1999 to 42 as of March 31, 2000. We expect to continue to spend
significant amounts on research and development as we continue to develop and
upgrade our technology. Accordingly, we expect that research and development
expenses will continue to increase.
General and Administrative. General and administrative expenses consist
primarily of compensation and related expenses and fees for contractor services.
General and administrative expenses increased to $2.0 million, or 12.3% of
revenues, for the three months ended March 31, 2000 from $456,000, or 27.9% of
revenues, for the three months ended March 31, 1999. The increase in general
and administrative expenses was due primarily to the hiring
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of general and administrative personnel. We had six general and administrative
personnel as of March 31, 1999 and 27 persons as of March 31, 2000. We expect
that general and administrative expenses will continue to increase.
Stock-based Compensation. Stock-based compensation expense increased to $11.5
million, or 71.0% of revenues, for the three months ended March 31, 2000
comprised to $2.0 million, or 125.0% of revenues, for the three months ended
March 31, 1999. For accounting purposes, we recognize stock-based compensation
in connection with the issuance of shares of our common stock and the granting
of options or warrants to purchase our common stock to employees and
consultants where the purchase or exercise prices are less than the deemed
fair market value at the grant date. Stock-based compensation related to the
issuance of shares of common stock has been expensed in the period in which
the common stock was issued. Stock-based compensation related to the issuance
of options and warrants to purchase common stock is being amortized over the
vesting period of the stock options. Total deferred stock compensation as of
March 31, 2000 was $3.7 million. The deferred stock compensation associated
with 33,333 options requires remeasurement at the end of each period and is
directly related to the then current fair value of our common stock.
Therefore, as our stock price increases, the stock-based compensation or the
amortization of these deferred stock compensation amounts will proportionately
increase.
Amortization of Goodwill and Intangible Assets. Amortization expense was
$250,000, or 1.5% of revenues, for the three months ended March 31, 2000, due to
the amortization of goodwill and intangible assets recorded in connection with
our acquisition of Netranscend Software, Inc. in March 2000. We recorded no
goodwill amortization expense for the three month period ended March 31, 1999.
We expect to recognize $250,000 of amortization expense for this transaction in
each quarter through the first quarter of 2002.
Interest Income, Net. Interest income, net was $1.3 million for the three
months ended March 31, 2000, representing primarily interest earned on the cash
and cash equivalents and short-term investments we generated in 1999 from
private placements of convertible preferred stock and the initial public
offering. The net interest income of $1,000 for the three months ended March
31, 1999 was primarily due to the cash we generated from a private placement
of convertible preferred stock in March 1999.
Net Loss. Net loss was $15.4 million for the three months ended March 31,
2000, and $3.0 million for the three months ended March 31, 1999. The increase
in net loss of $12.4 million from 1999 to 2000 was primarily due to the increase
in operating expenses of $17.7 million, which includes a $9.5 million increase
in stock-based compensation expense, from the first quarter of 1999 to the same
period in 2000.
Liquidity and Capital Resources
From our inception in September 1996 through October 1999, we financed our
operations primarily through the private placements of preferred stock, which
has generated net proceeds of $24.2 million. In November 1999, we completed an
initial public offering of our common stock, which generated net proceeds of
$75.5 million. As of March 31, 1999, we had $52.0 million in cash and cash
equivalents and $30.2 million in short-term investments.
Net cash used in operating activities for the three months ended March 31,
2000 and 1999 was $3.7 million and $442,000, respectively. Net cash used in
operating activities in each of these periods was primarily the result of net
losses before non-cash charges and net increases in accounts receivable, offset
by increases in accrued liabilities, and accounts payable.
Net cash used in investing activities for the three months ended March 31,
2000 and 1999 was $22.6 million and $573,000, respectively. Net cash used in
investing activities in both periods presented was due to the acquisition of
computer equipment and software, and the investment of our proceeds from the
public offering of our common stock into short-term investments, for the period
ending March 31, 2000.
Net cash provided by financing for the three months ended March 31, 2000 and
1999 was $227,000 and $1.2 million, respectively. In the three months ended
March 31, 2000, the cash provided by financing activity primarily consisted of
proceeds generated from the exercise of stock options. In the three months
ended March 31, 1999, net cash provided by financing activities was primarily
due to issuance of shares of our preferred stock.
10
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Although we have no material commitments for capital expenditures, we
anticipate an increase in the rate of capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel. We believe that
our current level of cash and cash equivalents will be sufficient to meet our
anticipated liquidity needs for working capital and capital expenditures for at
least twelve months from March 31, 2000. After that time, we may need
additional funds to expand or to meet all of our operating needs. Our forecast
of the period of time through which our financial resources will be adequate to
support operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of the
factors described above. If we require additional capital resources to grow our
business internally or to acquire complementary technologies and businesses, we
may seek to sell additional equity or debt securities or secure a bank line of
credit. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. We cannot assure you that
any financing arrangements will be available in amounts or on terms acceptable
to us.
New Accounting Pronouncements
Mediaplex continually assesses the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in the notes to the unaudited interim financial statements in
this quarterly report on Form 10-Q.
RISK FACTORS
SET FORTH BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT AND IN THE OTHER
DOCUMENTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION ARE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
QUARTERLY REPORT.
Risks Related to Our Company
Our limited operating history makes financial forecasting and evaluation of our
business difficult.
We were founded in 1996 and only began selling our advertising campaign
management services in April 1998. In addition, we have only recently begun
deploying our MOJO technology in client advertising campaigns. In the three
months ended March 31, 2000, we employed portions of our MOJO technology in
twelve campaigns. Consequently, we have only slightly more than one year of
relevant operating history upon which you may evaluate our operations and
financial prospects. Our limited operating history makes it difficult to
forecast our future operating results, and for you to evaluate our future
revenue and income potential, as well as your investment in our common stock.
In particular, our limited operating history makes it difficult to evaluate our
ability to:
. purchase appropriate media space at reasonable costs;
. attract new advertisers and maintain current client relationships;
. achieve effective ad campaign results for our clients;
. develop new relationships and maintain existing relationships with
advertising agencies, our marketing alliance partners and other third
parties;
. continue to develop and upgrade our MOJO platform and other technology to
keep pace with the growth of the Internet advertising industry and changes in
technology; and
. continue to expand the number of services we offer.
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We have a history of losses, expect future losses and may never become
profitable.
We have not achieved profitability in any period to date and, given the level
of planned operating and capital expenditures, we expect to continue to incur
losses and negative cash flows for the foreseeable future. Our accumulated
deficit as of March 31, 2000 was approximately $55.0 million. We incurred
losses of $15.4 million in the three months ended March 31, 2000, $21.8 million
for the year ended December 31, 1999 and $2.0 million for the year ended
December 31, 1998. If our revenues decrease or grow more slowly than we
anticipate, or if our operating expenses exceed our expectations and cannot be
adjusted accordingly, our business will be harmed. Furthermore, if we are
unable to generate a long-term profit, we will eventually have to cease
operations.
Variations in quarterly operating results, due to factors such as changes in
demand and the mix of services we provide, may cause our stock price to decline.
It is possible that in future periods our results of operations will be below
the expectations of securities analysts. If so, the market price of your shares
would likely decline. Our quarterly operating results have fluctuated in the
past and are likely to continue to do so in the future. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance and should not be relied upon to predict
our future performance or our stock price.
Our quarterly revenues, expenses and operating results could vary
significantly from quarter-to-quarter for several other reasons, many of which
are beyond our control. These factors include:
. demand for our advertising services and mix of services we provide;
. addition of new or loss of current advertisers and advertising agencies;
. decisions by advertisers or advertising agencies to implement or delay
campaigns;
. deployment of new services we may offer;
. changes in availability and pricing of advertising space;
. changes in our pricing policies or the pricing policies of our competitors;
and
. costs related to acquisitions of technology or businesses.
Our current and future expense estimates are based, in large part, on
estimates of future revenues, which are difficult to predict, and on our
investment plans. In particular, we plan to increase our operating expenses
significantly in order to expand our sales and marketing operations, to enhance
our proprietary software and to expand internationally. We may be unable to, or
may elect not to, adjust spending quickly enough to offset any unexpected
revenues shortfall. If these expenses are not accompanied by increased revenues,
our results of operations and financial condition would be harmed.
Further, we are subject to employer payroll taxes when our employees exercise
their non-qualified stock options. The employer payroll taxes are assessed on
each employee's gain, which is the difference between the price of our common
stock on the date of exercise and the exercise price. These employer payroll
taxes will be recorded as operating expenses in the period those options are
exercised based on the aggregate gains realized by employees. During a
particular period, these payroll taxes could be material. However, because we
are unable to predict our future stock price and the number of optionees who may
exercise during any particular period, we cannot predict what, if any, expense
will be recorded in a future period and the impact on our future financial
results.
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Our revenues depend upon a few key clients, and if we lose a major client, our
revenues may be significantly reduced.
Our revenues have been derived from a limited number of advertisers and
advertising agencies that use our services. Our quarterly and annual results of
operations would be harmed by the loss of any of these clients. In 1999,
ShopNow.com and DATEK Online accounted for approximately 12% and 10% of our
annual revenues, respectively. In addition, one customer accounted for 12% of
our outstanding accounts receivable at December 31, 1999. We expect that some
of these entities may continue to account for a significant percentage of our
revenues for the foreseeable future. Advertisers typically purchase advertising
that runs for a limited time under short-term arrangements ranging from 30 days
to one year. Currently only a limited number of our clients purchase our
advertising services under a long-term contract. Current advertisers may not
continue to purchase advertising from us or we may not be able to successfully
attract additional advertisers. In addition, the non-payment or late payment of
amounts due to us from a significant advertiser or ad agency could harm our
financial condition. Further, our advertising agency customers may develop
online message management capabilities in-house, thus eliminating their need for
our services.
We could be held liable for failing to comply with current federal, state and
foreign laws governing consumer privacy or our own stated privacy policies.
Failure to comply with applicable foreign, federal and state laws and
regulatory requirements of regulatory authorities may result in, among other
things, indemnification liability to our clients and the advertising agencies we
work with, administrative enforcement actions and fines, class action lawsuits,
cease and desist orders, and civil and criminal liability. Our stated privacy
policy is to not maintain, share, or sell any personally identifiable data or
anonymous user profile information, and our clients retain the sole and
exclusive right to use any data that they have obtained through explicit
permission from an Internet user. Our failure to comply with this stated policy
could result in similar consequences under federal and state fair trade acts.
The Federal Trade Commission and state attorneys general have been
investigating Internet service providers regarding their use of personal
information. Recently, class action lawsuits have been filed alleging
violations of privacy laws by Internet service providers. In October 1998, the
European Union adopted a directive addressing data privacy that may result in
limitations on our ability to collect and use information regarding Internet
users. These restrictions may limit our ability to target advertising in most
European countries. Our failure to comply with these or other federal, state or
foreign laws could result in liability and materially harm our business.
Future governmental or industry restrictions or regulations related to privacy
on the Internet could limit the effectiveness and reduce the demand for Internet
advertising.
Federal and state legislatures have recently proposed limitations on the
collection and use of information regarding Internet users. For instance, one
proposed restriction would require Web sites to obtain the permission of their
Web visitors before aggregating, sharing or selling any information related to
those Web visitors. Similarly, the high-technology and direct marketing
industries are considering various new, additional or different self-regulatory
standards. If the gathering of profiling information were to be curtailed,
Internet advertising would be less effective, which would reduce demand for
Internet advertising and harm our business.
We may be held liable for our clients' non-compliance with privacy regulations
or their own stated privacy policies.
Our customers are also subject to various federal and state regulations
concerning the collection and use of information regarding individuals. These
laws include the Children's Online Privacy Protection Act, the Federal Drivers
Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley
Act, as well as other laws that govern the collection and use of consumer credit
information. We cannot assure you that our clients are currently in compliance,
or will remain in compliance, with these laws and their own privacy policies.
We may be held liable if our clients use our technology in a manner that is not
in compliance with these laws or their own stated privacy standards.
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If we fail to establish, maintain and expand our business and marketing
alliances, our ability to grow could be limited, we may not achieve desired
revenues and our stock price may decline.
In order to grow our business, we must generate, retain and strengthen
successful business and marketing alliances with companies in industries
including:
. Internet and traditional media advertising;
. business software;
. enterprise resource planning;
. Web site development and consulting; and
. information technology consultants.
We depend, and expect to continue to depend, on our business and marketing
alliances, which are companies with which we have written or oral agreements to
work together to provide services to our clients, to refer business from their
clients and customers to us. If companies with which we have business and
marketing alliances do not refer their clients and customers to us to perform
their online campaign and message management, our revenues and results of
operations would be severely harmed. We currently expect that a significant
amount of our future revenues will need to be generated through these
relationships. In addition, if companies with which we have business and
marketing alliances do not provide high quality products and services to our
mutual clients, our sales could suffer. We have little control over the amount
of resources these companies will devote to online advertising or referring
their clients to our services. We may not be able to generate and maintain
adequate relationships to offset the significant resources that are necessary to
develop marketing efforts to reach clients of our business and marketing
alliances.
We are substantially dependent upon our MOJO technology for our future revenues,
and if our MOJO technology does not generate revenues, our business may fail.
We believe that our future revenues are substantially dependent on the
acceptance by clients of the use of our MOJO technology, which we believe is the
cornerstone of our business. If our MOJO technology does not perform as
anticipated or otherwise does not attract clients to use our services, our
operations will suffer. We began using our MOJO technology to provide
advertising and direct marketing services in April 1999, and have only used
portions of it in twelve campaigns as of March 31, 2000. We have only recently
introduced message management services using our MOJO technology and these
services remain largely untested. To date, we have not generated any material
revenue from message management. In addition, we have incurred and will
continue to incur significant expense developing our MOJO technology. If our
revenues generated from the use of our MOJO technology do not cover these
development costs, our financial condition would suffer.
Our MOJO technology is relatively new and untested; if our MOJO technology does
not perform as anticipated, we would need to devote significant resources to
address defects, and our reputation would be damaged.
Our MOJO technology is complex and has had, and may have in the future,
errors, defects or performance problems. In particular, we may encounter
problems when it is more broadly used or when it is updated to expand and
enhance its capabilities. Although we have internally tested our MOJO
technology extensively, we have only used portions of it in twelve campaigns as
of March 31, 2000. Consequently, our technology may still malfunction or suffer
from design defects. If our technology malfunctions or contains such defects,
our services may not be reliable or compatible in certain online environments
used by our clients. In such instances, we would need to devote significant
resources to address these defects, and any problems could result in lost
revenues and damage to our reputation.
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If our MOJO technology suffers from design defects, we may need to expend
significant resources to address resulting product liability claims.
Our business will be harmed if our MOJO technology suffers from design defects
and, as a result, we become subject to significant product liability claims.
Technology as complex as ours may contain design defects which are not
detectable even after extensive internal testing. Such defects may become
apparent only after widespread commercial use. Our contracts with our clients
currently do not contain provisions to limit our exposure to liabilities
resulting from product liability claims. We currently do not carry any
insurance against product liabilities. Although we have not experienced any
product liability claims to date, we cannot assure you that we will not do so in
the future. Any product liability claim brought against us could materially
harm our business.
If we fail to effectively manage our growth, our management and resources could
be strained and our ability to capture new business could suffer.
We have grown significantly since our inception and expect to grow quickly in
the future. Future expansion could be expensive and strain our management and
other resources. As we continue to increase the scope of our operations, we
will need an effective planning and management process to implement our business
plan successfully in the rapidly evolving market for Internet advertising. Our
failure to manage this growth could seriously harm our business. We have
increased our number of employees from 35 at March 31, 1999 to 161 at March 31,
2000. In addition, we have recently opened an office in Germany and we
anticipate that we will further expand international operations in 2000.
The loss of our key personnel, including our chief executive officer, president
and chief operating officer, or any inability to attract and retain additional
personnel, could affect our ability to grow our business.
Our future success depends to a significant extent on the continued service of
our key senior management, technical and professional service and support
personnel. The loss of the services of any member of our management team, in
particular our chief executive officer, president and chief operating officer,
would harm our business. We have employment agreements with only some of our
key senior management, namely, Gregory R. Raifman, Jon L. Edwards, Barclay Jiang
and Walter Haefeker, however, any of these individuals could terminate their
employment with us anytime. All of our other employees are at-will. Because of
the substantial competition for qualified personnel in Northern California, we
could suffer substantial attrition and could lose key members of our management.
We would also be harmed if one or more of our officers or key employees decided
to join a competitor or otherwise compete with us. In addition, because many of
our executives have only recently joined us, our management team has only worked
together for a short time and may not work effectively together.
Our future success also depends on our continuing ability to attract, retain
and motivate highly skilled employees. Competition for qualified personnel in
the high technology industry is intense, particularly in the San Francisco Bay
area of Northern California, where our principal offices are located. If we
fail to hire and retain a sufficient number of sales, marketing, technical,
service and support personnel, we will not be able to maintain or expand our
business.
Our sales and implementation cycle is lengthy, which could divert our financial
and other resources, and is subject to delays, which could result in delayed
revenues.
If the sales and implementation cycle of our services is delayed, our revenues
will likewise be delayed. Our sales and implementation cycle is lengthy,
causing us to recognize revenues long after our initial contact with a client.
During our sales effort, we spend significant time educating prospective clients
on the use and benefit of our campaign and message management services. As a
result, the sales cycle for our products and services is long, ranging from a
few weeks to several months for our larger clients. The sales cycle for our new
message management services is likely to be longer than the sales cycle for our
other current campaign management services because we believe that clients may
require more extensive approval processes related to integrating internal
business information with their online advertising campaigns. In addition, in
order for a client to implement our services, the client must commit a
significant amount of resources over an extended period of time. Furthermore,
even after a client purchases our services, the implementation cycle is subject
to delays. These delays may be
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caused by factors within our control, such as possible technology defects, as
well as those outside our control, such as clients' budgetary constraints,
internal acceptance reviews and the complexity of clients' online advertising
needs.
Sustained or repeated system failures could significantly disrupt our
operations, cause client dissatisfaction and reduce our revenues.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our operations depend on our ability to protect our
computer systems against damage from fire, power loss, water damage,
telecommunications failures, viruses, vandalism and other malicious acts, and
similar unexpected adverse events, including earthquakes. Although we maintain
system backup and auxiliary systems to mitigate the damage from the occurrence
of any of these events, we may not have taken adequate steps to guard against
every difficulty that could occur. Clients may become dissatisfied by any
system failure that interrupts our ability to provide our services to them,
including failures affecting the ability to deliver advertisements quickly and
accurately to the targeted audiences. Sustained or repeated system failures
would reduce significantly the attractiveness of our solutions to advertisers.
In addition, interruptions in our services could result from the failure of
our telecommunications providers to provide the necessary data communications
capacity in the time frame required. Our ad network operations and computer
hardware is primarily housed at Verio, Inc. and AboveNet Communications, Inc.,
third-party providers of Internet communication services located in San
Francisco and San Jose, California, respectively. In addition, the failure of
any advertising server system such as ours, including failures that delay the
delivery of advertisements to Internet sites, could reduce client satisfaction
and severely harm our business, results of operations and financial condition.
In the past, users have occasionally experienced difficulties due to software
incompatibility or system failures unrelated to our systems. In particular, on
two occasions our network operations and computer hardware located in San
Francisco experienced power failures that affected our ability to deliver our ad
serving services for fifteen minutes and one hour, respectively. On another
occasion, the same facility had network routing problems that caused a high
number of retries to serve ads, which slowed down our ad serving operations.
Although these disruptions have not had a material effect on our business, any
further disruption in the Internet access provided by third-party providers or
any failure of third-party providers to handle higher volumes of user traffic
could seriously harm our business, results of operations and financial
condition.
Our technology has not yet been fully tested at higher capacities, and capacity
constraints could reduce our advertising revenues.
The volume of advertising delivered through our servers has increased from 1
million impressions per day in January 1999 to up to 39 million impressions per
day as of March 31, 2000, representing approximately one-third of our capacity
at that date. Although to date we have not had difficulties in meeting demand
for our services, further increases in the volume of advertising delivered
through our servers could strain the capacity of our MOJO technology platform,
which could lead to slower response times or system failures. This would
adversely affect the availability of advertisements, the number of impressions
received by advertisers and our advertising revenues. If we do not effectively
address capacity constraints or system failures, our business, results of
operations and financial condition would be harmed.
Acquisitions or strategic investments may divert our management's attention and
consume resources necessary to sustain our business.
In March 1999, we acquired Netranscend Software, Inc., a Java-based business
automation solutions software company. We intend to continue pursuing selective
acquisitions of businesses and technologies to complement our current business.
Any future acquisition or investment may result in the use of significant
amounts of cash, potentially dilutive issuances of equity securities, the
incurrence of debt, and amortization expenses related to goodwill and other
intangible assets. In addition, acquisitions involve numerous risks, any of
which could harm our business, operating results or financial condition
including:
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. difficulties in the integration and assimilation of the operations,
technologies, services and personnel of an acquired business;
. diversion of management's attention from other business concerns;
. unavailability of favorable financing for future acquisitions; and
. potential loss of key employees in any acquired business.
If we fail to develop new technology-based services or improve our existing
technology-based services to adapt to the changing needs and standards of the
Internet advertising industry, sales of our services will decline.
The Internet advertising markets are characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing client demands. The introduction of new services
embodying new technologies and the emergence of new industry standards and
practices could render our existing services obsolete and unmarketable or
require unanticipated investments in research and development. Our failure to
adapt successfully to these changes could harm our business, results of
operations and financial condition.
Our future success will depend on our ability to adapt to rapidly changing
technologies, to enhance existing technologies and to partner or develop and
introduce a variety of new technology-based services to address our clients'
changing demands. For example, advertisers may require the ability to deliver
advertisements utilizing new rich media formats and more precise consumer
targeting techniques. In addition, increased availability of broadband Internet
access is expected to enable the development of new services that take advantage
of this expansion in delivery capability. We may also experience difficulties
that could delay or prevent the successful design, development, introduction or
marketing of our technology-based services. In addition, any new technologies
or enhancements that we develop must meet the requirements of our current and
prospective clients and must achieve significant market acceptance. Material
delays in introducing new technology-based services and enhancements may cause
clients to forego purchases of our services and purchase those of our
competitors.
A key component of our strategy is to enhance the return on investment and
other performance measurements for our advertiser and advertising agency
clients. We have limited experience in implementing and following such a
strategy and this strategy may not succeed.
We intend to expand our international sales efforts but do not have substantial
experience in international markets.
We intend to expand our international sales effects in the future. We opened
a sales office in Germany in August 1999 and expect to initiate operations in
selected additional international markets in 2000. As of March 31, 2000, we had
not generated any significant revenues from international operations. We have
limited experience in marketing, selling and supporting our services abroad, and
we consequently may not be successful in these international markets. Expansion
into international markets will require extensive management attention and
resources.
We also may enter into a number of international alliances as part of our
international strategy and rely on these prospective business alliances to
conduct operations, establish local networks, aggregate Internet sites and
coordinate sales and marketing efforts. Our success in international markets
will depend on the success of our business alliances and their willingness to
dedicate sufficient resources to our relationships. In the future, any
international operations we commence will be subject to other risks, including:
. difficulties and costs of staffing and managing foreign operations;
. seasonal reductions in business activity;
. the impact of recessions in economies outside the United States;
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. privacy laws and regulations outside the United States;
. changes in regulatory requirements;
. export restrictions, including export controls relating to encryption
technology;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences;
. political and economic instability;
. tariffs and other trade barriers; and
. fluctuations in currency exchange rates.
Our failure to address these risks adequately may severely harm our ability to
expand our operations internationally.
If others claim that we are infringing their intellectual property, we could
incur significant expenses or be prevented from selling our services.
Third parties may claim that we are infringing their intellectual property
rights. In particular, third parties may claim that our MOJO technology, on
which our success depends in large part, infringes their intellectual property
rights. The intellectual property rights of others may cover some of our
technology. Claims of intellectual property infringement might require us to
enter into royalty or license agreements; however, we may not be able to obtain
royalty or license agreements on terms acceptable to us, or at all. We also may
be subject to significant damages or an injunction against the use of our
services.
If any claims of infringement are brought against us, we could incur
significant expenses defending against those claims, and suffer additional
damages if our defense is not successful. Any litigation regarding our
intellectual property could be costly and time-consuming and divert the
attention of our management and key personnel from our business operations. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. A successful claim of patent or other
intellectual property infringement against us would immediately harm our
business and financial condition.
We may not be able to protect our technology from unauthorized use, which could
diminish the value of our services, weaken our competitive position and reduce
our revenues.
Our success depends in large part on our proprietary technology, including our
MOJO platform. In addition, we believe that our Mediaplex and MOJO trademarks
are key to identifying and differentiating our services from those of our
competitors. We may be required to spend significant resources to monitor and
police our intellectual property rights. If we fail to successfully enforce our
intellectual property rights, the value of our services could be diminished and
our competitive position may suffer.
We rely on a combination of patent, copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect our proprietary rights. Third-party software providers could copy or
otherwise obtain and use our technology without authorization or develop similar
technology independently which may infringe our proprietary rights. We may not
be able to detect infringement and may lose competitive position in the market
before we do so. In addition, competitors may design around our technology or
develop competing technologies. Intellectual property protection may also be
unavailable or limited in some foreign countries.
We generally enter into confidentiality or license agreements with our
employees, consultants, vendor clients and corporate partners, and generally
control access to and distribution of our technologies, documentation and other
proprietary information. Despite these efforts, unauthorized parties may
attempt to disclose, obtain or use our
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services or technologies. Our precautions may not prevent misappropriation of
our services 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.
Risks Related to Our Industry
Inadequate security on the Internet could limit the effectiveness of and reduce
the demand for our services and technology.
The failure of the Internet to continue to develop as a medium for the
purchase of goods and services would decrease the demand for online advertising.
Concerns over the security of transactions conducted over the Internet and the
privacy of consumers may inhibit the growth of the Internet and online
advertisers. Our clients generally have implemented security features to
protect the privacy and integrity of the data collected from their users.
However, this information may be susceptible to hacker interception, break-ins
and disruption. If any of these were to occur, or if a well-publicized
compromise of security were to occur, Internet usage may not increase at the
rate we expect and, consequently, our services would be perceived as less
effective or desirable by our clients.
Increased usage of filtering software could limit the effectiveness of and
reduce the demand for our services and technology.
Visitors to Web sites on which our advertising messages are placed may not be
aware that information regarding them is being collected by third-party data
profiling companies. There currently exists software that can limit the
effectiveness of data profiling technology in capturing information for a
particular visitor to a Web site. Widespread use of this limiting or inhibiting
technology would decrease the effectiveness of our services for our clients that
are dependent upon the reliability of the information we obtain from profiling
companies, which would decrease the attractiveness of those services to our
clients. If this occurs, our business would be significantly harmed.
Our business model and ability to generate significant revenues depend upon
broad market acceptance of Internet advertising.
Our business model relies on revenues generated primarily by providing
Internet advertising services to response-oriented advertisers. The Internet as
an advertising medium has not been in existence for a sufficient period of time
to demonstrate its effectiveness. Internet advertising, as well as technology-
based methods for targeting advertising and tracking, measuring and reporting
the results of Internet advertising may not achieve broad market acceptance. Our
ability to generate significant revenues from advertisers will depend, in part,
on our ability to:
. demonstrate to advertisers that advertising on the Internet will add value
and increase marketing effectiveness;
. attract and retain advertisers and advertising agencies by differentiating
the services and technology we offer; and
. obtain adequate available advertising inventory from a large base of Internet
sites.
Intense competition in the Internet advertising industry could reduce our
ability to gain clients and might require us to reduce prices, which could
reduce our revenues.
We face intense competition in the Internet advertising services industry.
Our primary competitor for providers of online media planning and buying
services is Avenue A, and our primary competitor for third party ad serving is
DoubleClick. We have terminated our contractual relationship with DoubleClick
and, as a result, we expect competitive pressure from DoubleClick to increase in
the future.
The following categories represent current and potential competition:
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. providers of online media planning and buying services, such as Avenue A;
. ad serving companies, such as AdForce, DoubleClick and Engage Technologies;
. publisher networks that provide services directly to clients, such as Flycast
Communications, Adsmart, and 24/7 Media;
. organizations that manage affiliate programs, such as LinkShare; and
. advertising agencies that have or elect to develop in-house online media
management capabilities, such as Lowe Interactive.
We believe that our ability to compete depends upon many factors both within
and outside of our control, including:
. the effectiveness, ease of use, performance and features of our technology;
. client perceptions of the effectiveness of our services and technology;
. the price of our services;
. our ability to service our clients effectively over a broad geographic basis;
and
. the timing and acceptance of new services and enhancements to existing
solutions developed by us or our competitors.
The intense competition among Internet sites has led to the creation of a
number of pricing alternatives for Internet advertising. These alternatives
make it difficult for us to project future levels of advertising revenues and
applicable gross margins that can be sustained either by us or the Internet
advertising industry in general.
We expect competition to continue to increase in our industry because there
are no substantial barriers to entry. In particular, advertising agencies
without in-house online media management capabilities, including those with
which we currently work, may develop these capabilities in the future. We
believe that, in addition, competition will continue to increase as a result of
industry mergers, partnerships and consolidations. For example, AdForce and
Flycast have recently been acquired by CMGI, AdKnowledge has recently been
acquired by Engage Technologies, a subsidiary of CMGI, and NetGravity has
recently been acquired by DoubleClick. As we expand internationally, we expect
to face competition from internationally-based competitors such as Mindshare
Digital and Publicis Technology, as well as our domestic competitors with
international operations, such as BBDO Interactive, Leo Burnett and The
Interpublic Group. Companies doing business on the Internet, including ours,
must also compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets. Advertisers may be reluctant to devote
a significant portion of their advertising budget to Internet advertising if
they perceive the Internet to be a limited or ineffective advertising medium.
In addition, as we expand the scope of our Internet advertising and direct
marketing services, we may compete with a greater number of Internet sites and
other media companies across a wide range of different Internet services.
Competitive pressures could prevent us from growing, reduce our market share or
require us to reduce prices on our services, any of which could harm our
business.
Many of our existing competitors have significantly greater financial,
technical, marketing, service and other resources, have a larger installed base
of users, have been in business longer or have greater name recognition than we
do. Some of our competitors' services may be more effective than our services
at performing particular functions or be more customized for particular needs.
Some large companies may attempt to build functions into their services that are
similar to functions of our services. Even if these functions are more limited
than those provided by our services, those services could discourage potential
clients from purchasing our services, as well as lead to price reductions that
could harm our revenues. In addition, companies larger than ourselves may be
more successful in purchasing advertising space.
20
<PAGE>
Seasonality and cyclical spending may cause fluctuations in our quarterly
revenue, which may cause us to miss our revenue projections and result in a
decline in our stock price.
We believe that our revenues will be subject to seasonal fluctuations because
advertisers generally place fewer advertisements during the first and third
calendar quarters of each year. In addition, expenditures by advertisers tend
to be cyclical, reflecting overall economic conditions as well as budgeting and
buying patterns. A decline in the economic prospects of advertisers or the
economy generally could cause companies to discontinue, delay or reduce online
advertising spending. These events could reduce the demand for our services and
cause a decline in our stock price.
Potential clients in specific industries may require us to refuse business from
their competitors, limiting our business opportunities and stunting our revenue
growth.
To use our services most effectively, advertisers must integrate their
internal business data into their advertising campaigns to deliver a targeted
message. This type of integration may raise privacy concerns and prompt our
clients to require us to contract with them exclusively within their specific
industry. If our clients impose these restrictions on us, our potential client
base and revenue growth would be limited.
To fully utilize our MOJO-based services, we must have access to our clients'
proprietary business data. Many companies are wary of third parties having
access to their business information, because access by third parties increases
the risk that confidential business data may become known, even if
unintentionally, to outsiders who are not the intended recipients of the data.
These privacy concerns may be so great as to prompt our clients to attempt to
contractually prohibit us from managing the online advertising campaigns of
their competitors. If our potential client base in a particular industry was
limited in this way, our business and future revenues could be harmed. To date,
a few clients have requested that we do not service their competitors; however,
we have not agreed to these requests. To address our clients' concerns, we have
established procedures to ensure the protection of our clients' data, such as
the use of separate teams to work with each client and the use of separate,
secure servers for clients' advertising and message campaigns where a conflict
may exist. However, we cannot assure you that these measures will be adequate
for our clients to continue to use our services.
Government regulation and legal uncertainties of doing business on the Internet
may inhibit the commercial acceptance of the Internet and result in decreased
demand for our services.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. These regulations could affect the
costs of communicating on the Internet and adversely affect the growth in use of
the Internet. In turn, these regulations could result in decreased demand for
our services or otherwise harm our business.
Recently, the United States Congress enacted Internet legislation regarding
children's privacy, copyrights and taxation. A number of other laws and
regulations may be adopted covering issues such as user privacy, pricing,
acceptable content, taxation and quality of products and services. This
legislation could hinder growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. In addition, the growing use of the Internet has burdened
existing telecommunications infrastructure and has caused interruptions in
telephone service. Certain telephone carriers have petitioned the government to
regulate and impose fees on Internet service providers and online service
providers in a manner similar to long distance carriers.
Due to the global nature of the Internet, it is possible that, while our
transmissions originate in California, the governments of other states or
foreign countries might attempt to regulate our transmissions or levy sales or
other taxes relating to our activities. The laws governing the Internet remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws including those
governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising. In addition, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet. Our
business could be adversely affected by the adoption or modification of laws or
regulations relating to the Internet.
21
<PAGE>
Additional Risks That May Cause Your Investment in Our Stock to Decline
Because our directors and executive officers together own a large percentage of
our voting stock, your voting power may be limited, which may prevent an
acquisition of our company or depress our stock price.
As of March 31, 2000, our executive officers and directors beneficially owned
or controlled, directly or indirectly, 20,437,313 shares of common stock, which
in the aggregate represents approximately 54.2% of the outstanding shares of
common stock. As a result, if these persons act together, they will have the
ability to control all matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any business
combination. This may delay or prevent an acquisition or affect the market
price of our stock.
Future sales of our common stock may depress our stock price.
A substantial number of our shares of common stock will become available for
sale on May 18, 2000. Sales of such shares could depress the market price of
our common stock.
We have adopted anti-takeover provisions in our charter documents that could
delay or prevent an acquisition of our company.
Our certificate of incorporation and bylaws contain provisions, such as
undesignated preferred stock, a staggered board and the restriction on the
persons that can call special board or stockholder meetings, which could make it
more difficult for a third-party to acquire us without the consent of our board
of directors. While we believe these provisions provide for an opportunity to
receive a higher bid by requiring potential acquirors to negotiate with our
board of directors, these provisions may apply even if the offer may be
considered beneficial by some stockholders.
22
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS DURING THE REPORTING PERIOD
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
- ------ -----------
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 1, 2000 MEDIAPLEX, INC.
By: /s/ GREGORY R. RAIFMAN
------------------------------------
Gregory R. Raifman
Chairman and Chief Executive Officer
By: /s/ SAMEER PRABHAVALKAR
-------------------------------------
Sameer Prabhavalkar
Vice President, Finance and Controller
(Principal Accounting Officer)
23
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