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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-27787
DIGITAL IMPACT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3286913
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
177 BOVET ROAD
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (650) 356-3400
(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 reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
As of August 4, 2000, there were approximately 24,790,000 shares of the
Registrant's Common Stock outstanding.
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DIGITAL IMPACT, INC.
INDEX
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2000 and 1999................... 1
Condensed Consolidated Balance Sheets as of June 30, 2000
and March 31, 2000.......................................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2000 and 1999................... 3
Notes to the Unaudited Condensed Consolidated Financial
Statements.................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
Signatures.................................................. 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
JUNE 30,
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2000 1999
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Revenues.................................................... $ 8,474 $ 1,385
Cost of revenues............................................ 3,713 672
------- -------
Gross margin................................................ 4,761 713
Operating expenses:
Research and development.................................. 3,226 843
Sales and marketing....................................... 4,224 1,010
General and administrative................................ 2,300 1,047
Stock-based compensation.................................. 2,035 977
------- -------
Total operating expenses.......................... 11,785 3,877
------- -------
Loss from operations........................................ (7,024) (3,164)
Interest income, net........................................ 968 4
------- -------
Net loss.......................................... $(6,056) $(3,160)
======= =======
Net loss per common share -- basic and diluted.............. $ (0.27) $ (1.24)
======= =======
Shares used in net loss per common share calculation --basic
and diluted............................................... 22,160 2,554
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
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<CAPTION>
JUNE 30, MARCH 31,
2000 2000
----------- ---------
(UNAUDITED)
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Current assets:
Cash and cash equivalents................................. $ 59,958 $ 68,073
Accounts receivable, net.................................. 6,995 4,809
Prepaid expenses and other current assets................. 686 626
-------- --------
Total current assets.............................. 67,639 73,508
-------- --------
Property and equipment, net................................. 8,300 7,309
Restricted cash............................................. 108 108
Other assets................................................ 197 177
-------- --------
Total assets...................................... $ 76,244 $ 81,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,097 $ 3,066
Accrued liabilities....................................... 3,495 3,250
Current portion of long term debt......................... 574 530
-------- --------
Total current liabilities......................... 5,166 6,846
-------- --------
Long term debt, less current portion...................... 603 726
-------- --------
Total liabilities................................. 5,769 7,572
-------- --------
Stockholders' equity:
Common Stock.............................................. 25 24
Additional paid-in capital................................ 109,964 109,866
Accumulated other comprehensive loss...................... (15) (15)
Unearned stock-based compensation......................... (8,447) (11,349)
Accumulated deficit....................................... (31,052) (24,996)
-------- --------
Total stockholders' equity........................ 70,475 73,530
-------- --------
Total liabilities and stockholders' equity........ $ 76,244 $ 81,102
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
JUNE 30,
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2000 1999
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Operating activities
Net loss.................................................. $(6,056) $(3,160)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 763 190
Provision for bad debts................................ 400 18
Amortization of unearned stock-based compensation...... 2,035 977
Changes in operating assets and liabilities
Accounts receivable.................................. (2,586) (386)
Prepaid expenses and other current assets............ (60) (11)
Other assets......................................... (20) (74)
Accounts payable..................................... (1,969) 904
Accrued liabilities.................................. 245 325
------- -------
Net cash used in operating activities....................... (7,248) (1,217)
------- -------
Investing activities
Acquisition of property and equipment..................... (1,614) (1,106)
------- -------
Net cash used in investing activities....................... (1,614) (1,106)
------- -------
Financing activities
Principal payments on long-term debt...................... (219) (150)
Proceeds from bridge loan................................. -- 500
Proceeds from exercise of common stock options and
warrants............................................... 966 2
Proceeds from issuance of convertible preferred stock, net
of issuance costs...................................... -- 6
Repayment of stock subscription........................... -- 1
------- -------
Net cash provided by financing activities................... 747 359
------- -------
Net decrease in cash and cash equivalents................... (8,115) (1,964)
Cash and cash equivalents at beginning of year.............. 68,073 2,864
------- -------
Cash and cash equivalents at end of period.................. $59,958 $ 900
======= =======
Supplemental noncash information:
Assets acquired under capital leases...................... $ 140 $ --
Unearned stock-based compensation......................... $ (867) $ 3,699
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Digital Impact, Inc. ("Digital Impact" or the "Company"), a Delaware
corporation, is a leading provider of eMarketing solutions. The Company sells
comprehensive customer acquisition, retention, and analysis eMarketing solutions
either as single or bundled services which leverage the following proprietary
capabilities: Mass Personalization Engine(TM), the Company's messaging platform
which assembles and delivers personalized content over various digital media
such as email and set-top box; eMarketing Dashboard, the Company's web-based
campaign management and reporting system; and Adaptive Intelligent
Marketing(TM), the Company's consulting and data management methodology for
developing and implementing eMarketing strategies and programs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of Digital Impact
at June 30, 2000 and for the three-month period then ended reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements under the rules and regulations of the
Securities and Exchange Commission ("SEC"). The condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in Digital Impact's annual report on Form 10-K
for the fiscal year ended March 31, 2000. The results of operations for the
three months ended June 30, 2000 are not necessarily indicative of the results
for the entire fiscal year ending March 31, 2001.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Other comprehensive loss, a component of stockholders'
equity, recorded by the Company for the fiscal year ended March 31, 2000 was
attributable to an unrealized loss on cash equivalents. The Company did not have
any additional transactions that were required to be reported in other
comprehensive income during the fiscal quarter ended June 30, 2000.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
SFAS 133 will be effective for fiscal years beginning after June 15, 2000. The
Company does not currently hold derivative instruments or engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
adopted the provisions of SAB 101 during the third quarter of fiscal year
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000, and believes that its adoption has not had a material effect on its
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences 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, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company believes that FIN 44 will not have a material
effect on the financial position or results of operations of the Company.
NOTE 4. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the weighted
average number of vested common shares outstanding for the period. Diluted net
loss per share is calculated giving effect to all dilutive potential common
shares, including options, warrants and preferred stock. Options, warrants, and
preferred stock were not included in the calculation of diluted net loss per
share for the three-month periods ended June 30, 2000 and June 30, 1999 because
the effect would be antidilutive. A reconciliation of the numerators and
denominators used in the basic and diluted net loss per share amounts follows
(in thousands except per share data):
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THREE MONTHS ENDED
JUNE 30,
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2000 1999
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Numerator:
Net loss................................................. $(6,056) $(3,160)
======= =======
Denominator:
Weighted average common shares outstanding............. 24,620 6,123
Weighted average unvested common shares subject to
repurchase.......................................... (2,460) (3,569)
------- -------
Denominator for basic and diluted calculation............ 22,160 2,554
======= =======
Net loss per common share -- basic and diluted........... $ (0.27) $ (1.24)
======= =======
</TABLE>
All convertible preferred stock, warrants, outstanding stock options, and
shares subject to repurchase by the Company have been excluded from the
calculation of diluted net loss per common share because all such securities are
antidilutive for all periods presented. As of June 30, 1999, 10,040,000 shares
of convertible preferred stock have not been included in the calculation of
diluted net loss per share. Warrants to purchase 38,000 and 152,000 shares at a
weighted average exercise price of $0.21 and $0.64 have been excluded from the
computation of diluted net loss per share at June 30, 2000 and 1999,
respectively. Options to purchase 3,485,000 and 1,176,000 shares of common stock
at a weighted average exercise price of $13.30 and $0.25 have been excluded from
the calculation of diluted net loss per share at June 30, 2000 and 1999,
respectively.
NOTE 5. STOCK-BASED COMPENSATION
During the three months ended June 30, 2000, the Company reduced unearned
stock-based compensation, a component of stockholders' equity, by $2.9 million.
This reduction was the result of stock-based compensation of $2.0 million and a
further current quarter reduction of $867,000 related primarily to stock
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option cancellations. Unearned stock-based compensation is amortized to expense
over the period during which the options vest, generally four years in
accordance with FASB Interpretation No. 28.
NOTE 6. SUBSEQUENT EVENT
On July 31, 2000, the Company acquired all the capital stock of MineShare,
Inc. ("MineShare"), a customer intelligence and analysis company based in Santa
Monica, California, in exchange for approximately 1,855,700 shares of the
Company's common stock. Additionally, the Company assumed MineShare's
outstanding stock options and warrants by issuing approximately 133,000 Digital
Impact stock options and warrants. The acquisition was effected by means of a
merger pursuant to which a wholly-owned subsidiary of the Company was merged
with and into MineShare, with MineShare as the surviving corporation. The
acquisition will be accounted for as a purchase. To assist in the allocation of
the purchase price, an independent valuation of MineShare is being completed.
The Company expects that the total value of the transaction will be between $32
million to $34 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our consolidated financial statements
and related notes. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of factors
including those discussed in "Certain Factors Which May Impact Future Operating
Results," starting on page 10, as well as factors set forth in Digital Impact's
annual report on Form 10-K for the fiscal year ended March 31, 2000. Any
forward-looking statements speak only as of the date such statements are made.
OVERVIEW
Digital Impact, Inc., a Delaware corporation, is a leading provider of
eMarketing solutions. We sell comprehensive customer acquisition, retention, and
analysis eMarketing solutions either as single or bundled services which
leverage the following proprietary capabilities: Mass Personalization
Engine(TM), our messaging platform which assembles and delivers personalized
content over various digital media such as email and set-top box; eMarketing
Dashboard, our web-based campaign management and reporting system; and Adaptive
Intelligent Marketing(TM), our consulting and data management methodology for
developing and implementing eMarketing strategies and programs.
On July 31, 2000, we acquired all the capital stock of MineShare, Inc.
("MineShare"), a customer intelligence and analysis company based in Santa
Monica, California, in exchange for approximately 1,855,700 shares of our common
stock. Additionally, we assumed MineShare's outstanding stock options and
warrants by issuing approximately 133,000 Digital Impact stock options and
warrants. The acquisition was effected by means of a merger pursuant to which a
wholly-owned subsidiary of Digital Impact was merged with and into MineShare,
with MineShare as the surviving corporation. The acquisition will be accounted
for as a purchase. To assist in the allocation of the purchase price, an
independent valuation of MineShare is being completed. We expect that the total
value of the transaction will be between $32 million to $34 million.
We generate revenues from the sale of services to businesses that enable
them to proactively communicate with their customers online. Historically, these
services have primarily consisted of the design and execution of eMarketing
campaigns. In accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," revenue is recognized as these eMarketing
campaigns are delivered, provided that there are no remaining significant
obligations and collection of the resulting receivable is reasonably assured.
Cost of revenues consists primarily of expenses relating to the delivery of
eMarketing services, including personnel costs, primarily consisting of our
production services staff, the amortization of equipment and licensed
technology, and data center expenses.
Operating expenses are categorized into research and development, sales and
marketing, general and administrative, and stock-based compensation.
Research and development expenses consist primarily of personnel and
related costs, consultants and outside contractor costs, and software and
hardware maintenance costs for our development efforts. To date, all research
and development costs have been expensed as incurred.
Sales and marketing expenses consist of personnel and related costs
primarily for our direct sales force and marketing staff, in addition to
marketing programs which include trade shows, advertisements, promotional
activities and media events.
General and administrative expenses consist primarily of personnel and
related costs for corporate functions, including information services, finance,
accounting, human resources, facilities and legal.
Stock-based compensation related to stock options granted to employees
represents the aggregate difference, at the date of grant, between the
respective exercise price of stock options and the deemed fair market value of
the underlying stock. Stock-based compensation related to stock options granted
to consultants is revalued at each reporting date using the Black-Scholes option
pricing model. Stock-based
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compensation is amortized based on an accelerated vesting method over the
vesting period of the underlying options, generally four years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenues. Revenues increased from $1.4 million for the quarter ended June
30, 1999 to $8.5 million for the quarter ended June 30, 2000, an increase of
$7.1 million. The increase was primarily due to the addition of new clients from
June 1999 through June 2000 as well as increased volumes from continuing
clients.
Cost of Revenues. Cost of revenues increased from $672,000 during the
quarter ended June 30, 1999 to $3.7 million during the quarter ended June 30,
2000. The increase was primarily due to higher costs of campaign creation and
delivery associated with supporting a larger number of clients and a higher
volume of campaigns. Gross margins improved from 51% for the quarter ended June
30, 1999 to 56% for the quarter ended June 30, 2000, largely due to the
continued scaling of our operations as volumes increased.
Research and Development. Research and development expenses increased from
$843,000 for the quarter ended June 30, 1999 to $3.2 million for the quarter
ended June 30, 2000. The increase is largely a result of an increase in
personnel costs of approximately $1.8 million and an increase in professional
fees of $452,000 to further develop and enhance our eMarketing service offerings
and internal capabilities. We expect to continue to make substantial investments
in research and development and anticipate that research and development
expenses will continue to increase in absolute dollars in future periods, but
will vary as a percentage of total revenues from period to period.
Sales and Marketing. Sales and marketing expenses increased from $1.0
million for the three months ended June 30, 1999 to $4.2 million for the three
months ended June 30, 2000. The increase was primarily due to an increase in
marketing costs of $1.5 million related to expanded advertising and promotional
activities and increased personnel costs of $806,000 associated with the growth
of our sales force and marketing staff. We expect our sales and marketing
expenses to increase on an absolute basis as we increase our marketing and
promotional efforts and hire additional personnel.
General and Administrative. General and administrative expenses increased
from $1.0 million for the three months ended June 30, 1999 to $2.3 million for
the three months ended June 30, 2000. The increase was due primarily to an
increase in personnel related expenses of $606,000 associated with the expansion
of our finance and information technology departments. We anticipate that
general and administrative expenses will increase in absolute dollars in future
periods as we incur additional costs related to the expected growth of our
business and operations. However, we anticipate that these expenses will vary as
a percentage of revenues from period to period.
Stock-based Compensation. Stock-based compensation recognized during the
three months ended June 30, 2000 and 1999 was $2.0 million and $977,000
respectively. These amounts are recognized over the period during which the
underlying stock options vest, generally four years.
Interest Income, Net. Interest income increased from $4,000 for the three
months ended June 30, 1999 to $968,000 for the three months ended June 30, 2000.
The increase is largely due to higher average cash and cash equivalents balances
resulting from the $70.8 million in net proceeds raised during the Company's
initial public offering in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $7.2 million for the three months
ended June 30, 2000, which was due primarily to a net loss of $6.1 million, an
increase in accounts receivable of $2.6 million related to higher sales during
the period, and a decrease in accounts payable and accrued liabilities of $1.7
million. This was partially offset by the amortization of stock-based
compensation of $2.0 million and depreciation and amortization of $763,000. Net
cash used in operating activities for the three months ended June 30, 1999 was
$1.2 million.
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Our investing activities used $1.6 million during the three months ended
June 30, 2000 related to the acquisition of property and equipment as we
expanded our data center capacity and purchased new office furniture and
equipment for our increased staff. Cash used in investing activities for the
three months ended June 30, 1999 was $1.1 million.
Financing activities generated $747,000 during the three months ended June
30, 2000, consisting primarily of the proceeds from the exercise of stock
options and the purchase of shares through our employee stock purchase plan.
This was slightly offset by principal payments on our long-term debt. During the
three months ended June 30, 1999, cash provided by financing activities was
$359,000.
At June 30, 2000, we had $60.0 million in cash and cash equivalents and
availability of $160,000 under a leasing line of credit. Amounts borrowed under
this agreement of $1.1 million at June 30, 2000 bear interest at rates of
between 6.2% and 10.1%. At June 30, 2000, we also had $82,000 outstanding under
a promissory note which bears interest at 12.7%.
Our other principal commitments at June 30, 2000 consist of obligations
under operating leases for facilities. We believe that our existing cash and
cash equivalents will be sufficient to satisfy our currently anticipated cash
requirements for the next twelve months. Longer-term cash requirements are
anticipated for the continued investment in the development of our current and
future eMarketing services, the expansion of our sales and marketing activities,
investment in our infrastructure, and the acquisition or investment in
complementary products, businesses, or technologies. We believe that our
existing cash and cash equivalents will be sufficient to satisfy our currently
anticipated longer-term cash requirements.
YEAR 2000 READINESS DISCLOSURE
Before January 1, 2000, we completed our testing of systems for Year 2000
readiness. To date, we have not experienced any major disruptions to our
business nor are we aware of any significant Year 2000-related disruptions
impacting the providers of our key software applications and our key data center
equipment suppliers. We will continue to monitor our critical systems over the
next several months but do not anticipate any significant future impacts due to
Year 2000 exposures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
SFAS 133 will be effective for fiscal years beginning after June 15, 2000. The
Company does not currently hold derivative instruments or engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We adopted the
provisions of SAB 101 during the third quarter of fiscal year 2000, and we
believe that its adoption has not had a material effect on our financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences 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, but certain
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conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. We believe that FIN 44 will not have a
material effect on our financial position or results of operations.
CERTAIN FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period
due to a number of factors, many of which are beyond our control. The following
discussion highlights some of these factors and the possible impact of these
factors on future results of operations. You should carefully consider these
factors before making an investment decision. If any of the following factors
actually occur, our business, financial condition or results of operations could
be harmed. In that case, the price of our common stock could decline, and you
could experience losses on your investment.
Because of our limited operating history and the emerging nature of the
eMarketing industry, any predictions about our future revenues and expenses may
not be as accurate as they would be if we had a longer business history, and we
cannot determine trends that may affect our business.
We were incorporated in October 1997 in California and reincorporated in
Delaware in October 1999. Our limited operating history makes financial
forecasting and evaluation of our business difficult. Since we have limited
financial data, any predictions about our future revenues and expenses may not
be as accurate as they would be if we had a longer business history. Because of
the emerging nature of the eMarketing industry, we cannot determine trends that
may emerge in our market or affect our business. The revenue and income
potential of the eMarketing industry, and our business, are unproven.
Our operating results have varied significantly in the past and are likely to
vary significantly from period to period, and our stock price may decline if we
fail to meet the expectations of analysts and investors.
Our operating results have varied significantly in the past and are likely
to vary significantly from period to period. As a result, our operating results
are difficult to predict and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our common stock would
likely decline.
Seasonal trends may cause our quarterly operating results to fluctuate, which
may adversely affect the market price of our common stock.
The traditional direct marketing industry has typically generated lower
revenues during the summer months and higher revenues during the calendar
year-end months. We believe our business may be affected by similar revenue
fluctuations, but our limited operating history is insufficient to predict the
existence or magnitude of these effects. If we do experience these effects,
analysts and investors may not be able to predict our quarterly or annual
operating results, and if we fail to meet expectations of analysts and
investors, our stock price could decline.
The loss of a major client could result in lower than expected revenues.
The loss of a major client could harm our business. While no single
customer accounted for more than 10 percent of Digital Impact's revenues for the
three months ended June 30, 2000, the loss of a major client could have a
material adverse effect on our business and results of operations. Additionally,
some internet-based businesses ("dot-coms") have recently been experiencing
financial problems. While the majority of our clients are not dot-coms, the loss
of a number of these clients could have a material adverse effect on our
business and results of operations.
The eMarketing industry is highly competitive, and if we are unable to compete
effectively, the demand for, or the prices of, our services may decline.
The market for eMarketing is highly competitive, rapidly evolving and
experiences rapid technological change. We expect the intensity of competition
to increase significantly in the future because of the attention the internet
has received as a medium for advertising and direct marketing and because there
are no significant
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barriers to entry into our market. Intense competition may result in price
reductions, reduced sales, gross margins and operating margins, and loss of
market share. Our principal competitors include providers of eMarketing
solutions such as 24/7 Media Inc. (through its acquisition of Exactis.com), Kana
Communications, Inc. (through its Kana Connect product), FloNetwork (formerly
Media Synergy), MessageMedia, Responsys.com, Netcentives Inc. (through its
acquisition of Post Communications, Inc.), and Annuncio Software, Inc., as well
as the in-house information technology departments of our existing and
prospective clients.
In addition, we expect competition to persist and intensify in the future,
which could harm our ability to increase sales and maintain our prices. In the
future, we may experience competition from internet service providers,
advertising and direct marketing agencies and other large established businesses
such as America Online, DoubleClick, E.piphany, Microsoft, IBM, AT&T, Yahoo!,
ADVO, CMGI, and the Interpublic Group of Companies. Each of these companies
possesses large, existing customer bases, substantial financial resources and
established distribution channels and could develop, market or resell a number
of eMarketing solutions. These potential competitors may also choose to enter
the market for eMarketing by acquiring one of our existing competitors or by
forming strategic alliances with these competitors. Any of these occurrences
could harm our ability to compete effectively.
If we do not attract and retain additional highly-skilled personnel, we may be
unable to execute our business strategy.
Our business depends on the continued technological innovation of our core
services and our ability to provide comprehensive eMarketing expertise. Our main
offices are located in the San Francisco Bay Area, where competition for
personnel with internet-related technology and marketing skills is extremely
intense. If we fail to identify, attract, retain and motivate these highly
skilled personnel, we may be unable to successfully introduce new services or
otherwise implement our business strategy. We plan to significantly expand our
operations, and we will need to hire additional personnel as our business grows.
We face greater difficulty attracting these personnel with equity incentives as
a public company than we did as a private company.
We rely on the services of our founders and other key personnel, whose knowledge
of our business and technical expertise would be extremely difficult to replace.
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management. In particular, we depend upon
the continued services of William Park, our President, Chief Executive Officer
and co-founder and Gerardo Capiel, our Chief Technology Officer and co-founder,
whose vision for our company, knowledge of our business and technical expertise
would be extremely difficult to replace. In addition, we have not obtained life
insurance benefiting Digital Impact on any of our key employees. If any of our
key employees left or was seriously injured and unable to work and we were
unable to find a qualified replacement, the level of services we are able to
provide could decline or we may be otherwise unable to execute our business
strategy.
If we are unable to implement appropriate controls, systems and procedures to
manage our expected growth, we may not be able to successfully offer our
services and implement our business plan.
Our ability to successfully offer services and implement our business plan
requires an effective planning and management process. Since we began
operations, we have significantly increased the size of our operations. This
growth has placed, and we expect that any future growth we experience will
continue to place, a significant strain on our management, systems and
resources. To manage the anticipated growth of our operations, we will be
required to improve existing and implement new operational, financial and
management information controls, reporting systems and procedures.
If the delivery of our emails is limited or blocked, then our clients may
discontinue their use of our services.
Our business model relies on our ability to deliver emails over the
internet through internet service providers and to recipients in major
corporations. In particular, a significant percentage of our emails are sent
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to recipients who use America Online. We do not have, and we are not required to
have, an agreement with America Online to deliver emails to their customers.
America Online uses a proprietary set of technologies to handle and deliver
email and the value of our services will be reduced if we are unable to provide
emails compatible with these technologies. In addition, America Online and other
internet service providers are able to block unwanted messages to their users.
If these companies limit or halt the delivery of our emails, or if we fail to
deliver emails in such a way as to be compatible with these companies' email
handling technologies, then our clients may discontinue their use of our
services.
Our facilities and systems are vulnerable to natural disasters and other
unexpected events, and any of these events could result in an interruption of
our ability to execute our clients' eMarketing campaigns.
We depend on the efficient and uninterrupted operations of our data center
and hardware systems. Our data center and hardware systems are located in
Northern California, an area susceptible to earthquakes. Our data center and
hardware systems are also vulnerable to damage from fire, floods, power loss,
telecommunications failures, and similar events. If any of these events result
in damage to our data center or systems, we may be unable to execute our
clients' eMarketing campaigns until the damage is repaired, and may accordingly
lose clients and revenues. In addition, we may incur substantial costs in
repairing any damage.
Our data center is located at facilities provided by a third party, and if this
party is unable to adequately protect our data center, our reputation may be
harmed and we may lose clients.
Our data center, which is critical to our ongoing operations, is located at
facilities provided by a third party. Our operations depend on this party's
ability to protect our data center from damage or interruption from human error,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. If this party is unable to adequately protect our data center and
information is lost or our ability to deliver our services is interrupted, our
reputation may be harmed and we may lose clients.
If we are unable to adequately protect our intellectual property, third parties
could use our intellectual property without our consent.
Our ability to successfully compete is substantially dependent upon our
internally developed technology and intellectual property, which we protect
through a combination of copyright, trade secret and trademark law, and
contractual obligations. We have no issued patents and have two U.S. patent
applications pending. We have no registered trademarks and have two U.S.
trademark applications pending. We may not be able to adequately protect our
proprietary rights. Unauthorized parties may attempt to obtain and use our
proprietary information. Policing unauthorized use of our proprietary
information is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States.
If we are unable to safeguard the confidential information in our data
warehouse, our reputation may be harmed and we may be exposed to liability.
We currently retain highly confidential customer information in a secure
data warehouse. We cannot assure you, however, that we will be able to prevent
unauthorized individuals from gaining access to this data warehouse. If any
compromise or breach of security were to occur, it could harm our reputation and
expose us to possible liability. Any unauthorized access to our servers could
result in the misappropriation of confidential customer information or cause
interruptions in our services. It is also possible that one of our employees
could attempt to misuse confidential customer information, exposing us to
liability. In addition, our reputation may be harmed if we lose customer
information maintained in our data warehouse due to systems interruptions or
other reasons.
Activities of our clients could damage our reputation or give rise to legal
claims against us.
Our clients' promotion of their products and services may not comply with
federal, state and local laws. We cannot predict whether our role in
facilitating these marketing activities would expose us to liability under
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these laws. Any claims made against us could be costly and time-consuming to
defend. If we are exposed to this kind of liability, we could be required to pay
substantial fines or penalties, redesign our business methods, discontinue some
of our services or otherwise expend resources to avoid liability.
Our services involve the transmission of information through the internet.
Our services could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data or computer
viruses to end-users in the course of delivery. Any transmission of this kind
could damage our reputation or could give rise to legal claims against us. We
could spend a significant amount of time and money defending against these legal
claims.
New regulation of and uncertainties regarding the application of existing laws
and regulations to, eMarketing and the internet, could prohibit, limit or
increase the cost of our business.
Legislation has recently been enacted in several states restricting the
sending of unsolicited commercial email. We cannot assure you that existing or
future legislation regarding commercial email will not harm our business. The
federal government and several other states are considering, or have considered,
similar legislation. These provisions generally limit or prohibit both the
transmission of unsolicited commercial emails and the use of forged or
fraudulent routing and header information. Some states, including California,
require that unsolicited commercial emails include opt-out instructions and that
senders of these emails honor any opt-out requests.
Our business could be negatively impacted by new laws or regulations
applicable to eMarketing or the internet, the application of existing laws and
regulations to eMarketing or the internet or the application of new laws and
regulations to our business as we expand into new jurisdictions. There is a
growing body of laws and regulations applicable to access to or commerce on the
internet. Moreover, the applicability to the internet of existing laws is
uncertain and may take years to resolve. Due to the increasing popularity and
use of the internet, it is likely that additional laws and regulations will be
adopted covering issues such as privacy, pricing, content, copyrights,
distribution, taxation, antitrust, characteristics and quality of services and
consumer protection. The adoption of any additional laws or regulations may
impair the growth of the internet or eMarketing, which could, in turn, decrease
the demand for our services and prohibit, limit or increase our cost of doing
business.
Internet-related stock prices are especially volatile and this volatility may
depress our stock price.
The stock market and specifically the stock prices of internet-related
companies have been very volatile. Because we are an internet-related company,
we expect our stock price to be similarly volatile. As a result of this
volatility, the market price of our common stock could significantly decrease.
This volatility is often not related to the operating performance of the
companies and may accordingly reduce the price of our common stock without
regard to our operating performance.
Our acquisition of MineShare, Inc. may result in disruptions to our business and
management due to difficulties in assimilating personnel and operations.
In July 2000, we completed our acquisition of MineShare, Inc. We may not be
able to successfully assimilate MineShare's personnel, operations, acquired
technology and products into our existing business. Key personnel from MineShare
may decide in the future that they want to leave our employment. Additionally,
MineShare products will have to be integrated into our existing products, and
this may not be easily accomplished. These difficulties could disrupt our
ongoing business or distract management and other key personnel. We may also
face unexpected costs which could lead to higher than expected expenses, which
may adversely affect our future operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period from our inception through June 30, 2000, we provided our
services to clients primarily in the United States. As a result, our financial
results have not been directly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. All of
our sales are
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currently denominated in U.S. dollars. During the first quarter of fiscal year
2001, we set up a subsidiary in the United Kingdom which had minimal operations
during the quarter. As the operations of this subsidiary expand, our future
operating results could be directly impacted by changes in foreign currency
exchange rates or economic conditions in this region.
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay on our outstanding debt instruments. The risk associated
with fluctuating interest expense is limited, however, to the exposure related
to those debt instruments and credit facilities which are tied to market rates.
We do not plan to use derivative financial instruments in our investment
portfolio. We plan to ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
plan to mitigate default risk by investing in high-credit quality securities.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 23, 1999, we completed our initial public offering of 5,175,000
shares of our common stock, which includes 675,000 shares in connection with the
exercise of the underwriters' overallotment option, at $15 per share. The
managing underwriters in the offering were Credit Suisse First Boston, Hambrecht
& Quist, Donaldson, Lufkin & Jenrette, and U.S. Bancorp Piper Jaffray. The
shares of common stock sold in the offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-1 (Reg. No.
333-87299) that was declared effective by the SEC on November 22, 1999. The
aggregate offering amount including the overallotment exercise was approximately
$77.6 million. We incurred expenses of approximately $6.8 million, of which
approximately $5.4 million represented underwriting discounts and commissions
and approximately $1.4 million represented other expenses related to the
offering.
Currently, we have placed the net proceeds from the offering in short-term,
(primarily with maturities less than 90 days) interest bearing, investment grade
securities. During the first quarter of fiscal year 2001, we used a portion of
the net proceeds to fund our general operations and to purchase new data center
equipment and office furniture and equipment. We expect to use the remaining
offering net proceeds for working capital and general corporate purposes,
including continued investment in the development of our current and future
eMarketing services, the expansion of our sales and marketing activities, and
investment in our infrastructure. Additionally, we may use a portion of the net
proceeds to acquire or invest in complementary products, technologies, or
businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 9, 2000
DIGITAL IMPACT, INC.
(Registrant)
/s/ WILLIAM PARK
--------------------------------------
William Park
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ DAVID OPPENHEIMER
--------------------------------------
David Oppenheimer
Vice President and Chief Financial
Officer,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
16
