<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES 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 QUARTERLY PERIOD ENDED MARCH 31, 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: 000-28893
L90, Inc.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Delaware 95-4761069
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2020 Santa Monica Boulevard
Suite 400
Santa Monica, California 90404
(Address of principal executive offices) (Zip Code)
(310) 315-1199
(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. [X] Yes [_] No
As of May 10, 2000, L90, Inc. had 21,984,269 shares of its common stock,
$.001 par value per share, outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
L90, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Part I
Item 1. Financial Statements
Balance Sheets.......................................... 1
Statements of Operations................................ 2
Statements of Cash Flows................................ 3
Statements of Stockholders' Equity...................... 4
Notes to Financial Statements........................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
Item 3. Quantitative and Qualitative Disclosures About Market 22
Risk...................................................
Part II
Item 1. Legal Proceedings....................................... 23
Item 2. Changes in Securities and Use of Proceeds............... 23
Item 6. Exhibits and Reports on Form 8-K........................ 24
Signatures.......................................................... 25
Exhibits Index...................................................... 26
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
L90, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.......................... $103,692,627 $ 6,895,938
Accounts receivable, net of allowances of $668,010
and $957,200 at December 31, 1999 and March 31,
2000, respectively................................ 7,228,151 4,128,069
Notes receivable from officers..................... 925,588 --
Prepaid expenses and other assets.................. 854,391 1,341,950
------------ -----------
Total current assets........................... 112,700,757 12,365,957
------------ -----------
Restricted cash.................................... 1,868,632 1,268,632
Property and equipment:
Equipment........................................ 7,456,026 2,695,847
Furniture and fixtures........................... 108,883 70,006
Leasehold improvements........................... 38,012 32,421
------------ -----------
7,602,921 2,798,274
Less--Accumulated depreciation and amortization.. (731,653) (296,808)
------------ -----------
Property and equipment, net........................ 6,871,268 2,501,466
------------ -----------
Total assets................................... $121,440,657 $16,136,055
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................................... $ 7,974,960 $ 4,693,881
Accrued expenses................................... 1,847,711 1,686,274
Current portion of note payable.................... 347,967 414,222
Current portion of long-term capital lease
obligations....................................... 153,678 256,928
Deferred revenues.................................. 190,600 --
Accrued dividends.................................. -- 401,139
------------ -----------
Total current liabilities...................... 10,514,916 7,452,444
Note payable, net of current portion............... 1,005,320 928,702
Long-term capital lease obligations, net of current
portion........................................... 819,776 442,710
------------ -----------
Total liabilities.............................. 12,340,012 8,823,856
------------ -----------
Stockholders' Equity:
Preferred stock, $0.001 par value, 15,000,000
shares authorized: Series A preferred stock,
$0.001 par value, 2,000 shares authorized, 2,000
shares issued and outstanding, including paid-in
capital of 2,077,501.............................. -- 2,077,503
Series B preferred stock, $0.001 par value,
5,000,000 shares authorized, 4,107,044 shares
issued and outstanding, including paid-in-capital
of 9,348,823..................................... -- 9,352,930
Series C preferred stock, $0.001 par value,
3,000,000 shares authorized, 1,307,190 shares
issued and outstanding, including paid-in-capital
of 4,574,279..................................... -- 4,575,586
Common stock, $0.001 par value, 53,333,333 shares
authorized, 16,583,947 and 21,960,830 shares
issued and outstanding, actual and proforma,
respectively...................................... 21,961 6,693
Additional paid-in capital......................... 123,043,880 181,901
Notes receivable for common stock.................. (126,083) (43,750)
Capital contributions, net of shareholder draws.... -- --
Retained earnings.................................. (13,839,113) (8,838,664)
------------ -----------
Total stockholders' equity..................... 109,100,645 7,312,199
------------ -----------
Total liabilities and stockholders' equity..... $121,440,657 $16,136,055
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
1
<PAGE>
L90, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
2000 1999
----------- ---------
<S> <C> <C>
Revenue
Service fee-based revenue........................... $ 8,053,803 $ 35,859
Commission-based revenue............................ 529,667 717,459
----------- ---------
Total revenue..................................... 8,583,470 753,318
----------- ---------
Operating expenses:
Cost of service fee and other revenue............... 5,455,575 2,295
Sales and marketing................................. 2,908,254 802,661
Research and development............................ 2,181,052 139,163
General and administrative.......................... 4,014,425 527,836
----------- ---------
Total operating expenses.......................... 14,559,306 1,471,955
----------- ---------
Operating loss........................................ (5,975,836) (718,637)
Interest income, net.................................. 977,798 10,731
----------- ---------
Loss before provision for income taxes................ (4,998,038) (707,906)
Provision for income taxes............................ -- --
----------- ---------
Net loss.............................................. $(4,998,038) $(707,906)
=========== =========
Cumulative dividends on participating preferred
stock................................................ (2,411) (20,000)
----------- ---------
Net loss attributable to common stockholders.......... $(5,000,449) $(727,906)
=========== =========
Net loss per share:
Basic/Diluted....................................... $ (0.30) $ (0.11)
=========== =========
Weighted average number of common shares outstanding:
Basic/Diluted....................................... 16,583,947 6,666,667
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
L90, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
2000 1999
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (4,998,038) $ (707,906)
Adjustments to reconcile net loss to cash used in
operating activities--
Depreciation and amortization..................... 434,845 30,988
Noncash charge for warrants issued................ 208,500 --
Changes in assets and liabilities:
Increase in accounts receivable................. (3,100,082) (12,161)
Increase in notes receivable from officers...... (925,588) --
Increase (decrease) in prepaid expenses and
other assets................................... 487,559 (66,572)
Increase in accounts payable.................... 3,281,079 362,007
Increase (decrease) in accrued expenses......... 161,437 (38,592)
Increase in deferred revenues................... 190,600 --
------------ ----------
Net cash used in operating activities......... (4,259,688) (432,236)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (4,804,647) (159,275)
------------ ----------
Net cash used in investing activities......... (4,804,647) (159,275)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under capital lease obligations...... 273,816 70,860
Net borrowings under loan payable obligations....... 10,363 --
Restricted cash..................................... (600,000) --
Proceeds from initial public offering, net of
issuance costs..................................... 102,587,595 --
Repayment of notes receivable for common stock...... 19,000 --
Exercise of warrants................................ 3,843,793 --
Distribution of dividends........................... (403,550) --
Exercise of common stock options.................... 130,007 --
------------ ----------
Net cash provided by financing activities..... 105,861,024 70,860
------------ ----------
Net increase (decrease) in cash..................... 96,796,689 (520,651)
Cash and cash equivalents, beginning of period...... 6,895,938 2,111,852
------------ ----------
Cash and cash equivalents, end of period...... $103,692,627 $1,591,201
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................... $ 62,321 $ 12,639
============ ==========
Income taxes...................................... $ -- $ --
============ ==========
SUMMARY OF NON-CASH FINANCING ACTIVITIES:
Notes receivable for common stock................. $ (101,333) $ --
============ ==========
Accrued dividends................................. $ 2,411 $ 20,000
============ ==========
Cashless exercise of warrants..................... $ 1,038 $ --
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
L90, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Notes
Additional Receivable
Preferred Capital Common Paid-in for Common Retained
Stock Account Stock Capital Stock Earnings Total
------------ ------- ------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at January 5,
1997................... $ -- $13,068 $ -- $ -- $ -- $ 177,458 $ 190,526
Withdrawal of capital... -- (5,000) -- -- -- -- (5,000)
Net income.............. -- -- -- -- -- 309,784 309,784
------------ ------- ------- ------------ --------- ------------ ------------
BALANCE at December 31,
1997................... -- 8,068 -- -- -- 487,242 495,310
Net loss................ -- -- -- -- -- (289,569) (289,569)
Issuance of Series A
preferred stock........ 2,000,000 -- -- -- -- -- 2,000,000
Issuance of common
stock.................. -- -- -- 43,750 (43,750) -- --
Distributions to
shareholders........... -- -- -- -- -- (50,000) (50,000)
Conversion to C-
corporation............ -- (8,068) 6,667 6,401 -- (5,000) --
Accrual of cumulative
dividends on
participating preferred
stock.................. -- -- -- -- -- (23,233) (23,233)
------------ ------- ------- ------------ --------- ------------ ------------
BALANCE at December 31,
1998................... 2,000,000 -- 6,667 50,151 (43,750) 119,440 2,132,508
Net loss................ -- -- -- -- -- (7,488,281) (7,488,281)
Issuance of Series B
preferred stock, net of
costs of $706,471...... 8,957,694 -- -- -- -- -- 8,957,694
Issuance of Series C
preferred stock, net of
costs of $45,505....... 3,956,408 -- -- -- -- -- 3,956,408
Issuance of common stock
for options............ -- -- 26 93,974 -- -- 94,000
Issuance of debt related
warrants............... -- -- -- 37,776 -- -- 37,776
Issuance of preferred
stock warrants......... 1,091,917 -- -- -- -- (1,091,917) --
Accrual of cumulative
dividends on
participating preferred
stock.................. -- -- -- -- -- (377,906) (377,906)
------------ ------- ------- ------------ --------- ------------ ------------
BALANCE at December 31,
1999................... $ 16,006,019 $ -- $ 6,693 $ 181,901 $ (43,750) $ (8,838,664) $ 7,312,199
Net loss (unaudited).... (4,998,038) (4,998,038)
Conversion of preferred
stock into common
stock.................. (16,006,019) -- 5,276 16,000,743 -- -- --
Issuance of common upon
IPO, net of costs of
$9,537,405............. -- -- 7,475 102,580,120 -- -- 102,587,595
Notes receivable for
exercise of options.... -- -- 267 101,066 (101,333) -- --
Repayment of notes
receivable for common
stock.................. -- -- -- -- 19,000 -- 19,000
Issuance of common stock
for options............ -- -- 99 129,908 -- -- 130,007
Exercise of warrants.... -- -- 1,113 3,842,680 -- -- 3,843,793
Issuance of warrant..... -- -- -- 208,500 -- -- 208,500
Cashless exercise of
warrants............... -- -- 1,038 (1,038) -- -- --
Accrual of cumulative
dividends on
participating preferred
stock.................. -- -- -- -- -- (2,411) (2,411)
------------ ------- ------- ------------ --------- ------------ ------------
BALANCE at March 31,
2000 (unaudited)....... $ -- $ -- $21,961 $123,043,880 $(126,083) $(13,839,113) $109,100,645
============ ======= ======= ============ ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business
L90, Inc. (the "Company") is an Internet-based provider of online
advertising and direct marketing solutions for advertisers and Web publishers.
The Company provides fully-outsourced ad sales, as well as ad serving and
tracking technology. The Company develops targeted advertising campaigns that
leverage the capabilities of the Internet. The Company's adMonitor technology
platform provides Web publishers, advertisers and ad agencies with the ability
to target, deliver, measure and analyze their marketing campaigns.
The Company commenced operations in January 1997 as a sole proprietorship.
In May 1997, the Company became a California limited liability company and
changed its name to John Bohan and Associates, LLC. At that time, the Company
did business as AdNet Strategies. In January 1998, the Company incorporated in
California, elected S-corporation status and changed its name to AdNet
Strategies, Inc. In December 1998, the Company became a California C-
corporation under the name Latitude 90, Inc. In September 1999, the Company
reincorporated in Delaware as L90, Inc.
2. Summary of Significant Accounting Policies
a. Interim Results
The unaudited condensed financial statements for the three month periods
ended March 31, 2000 and 1999 have been prepared by us and are unaudited. In
our opinion, the unaudited consolidated condensed 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 our 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 condensed 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles 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 annual report on Form 10-K.
b. Revenue Recognition
Revenue from ad sales is earned under commission-based and service fee-based
contracts. For commission-based contracts, the Company generally invoices the
full amount of revenue due to Web publishers for the sale of their ad
inventory and is entitled to receive a commission. Revenue earned from
commission-based contracts reflects only the amount of the commission earned
without any associated cost of revenue. The Company recognizes commissions
ratably over the term of the advertising campaigns, which usually range from
one to twelve months. For service fee-based contracts, the Company is
obligated to pay a service fee to the Web publishers for ads placed on their
Web sites that is included in cost of revenue. Additionally, under service
fee-based contracts, the Company must collect and bear the risk of loss from
the advertiser for ads sold. Consequently, revenue earned from service fee-
based contracts reflects the full value of the ads sold, or the Company's
credit risk exposure on service fee-based sales.
System revenue represents the full value of gross billings for ads sold
under either commission-based or service fee-based contracts and is not
affected by the mix of such contracts. Revenue of the Company was derived from
system revenue of $2,528,880 and $10,387,443, for the quarters ended March 31,
1999 and 2000, respectively.
5
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
c. Cash and Cash Equivalents
For purposes of the balance sheets and statements of cash flows, cash and
cash equivalents includes all cash instruments due on demand or with an
original maturity of 90 days or less.
The Company maintained its cash balances in two financial institutions
during 1999 and 2000. The cash balances in each financial institution is
insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31,1999 and March 31, 2000, the Company's uninsured cash balances
totaled $6,695,938 and $103,492,727, respectively.
d. Restricted Cash
Restricted cash consists of cash pledged under outstanding letters of
credit.
e. Accounts Receivable
The Company has receivables due from advertisers and from Web publishers
resulting from the sales of ads. These receivables relate to both commission-
based and service fee-based contracts. The Company's credit exposure on
commission-based contracts is limited to the net amount of cash to be received
by the Company from ad sales. The Company's credit exposure on service fee-
based contracts is the full amount of the ad sales as the Company is obligated
to pay the Web publishers for ads sold on their Web sites irrespective of
receiving payment from advertisers.
The Company extends credit to its customers, who are primarily located in
the United States. The ability of these customers to meet their obligations to
the Company is dependent on their economic health, as well as their industry
and other factors. The Company maintains an allowance for doubtful accounts
which represents management's estimate of expected losses on specific accounts
and inherent losses on other as yet unidentified accounts included in accounts
receivable. In estimating the potential losses on specific accounts,
management performs ongoing credit evaluations of its customers based on
management analysis and reviews of available public documents. The amounts the
Company will ultimately realize could differ materially in the near term from
the amounts assumed in arriving at the allowance for doubtful accounts
reported in the financial statement.
f. Property and Equipment
Property and equipment are recorded at cost and depreciated over the
estimated useful life of the asset, using the straight-line method of
depreciation. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the term of the lease. Property,
equipment and leasehold improvements have estimated useful lives ranging from
three to five years.
g. Equipment Under Capital Leases
Equipment under capital leases is recorded at the lower of the present value
of the minimum lease payments or the fair value of the leased property at the
inception of the lease. Amortization of leased property is computed using the
straight-line method over the term of the lease.
h. Deferred Revenue
Deferred revenue primarily represents advertising campaign revenue to be
recognized over the period of the campaign subsequent to the respective year-
end and quarter-end. This revenue will be recognized ratably over the term of
the advertising campaign, which usually ranges from one to twelve months.
6
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
i. Income Taxes
The Company provides for income taxes in accordance with the asset and
liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
j. Net Loss Per Share
Basic earnings per share ("EPS") is computed by dividing income or loss
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or result in the issuance of common
stock that would then share in the earnings of the Company. Potentially
dilutive securities are excluded from the Company's calculation of diluted EPS
when their inclusion would be antidilutive.
k. Stock-Based Compensation
Accounting principles generally accepted in the United States ("GAAP")
permit companies to use either of two alternative accounting methods to
recognize employee stock-based compensation. Under the first accounting
method, if options are granted at an exercise price equal to the market value
of the stock at the time of the grant, no compensation expense is recognized.
The Company follows this accounting method, which it believes better reflects
the motivation for its issuance of stock options, namely, that they are
incentives for future performance rather than compensation for past
performance. Under the second accounting method, issuers record compensation
expense over the period they are expected to be outstanding prior to exercise,
expiration, or cancellation. The amount of compensation expense recognized
over this term is the "fair value" of the options at the time of the grant as
determined by an option pricing model. The option pricing model attributes
fair value to the options based upon the length of their term, the volatility
of the stock price in past periods, and other factors. Under this method, the
issuer recognizes compensation expense regardless of whether the officer or
director exercised the options.
l. Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
m. New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires all costs related
to the development of internal use software other than those incurred during
the application development stage to be expensed as incurred. Costs incurred
during the application development stage are required to be capitalized and
amortized over the estimated useful life of the software. SOP 98-1 was adopted
by the Company on January 1, 1999 and did not have a material effect on the
Company's financial position or results of operations.
7
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Equity
a. Initial Public Offering
In February 2000, the Company completed an initial public offering (the
"IPO") of 7,475,000 shares of common stock, including 975,000 shares subject
to the underwriter's over-allotment option, at $15.00 per share of common
stock. The IPO resulted in aggregate net proceeds to the Company of
approximately $102,600,000, net of underwriting discounts and expenses of the
offering.
b. Conversion of Preferred Stock and Warrants
Upon the IPO of the Company's common stock, the Company converted all
outstanding shares of Series A, B and C preferred stock into 5,276,156 shares
of common stock. Additionally, the Series A, B and C preferred stockholders
exercised their warrants to purchase shares of the Company's common stock.
4. Debt
On November 29, 1999, the Company acquired a software license in exchange
for a promissory note for $1,453,715. The note bears interest at 7.86% per
annum. This note is collateralized by a standby letter of credit for a total
of $1,208,632. At December 31, 1999, the Company had pledged $1,208,632 of
cash as collateral for this outstanding letter of credit. Remaining principal
payments due under the note are $442,032, $486,708 and $524,976 for the years
ending December 31, 2000, 2001 and 2002, respectively.
On November 29, 1999, the Company obtained a standby letter of credit for a
total of $60,000. At December 31, 1999, the Company had pledged $60,000 of
cash as collateral for this outstanding letter of credit.
On March 28, 2000 the Company obtained a standby letter of credit for a
total of $600,000. At March 31, 1999 the Company had pledged $600,000 of cash
as collateral for this outstanding letter of credit.
5. Stock Options and Warrants
a. Stock Options
Employee transactions during the quarter ended March 31, 2000 are summarized
as follows:
<TABLE>
<CAPTION>
2000
--------------------------
Weighted
average
Employee stock options Shares exercise price
---------------------- ---------- --------------
<S> <C> <C>
Outstanding at beginning of period............ 2,151,734 $ 2.82
Granted....................................... 587,358 16.59
Exercised..................................... (365,967) 0.63
Forfeited..................................... (64,714) 5.12
---------- ------
Outstanding at end of period.................. 2,308,411 $ 6.61
========== ======
Options exercisable at end of period.......... 958,786
Weighted average fair value of options granted
during period................................. $ 16.59
</TABLE>
8
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about employee stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Weighted average remaining
Range of exercise prices Number outstanding contractual life
------------------------ ------------------ --------------------------
<S> <C> <C>
$1.20...................... 170,001 8.88 years
$1.50...................... 65,167 8.91 years
$3.53...................... 1,428,215 9.38 years
$4.59...................... 66,667 9.48 years
$15.00-$20.00.............. 475,978 9.84 years
$20.01-$25.00.............. 94,300 9.93 years
$25.01-$28.00.............. 8,083 9.86 years
---------
2,308,411
=========
</TABLE>
b. Common Stock Warrants
In connection with an advertising agreement, the Company issued a warrant to
purchase 50,000 shares of common stock at an exercise price of $15.00 per
share. This warrant is only exercisable from January 30, 2001 through February
5, 2001. The warrant expires on February 5, 2001. The fair value of the
warrant was estimated at $209,000 on the date of issuance using the Black-
Scholes option pricing model with the following assumptions: dividend yield of
0 percent; expected volatility of 65 percent; risk-free interest rate of 6.12
percent; and an expected life of one year.
6. Commitments and Contingencies
a. Litigation
The Company may become subject to legal proceeding from time to time in the
normal course of business. The Company is not currently involved in any
litigation that management believes will have a material adverse effect on the
Company's financial position or results of operations.
On November 12, 1999, DoubleClick, Inc. ("DoubleClick") filed a lawsuit
against the Company in the United States District Court for the Eastern
District of Virginia. The lawsuit was moved to the United States District
Court for the Southern District of New York in March 2000. The suit alleges
that the Company is infringing, and inducing and contributing to the
infringement by third parties of, a patent held by DoubleClick related to
methods and networks for delivering, targeting and measuring advertising over
the Internet. DoubleClick is seeking treble damages in an unspecified amount,
a preliminary and permanent injunction from further alleged infringement and
attorneys' fees and costs. The Company believes that it has meritorious
defenses to this lawsuit and intends to defend itself vigorously. The Company
currently believes that this lawsuit and its outcome will not have a material
adverse effect on the Company's results of operations or financial position.
However, the litigation could result in significant expenses and diversion of
management time and other resources. Further, if DoubleClick successfully
asserts an infringement claim against the Company, its operations would be
impacted severely. The DoubleClick suit could result in limitations on the
Company's ability to market its products and services, delays and costs
associated with redesigning its products and services or payments of license
fees or other payments.
9
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
b. Office Lease
On February 28, 2000, the Company entered into an agreement to lease
additional office space through July 30, 2003. The company is required to make
equal monthly payments which are due as follows:
<TABLE>
<CAPTION>
Office
Year Lease
---- ----------
<S> <C>
2000.......................................................... $ 292,500
2001.......................................................... 351,000
2002.......................................................... 351,000
2003.......................................................... 204,750
----------
$1,199,250
==========
</TABLE>
In connection with this agreement, the Company was required to obtain a
standby letter of credit in the amount of $600,000. This letter of credit
expires on July 31, 2001 and is automatically extended for an additional
period of one year through July 31, 2002. The Company has pledged $600,000
under this letter of credit.
7. Related Party Transactions
On January 1, 2000, the Company received $101,333 in notes receivable for
common stock from employees for the exercise of 266,666 options. These notes
bear interest at a rate equal to 5.00% per annum and mature at the earliest of
the cessation of the maker's employment by the Company for any reason or
January 1, 2005. The Company paid an aggregate of $925,588 in withholding
obligations for these employees upon exercise of these options. In April 2000,
these employees repaid the notes in full and reimbursed the Company in full
for the amounts advanced for their withholding obligations.
On January 26, 2000, the Company received payment of $19,000 for a note
receivable from a consultant for 50,000 shares of common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF L90 CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS AND THE FUTURE PERFORMANCE OF L90 WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. L90'S ACTUAL RESULTS AND TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS RELATING TO OUR BUSINESS AND
OPERATIONS" AND ELSEWHERE IN THIS REPORT AND IN L90'S OTHER PUBLIC FILINGS
MADE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
Overview
References in this Report to "L90," "we," "our" and "us" refer to L90, Inc.
We are a leading provider of Internet-based advertising and direct marketing
solutions for advertisers and Web publishers. We design and implement
advertising campaigns for our advertising clients and strategically place
their ads on our network of Web sites. We provide our Web publishing clients
with a fully-outsourced solution which includes the sale of advertising space
on their Web sites as well as the technology required to deliver
advertisements. We have developed adMonitor, our ad serving and tracking
technology that is used to deliver advertisements to our network of Web site
publishers. adMonitor enables our advertising and Web publishing clients to
implement sophisticated advertising campaigns quickly and to selectively
target ads to Web users based on specific interests or characteristics.
adMonitor also enables our clients to measure and manage the effectiveness of
their ad campaigns.
Since inception, substantially all of our revenue has been derived from
online advertising sales, and we expect this to continue for the foreseeable
future. We offer advertisements primarily priced on a cost per every thousand
ads viewed, or CPM, basis. We also offer direct marketing programs, which may
be priced on a cost per action basis, such as cost for each new user
registration. In January 1999, we began to charge our customers for the use of
our adMonitor technology. For the three months ended March 31, 2000, online
advertising sales accounted for 96.1% of our revenue, and fees generated by
our adMonitor technology accounted for 3.9% of our revenue.
Revenue from ad sales is earned under commission-based and service fee-based
contracts. For commission-based contracts, we receive commissions from Web
publishers for the sale of their ad inventory. Revenue earned from commission-
based contracts reflects only the amount of the commission earned without any
associated cost of revenue. We recognize commissions ratably over the term of
an advertising campaign, which typically ranges from one to twelve months. For
service fee-based contracts, we purchase advertising space, or ad inventory,
from Web publishers and are obligated to pay a service fee to Web publishers
for ads placed on their Web sites. Additionally, under service fee-based
contracts, we bear the risk of loss from the non-collection of fees payable by
advertisers for ads sold. Consequently, revenue earned from service fee-based
contracts reflects the full value of the ads sold. System revenue represents
the full value of gross billings for ads sold under either commission-based
contracts or service fee-based contracts.
In the second quarter of 1999, we began the process of amending many of our
commission-based contracts with Web publishers to provide that we will sell
their ad inventory on a best efforts basis to our advertising clients and
remit to Web publishers, as a service fee, a percentage of the resulting
advertising revenue. We are attempting to amend almost all of our existing
commission-based contracts with Web publishers to convert these contracts into
service fee-based contracts. So long as we have both commission-based and
service fee-based contracts, revenue will include a mix of commissions
received under our commission-based contracts and total billings to
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our advertising clients under our service fee-based contracts. For the
foreseeable future, we do not expect to completely convert all of our
contracts into service fee-based contracts. As our amended contracts are
phased in, we expect that revenue will increase disproportionately from prior
periods as a result of the recognition of total billings to our advertising
clients as revenue.
The financial statements included elsewhere in this report include
references to system revenue. We believe system revenue provides a consistent
basis for reporting revenue from period to period, regardless of the change in
contract type, as discussed above. System revenue represents the full value of
gross billings for ads sold under either commission-based contracts or service
fee-based contracts. We believe that period to period comparisons of operating
results are not always meaningful and that the results for any period should
not be relied upon as an indication of future performance. For the three
months ended March 31, 2000, service fee-based contracts accounted for 93.8%
of our revenue, and commission based contracts accounted for 6.2% of our
revenue. For the three months ended March 31, 1999, service fee-based
contracts accounted for 4.8% of our revenue, and commission-based contracts
accounted for 95.2% of our revenue.
Cost of revenue includes service fees paid to our Web publishers under our
service fee-based contracts and Internet connectivity and bandwidth costs
associated with ad serving. We expect cost of revenue to increase on an
absolute dollar basis in future periods as our revenue increases and as more
of the contracts with Web publishers are structured as service fee-based
contracts.
Results of Operations
Three Months Ended March 31, 2000 and 1999
Revenue. Revenue increased 1,039% to $8.6 million for the three months ended
March 31, 2000 from $753,000 for the three months ended March 31, 1999. This
increase was due to increases in the number of advertising customers that we
serviced, the number of Web publishers on our network and the number of ads
delivered. In addition, this increase was partly attributable to our adoption
of service fee-based contracts and the initiation of our charging service fees
to customers for the use of our adMonitor technology.
System Revenue. System revenue represents the full value of gross billings
for ads sold under either commission-based contracts or service fee-based
contracts. Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure of
advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one company
to another. System revenue increased 311% to $10.4 million for the three
months ended March 31, 2000 from $2.5 million for the three months ended March
31, 1999. This increase was due to increases in the number of advertising
customers that we serviced, the number of Web publishers on our network and
the number of ads delivered, as well as the initiation of our charging service
fees to customers for the use of our adMonitor technology.
Cost of Revenue. Cost of revenue was $5.5 million for the three months ended
March 31, 2000 and $2,000 for the three months ended March 31, 1999. During
the three months ended March 31, 1999, virtually all revenue was derived from
advertising sales commissions with no associated cost of revenue.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, travel, advertising, trade show costs and marketing materials
expense. Sales and marketing expenses were $2.9 million, or 33.9% of revenue,
for the three months ended March 31, 2000, and $803,000, or 106.6% of revenue,
for the three months ended March 31, 1999. This increase was primarily due to
an increase in the number of sales and marketing personnel. Our sales and
marketing organization has grown to 87 employees as of March 31, 2000 from
37 employees as of March 31, 1999. We expect sales and marketing expenses to
increase on an absolute dollar basis in future periods as we hire additional
personnel, expand into new markets and continue to promote our advertising
solutions.
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Research and Development. Research and development expenses consist
primarily of compensation, consulting expenses and expenses for hardware,
software and materials associated with the development and improvement of our
adMonitor technology. To date, all research and development costs have been
expensed as incurred. Research and development expenses were $2.2 million, or
25.4% of revenue, for the three months ended March 31, 2000, and $139,000, or
18.5% of revenue, for the three months ended March 31, 1999. This increase was
due primarily to the deployment and enhancement of our adMonitor technology.
We expect research and development expenses to increase significantly on an
absolute dollar basis in future periods.
General and Administrative. General and administrative expenses consist
primarily of compensation and professional service fees. General and
administrative expenses were $4.0 million, or 46.8% of revenue, for the three
months ended March 31, 2000, and $528,000, or 70.1% of revenue, for the three
months ended March 31, 1999. This increase was primarily a result of increases
in personnel expenses, professional service fees and facility expenses
necessary to support our growth. We expect general and administrative expenses
to increase on an absolute dollar basis as we hire additional personnel and
incur additional costs related to the growth of our business and our operation
as a public company.
Interest Income, Net. Net interest income primarily consists of interest
earned on cash balances, offset by interest expense incurred with respect to
our capital leases and equipment financing obligations. Net interest income
was $978,000 for the three months ended March 31, 2000. Net interest income
was $11,000 for the three months ended March 31, 1999.
Liquidity and Capital Resources
From our inception through September 1998, we financed our operations
primarily through internally generated cash flow. In September 1998, we
completed a private placement of equity securities to an individual investor
and received $1.9 million in net proceeds. In September 1999, we completed two
private placements of equity securities and received $12.9 million in net
proceeds. In February 2000, we completed our initial public offering of
7,475,000 shares of our common stock (including 975,000 shares subject to the
underwriter's over-allotment option) at $15.00 per share. The initial public
offering resulted in aggregate net proceeds of approximately $102.6 million,
net of underwriting discounts and expenses of the offering. The net proceeds
from these private placements and our initial public offering are being used
to expand our business operations, to hire additional personnel, to provide
additional services and for general corporate purposes related to the
expansion of our business.
Net cash used by operating activities was $4.3 million for the three months
ended March 31, 2000, and $432,000 for the three months ended March 31, 1999.
Cash used in operating activities for the three months ended March 31, 2000
resulted from a net loss of $5.0 million, as well as a $3.1 million increase
in accounts receivable and a $926,000 increase in notes receivable, partially
offset by a $3.4 million increase in accounts payable and accrued expenses, a
$487,000 decrease in prepaids and other current assets and a $189,000 increase
in deferred revenue. Cash used in operating activities for the three months
ended March 31, 1999 resulted from a net loss of $708,000 and a $79,000
increase in accounts receivable and prepaids and other current assets,
partially offset by a $323,000 increase in accounts payable and accrued
expenses.
Net cash used in investing activities was $4.8 million for the three months
ended March 31, 2000, and $159,000 for the three months ended March 31, 1999.
Cash used in investing activities was primarily related to purchases of
property and equipment related to research and development.
Net cash provided by financing activities was $105.9 million for the three
months ended March 31, 2000 and $71,000 for the three months ended March 31,
1999. Cash provided by financing activities for the three months ended March
31, 2000 resulted primarily from the proceeds from our IPO. Cash provided by
financing activities for the three months ended March 31, 1999 resulted
primarily from net borrowings under capital lease obligations.
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Although we do not have any material commitments for capital expenditures,
we anticipate that we will experience a substantial increase in our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We currently anticipate that we will continue to
experience significant growth in operating expenses for the foreseeable
future. We believe that our existing cash and cash equivalents will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
Year 2000 Compliance
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based
on operations since January 1, 2000, we do not expect any significant impact
to our on-going business as a result of the "Year 2000 issue." However, it is
possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. We cannot quantify the amount of our potential
exposure but we believe that any such problems are likely to be minor and
correctable. In addition, we could still be negatively impacted if our
customers or suppliers are adversely affected by the Year 2000 or similar
issues. We currently are not aware of any significant Year 2000 or similar
problems that have arisen for our customers and suppliers. In preparation for
the year 2000, we incurred internal staff costs as well as consulting and
other expenses. Year 2000 expenses incurred to date totaled less than
$100,000.
Risk Factors Relating to Our Business and Operations
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT L90 AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
L90'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 THIS SECTION AND ELSEWHERE IN THIS REPORT. L90 UNDERTAKES 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.
Our revenues and prospects are difficult to forecast because we have only been
operating our business since January 1997
We began our business in January 1997 and have a brief operating history.
Therefore, we lack sufficient historical financial and operating data on which
to adequately forecast future operating results. You should consider our
prospects in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets such as online
advertising.
These risks include our ability to:
. manage our growth effectively;
. anticipate and adapt to the rapid changes in the Internet;
. continue to develop and upgrade our technology;
. respond to competitive developments in our market; and
. continue to identify, attract, retain and motivate qualified personnel.
If we are unsuccessful in addressing these risks, our revenues may not grow
in accordance with our business model and may fall short of expectations of
market analysts and investors, which could negatively affect the price of our
stock.
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We have a history of losses and expect to incur substantial losses in the
future
We incurred net losses of approximately $5.0 million for the quarter ended
March 31, 2000 and $728,000 for the quarter ended March 31, 1999. Our
accumulated deficit from inception, as of March 31, 2000, was approximately
$13.8 million. We expect to continue to incur substantial net losses for the
foreseeable future due to a high level of planned operating expenditures. We
are making these expenditures in anticipation of higher revenue, but we cannot
assure you that we will realize higher revenue. If we do not succeed in
substantially increasing our revenue, our losses may continue indefinitely and
would likely increase. In addition, we cannot assure you that we will return
to profitability.
Intellectual property infringement claims, including a November 1999 lawsuit
against us by DoubleClick, could prevent or hinder our ability to deliver
advertisements over the Internet
We face the risk that other parties' intellectual property positions will
impair our ability to deliver advertisements over the Internet. On November
12, 1999, DoubleClick filed a patent infringement lawsuit against us in the
United States District Court for the Eastern District of Virginia. The lawsuit
was moved to the United States District Court for the Southern District of New
York in March 2000. The suit alleges that we are infringing, and inducing and
contributing to the infringement by third parties of, a patent held by
DoubleClick related to methods and networks for delivering, targeting and
measuring advertising over the Internet. DoubleClick is seeking treble damages
in an unspecified amount, a preliminary and permanent injunction from further
alleged infringement and attorneys' fees and costs. The case is currently in
the early stages of discovery. This litigation can be expected to result in
significant expenses to us and the diversion of management time and other
resources, the extent of which cannot be quantified with any reasonable
accuracy given the early stage of this litigation. In addition, some of our
contracts with Web publishers require us to indemnify the Web publishers for
losses they incur arising from any infringement by our ad serving technology
of a third party's intellectual property rights. If DoubleClick is successful
in its claims against us, we may be hindered from competing in the Internet
advertising market and our operations could be severely harmed. The
DoubleClick suit could result in limitations on how we implement our products
and services, delays and costs associated with redesigning our products and
services and payments of license fees and other monies. An injunction obtained
by DoubleClick could eliminate our ability to deliver advertisements over the
Internet. If DoubleClick is successful in its claims against us, we cannot
assure you that we would be able to enter into a licensing agreement with
DoubleClick on commercially reasonable terms, if at all. In that case, we
would be required to alter our technology in a way that would not infringe the
DoubleClick patent, and we cannot assure you that these alterations would be
successful. Furthermore, other third parties, such as 24/7 Media, may have, or
may in the future be granted, patents that cover our technology or other
aspects of our business. We may be limited in our ability to use our
technology or conduct our business without licenses from these third parties,
which may not be available on commercially reasonable terms, if at all.
Our quarterly operating results may fluctuate, which may make it difficult to
forecast our future performance and may result in volatility in our stock
price
Although we intend to increase our spending and investment to support our
planned growth, our revenue, and some of our costs, will be much less
predictable. This unpredictability will likely result in significant
fluctuations in our quarterly results. Therefore, you should not rely on
quarter-to-quarter comparisons of results of operations as an indication of
our future performance. Because of our limited operating history and the
emerging nature of our industry, we anticipate that securities analysts may
have difficulty in accurately forecasting our results. If our operating
results are below market expectations, the price of our common stock will
likely decline.
The following are among the factors that could cause significant
fluctuations in our operating results:
. market acceptance of the Internet as an advertising medium;
. delay or cancellation of advertising contracts;
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. expiration or termination of contracts with Web publishers;
. introduction of new or enhanced services by us or our competitors;
. system outages, delays in obtaining new equipment or problems with
upgrades;
. disruption or impairment of the Internet;
. changes in our pricing policies or those of our competitors;
. seasonality in the demand for advertising;
. changes in government regulation of the Internet; and
. general economic and market conditions, as well as economic and market
conditions specific to the Internet.
If we do not effectively manage our growth and expansion, our ability to
provide services could suffer
Our success depends in part on our ability to manage our growth and
expansion. We have grown to 135 full-time and three part-time employees as of
March 31, 2000 from 51 full-time and three part-time employees as of March 31,
1999. We plan to continue to expand our sales, marketing, technology and
administrative organizations. This anticipated future expansion may place a
significant strain on our managerial, operational and financial resources. In
addition, we will need to continue to improve our financial and managerial
controls, enhance our reporting systems and procedures and expand, train and
manage our work force.
If we are unable to attract and retain sales and client service personnel, or
if we are unable to adequately train our sales personnel in a timely manner,
our business and future revenue growth could suffer
Our future success depends on our ability to identify, recruit, train,
integrate and retain qualified sales and marketing, managerial and technical
personnel. We anticipate the need to hire a significant number of personnel to
achieve our growth objectives. Competition for these personnel is intense. The
inability to attract, integrate and retain the necessary sales, marketing,
technical and administrative personnel could harm our ability to generate
revenue.
If our ad delivery and tracking technology is not effective, our relationships
with our advertising clients may be harmed
Because our adMonitor technology is relatively new, we cannot assure you
that the use of our adMonitor services will remain effective in serving,
targeting and tracking advertisements or other marketing and promotional
activities. Our revenue would be adversely affected if advertisers do not
perceive that the use of our adMonitor services will improve the effectiveness
of their marketing campaigns.
A small number of Web publishers accounts for a substantial percentage of our
advertising revenue and our failure to develop and sustain long-term
relationships with Web publishers, or the reduction in traffic of a current
Web publisher in our network, could limit our ability to generate revenue
For the quarter ended March 31, 2000, our top five Web publishers accounted
for approximately 40.1% of our revenue, and our top three Web publishers
accounted for approximately 32.7% of our revenue. JobsOnline accounted for
18.1% of our revenue for the quarter ended March 31, 2000. Our contracts with
Web publishers, including these top Web publishers, are generally one year in
duration and can be terminated by either party with as little as 30 days
notice. We cannot assure you that any of our Web publishers will continue
their relationships with us. Additionally, we may lose Web publishers as a
result of acquisitions or as a result of the discontinuation of operations of
any of our Web publishers. For example, Four11, Inc. terminated its contract
with us following its acquisition by Yahoo! Furthermore, we cannot assure you
that we would be able to replace a departed or acquired Web publisher with
another Web publisher with comparable traffic patterns and
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demographics, if at all. Therefore, our failure to develop and sustain long-
term relationships with Web publishers or the reduction in traffic of a
current Web publisher in our network could limit our ability to generate
advertising revenue.
A limited number of advertisers accounts for a significant percentage of our
revenue and a loss of one or more of these advertisers could cause our results
of operations to suffer
For the quarter ended March 31, 2000, revenue from our five largest
advertisers accounted for 27.1% of our revenue. No single advertiser accounted
for more than 10% of our revenue for the quarter ended March 31, 2000.
Advertisers typically purchase advertising under short-term purchase order
agreements. We cannot assure you that our top advertisers or our other
advertisers will continue their relationships with us. The loss of one or more
of the advertisers that represent a significant portion of our revenue could
cause our results of operations to suffer. In addition, many of our contracts
with Web publishers require us to bear the risk of non-payment of advertising
fees from advertisers. Accordingly, the non-payment or late payment of amounts
due to us from a significant advertiser could cause our financial condition to
suffer. For the quarter ended March 31, 2000, our bad debt expense related to
uncollected advertising fees was $442,000.
Since we expect to derive substantially all of our revenue in the foreseeable
future from online advertising, our ability to generate revenue may suffer if
the Internet is not increasingly accepted as an effective advertising medium
If the online advertising market does not develop further, or develops more
slowly than expected, we may not generate enough advertising revenue to return
to profitability. Since we expect to derive substantially all of our revenue
in the foreseeable future from online advertising, our future success is
highly dependent on the increased use of the Internet as an advertising
medium. Online advertising is relatively new and rapidly evolving, and its
effectiveness, compared to traditional media, is uncertain. Widespread use of
online advertising depends upon businesses accepting a new way of marketing
their products and services. Businesses may view online advertising as
undesirable or less effective for promoting their products and services
relative to traditional advertising media. In addition, the widespread
adoption of technologies that permit Internet users to block advertisements on
Web sites could inhibit the growth of the Internet as an advertising medium.
Since our business depends in part on market acceptance of electronic
commerce, if electronic commerce does not grow, or grows slower than we
expect, our ability to generate revenue may suffer
Our success depends in part on market acceptance of electronic commerce. A
number of factors outside of our control could prevent this acceptance,
including the following:
. the necessary network infrastructure for substantial growth in usage of
the Internet may not develop adequately;
. insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
. negative publicity and consumer concern surrounding the security of
transactions could impede the growth of electronic commerce.
If electronic commerce does not grow, or grows slower than we expect, due to
any of the above factors, or any other factor, our ability to generate revenue
could suffer.
Failure of our technology and computing systems could harm our relationships
with our clients and cause our results of operations to suffer
The continuing and uninterrupted performance of our servers and networking
hardware and software infrastructure is critical to our business.
Periodically, we have experienced minor systems interruptions, including
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Internet disruptions, which we believe may occur periodically in the future.
Any system failure that causes interruptions in our ability to service our
customers, including failures that affect our ability to deliver
advertisements without significant delay to the viewer, could reduce customer
satisfaction and, if sustained or repeated, could cause our results of
operations to suffer. Further, an increase in the volume of advertising
delivered through our servers could strain the capacity of our hardware and
software, which could lead to slower response times or system failures. If we
do not effectively address any capacity constraints, customer satisfaction
could be harmed and our business would likely suffer.
Failure of the Web infrastructure to support the growth of the electronic
marketplace could limit the growth of our business
The Internet may not in the future be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, slow
development of complementary products, including high speed modems, delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity or increased government regulation. To
the extent that the Internet continues to experience significant growth in the
number of users and the level of use, we cannot assure you that the Internet
infrastructure will continue to be able to support the demands placed on it by
its users. If the necessary infrastructure or complementary products are not
developed, our business may not grow and would likely suffer.
Our failure to adequately respond to rapid changes in technology and the
Internet could harm our ability to generate revenue
The market for online products and services is subject to rapid change and
characterized by evolving industry standards and frequent introductions of new
technological developments. These new standards and technological developments
could make our existing or future products or services obsolete. Keeping pace
with the introduction of new standards and technological developments could
result in significant additional costs or prove to be difficult or impossible
for us. Any failure to keep pace with the introduction of new standards and
technological developments on a cost-effective basis could result in increased
costs and harm our ability to generate revenue.
Many competitors have substantial competitive advantages that may make it more
difficult for us to retain our existing advertisers and Web publishers and to
attract new advertisers and Web publishers
The markets for online advertising, direct marketing and ad delivery, or ad
serving, and tracking technology are intensely competitive. We compete with
television, radio, cable and print for a share of advertisers' total
advertising budgets. We also compete with large Web publishers and Web search
engine companies, such as America Online, Excite@Home, Infoseek and Yahoo!,
for the online advertising budgets of advertisers. In addition, we compete
with various Internet advertising networks, such as DoubleClick, 24/7 Media
and Engage Technologies. In marketing our adMonitor products and services to
Web publishers and advertisers, we also compete with providers of ad delivery,
or ad serving, technology, database management and related services, including
AdForce, DoubleClick and Engage Technologies. Many of our current and
potential competitors enjoy competitive advantages over us, including
significantly greater financial, technical and marketing resources. They may
also enjoy significantly greater brand recognition and substantially larger
bases of Web site clients and advertisers. As a result, our competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in client requirements. Our competitors may also have a significantly
greater ability to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
employees, strategic partners, advertisers and Web publishers. Further, we
cannot assure you that our competitors will not develop online products and
services that are equal to or superior to our products and services or that
achieve greater market acceptance than our products and services. If we are
unable to compete successfully against existing or potential competitors, our
revenue and margins may decline.
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Our failure to successfully acquire and integrate new technologies and
businesses could cause our results of operations to suffer
We focus on creating sponsorship-oriented advertising campaigns that take
full advantage of the unique capabilities of the Internet. The Internet is a
quickly changing environment, requiring companies to constantly improve their
technology and develop or acquire new technology. We intend to acquire and
make investments in complementary businesses, products, services or
technologies. We cannot assure you that we will be able to identify suitable
acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make any potential
acquisition or investment on commercially acceptable terms. Moreover, we may
have difficulty integrating any acquired businesses, products, services or
technologies into our operations. These difficulties could disrupt our
business, distract our management and employees and increase our expenses. In
addition, we may incur debt or issue equity securities to fund any future
acquisitions. The issuance of equity securities could be dilutive to existing
stockholders.
If we are unable to safeguard the security and privacy of our information, our
results of operations may suffer
Our technical infrastructure is potentially vulnerable to physical or
electronic computer break-ins, viruses and similar disruptive problems.
Weaknesses or vulnerabilities in the Internet, a user's personal computer or
in our services could compromise the confidential nature of information
transmitted over the Internet. These factors could require us to devote
significant financial and human resources to protect against future breaches
and alleviate or mitigate problems caused by security breaches. Security
breaches could result in financial loss, litigation and other liabilities, any
of which could cause our results of operations to suffer.
Government regulation may affect our ability to gather, generate or use
information for profiles and may hinder our ability to conduct business
The legal and regulatory environment governing the Internet and the use of
information about Web users is uncertain and may change. A number of lawsuits
have recently been filed against certain Internet companies related to online
privacy. Web sites typically place small files of information, commonly known
as cookies, on a Web user's hard drive, generally without the user's knowledge
or consent. Although it is possible to modify a Web user's Internet browser
software to prevent the placement of cookies, few users currently choose to do
so. Our adMonitor tracking technology is able to use cookies to collect data
about a Web user's movement through the Internet. Some Internet commentators
and privacy advocates have suggested limiting or eliminating the use of
cookies and restricting the collection of data through the use of cookies.
United States legislators in the past have introduced a number of bills aimed
at regulating the collection and use of data from Internet users and
additional similar bills are being considered during the current congressional
session. The European Union has recently adopted a directive addressing data
privacy that may result in limitations on the collection and the use of
specific personal information regarding Internet users. In addition, Germany
and other European Union member countries have imposed their own laws
protecting data that can become personally identifiable through subsequent
processing. Other countries have enacted, or are considering, limitations on
the use of personal data as well. The effectiveness of our technology could be
impaired by any limitation in the use of cookies or the collection of data
from Internet users, and consequently, our business and results of operations
could be harmed.
A number of laws and regulations have been, and in the future may be,
adopted covering issues such as pricing, acceptable content, taxation and
quality of products and services on the Internet. This legislation could
inhibit the growth in the use of the Internet and decrease the acceptance of
the Internet as a communications and commercial medium. In addition, due to
the global accessibility of the Internet, it is possible that multiple
federal, state or foreign jurisdictions might inconsistently regulate our
activities and our customers. Any of these developments could limit our
ability to do business and to generate revenue.
19
<PAGE>
Any failure by us to protect our intellectual property could harm our business
and competitive position
We generally protect our intellectual property through a combination of
patent, trademark, trade secret and copyright laws, confidentiality agreements
with our employees and third parties, and license agreements with consultants,
vendors and clients. We have filed a patent application for our adMonitor
technology in the United States. We have also filed applications for several
trademarks in the United States. We cannot assure you that any of our patent
or trademark applications will be approved. Even if these applications are
approved, the patents or trademarks may be successfully challenged by others
or invalidated. In addition, despite our efforts to protect our intellectual
property, unauthorized parties may attempt to copy aspects of our services or
to obtain and use information that we regard as proprietary. We may not have
adequate remedies for any breach of confidentiality agreements, and our trade
secrets may otherwise become known or independently developed by competitors.
We may be liable for content available or posted on the Web sites of our
publishers
We may be liable to third parties for content in the advertising we serve if
the music, artwork, text or other content involved violates the copyright,
trademark or other intellectual property rights of such third parties or if
the content is defamatory. Any claims or counterclaims could be time-
consuming, result in costly litigation or divert management's attention.
The loss of key employees would likely impair the growth of our business
Our performance and future success is substantially dependent on the
continued service of our executive officers and other key employees, all of
whom are employed on an at-will basis. In particular, our success depends on
the client relationships, management skills and industry and technical
knowledge of our CEO and president, John C. Bohan, and our chief technology
officer, Frank A. Addante. Given our early stage of development, we are
dependent on our ability to retain and motivate highly qualified personnel,
especially our management, technical and business development executives and
other key employees. The loss of the services of one or more of our executive
officers or other key employees would likely impair the growth of our
business.
The substantial number of shares that will be eligible for sale in the near
future may cause the market price of our common stock to decline
A substantial number of shares of our common stock are subject to 180 day
lock-up agreements that expire on July 26, 2000. Sales of substantial amounts
of our common stock, or the perception that such sales could occur, could
adversely affect the market price of our common stock.
Our executive officers and directors exercise significant control over our
company, including the ability to control the election of our board of
directors and the outcome of corporate actions requiring stockholder approval
Our executive officers and directors, in the aggregate, beneficially own or
control a substantial number of the outstanding shares of our common stock as
of March 31, 2000. Our officers, directors and their affiliates will have the
ability to control the election of our board of directors and the outcome of
corporate actions requiring stockholder approval, including merger and other
changes of corporate control, going private transactions and other
extraordinary transactions and terms thereof.
20
<PAGE>
Our planned international expansion may be affected by factors beyond our
control
We are currently evaluating the initiation of operations in selected
international markets. This potential expansion could occur through internal
growth, acquisition, or both. To date, we have not deployed international
versions of our products and services. Expansion into international markets
will require substantial resources and attention from management. We have no
experience in international operations and may not be able to compete
effectively in international markets. We may face numerous risks inherent in
conducting business internationally, such as:
. the impact of recessions in economies outside the United States;
. changes in domestic regulatory requirements, as well as differences
between domestic and foreign regulatory requirements;
. export restrictions, including export controls relating to encryption
technology;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences;
. difficulties and costs of staffing and managing foreign operations;
. problems associated with any acquisitions we might pursue;
. foreign political and economic instability;
. tariffs and other trade barriers;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity.
Our failure to address these risks adequately may cause our business,
results of operations and financial condition to suffer.
We may need additional capital in the future to operate our business and we
may experience difficulty in obtaining this additional capital
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. We may need to raise additional funds in the
future to fund our operations, to enhance or expand the range of products and
services we offer or to respond to competitive pressures or perceived
opportunities. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or not available when required or on acceptable terms, the growth of
our business and results of operations may suffer.
We are subject to anti-takeover provisions, which may make it difficult for a
third party to acquire us
A number of recent acquisitions and consolidations have occurred in our
industry. For example, DoubleClick acquired NetGravity in October 1999, and
CMGI, Inc., which recently acquired Flycast Communications and Adforce, has
agreed to sell Flycast Communications and Adsmart to its majority-owned
operating company, Engage Technologies, Inc. We are subject to anti-takeover
provisions that may make it difficult for a third party to acquire us. We are
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock.
21
<PAGE>
Our common stock and our stock price may experience extreme price and volume
fluctuations
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. The market price of our common stock has fluctuated in
the past and is likely to be highly volatile. The market price of our common
stock could be subject to wide fluctuations in response to factors such as:
. actual or anticipated variations in our revenue;
. earnings and cash flow;
. announcements of new service offerings;
. technological innovations;
. competitive developments with respect to patents, copyrights or
proprietary rights;
. changes in financial estimates by securities analysts;
. conditions and trends in the Internet and electronic commerce industries;
. adoption of new accounting standards affecting our industry; and
. general market conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the yield on our
investments.
Interest Rate Risk
The primary objective of our investment activities is to preserve the
principal while at the same time achieving an attractive return. To achieve
this objective, we maintain a portfolio of investment grade cash equivalents
and short-term investments. Although we are subject to interest rate risks, we
believe an effective increase or decrease of 10% in interest rate percentages
would not have a material adverse effect on our results from operations. The
potential change noted above is based on sensitivity analysis we performed as
of March 31, 2000.
We did not hold derivative financial instruments as of March 31, 2000, and
have never held these instruments in the past.
Foreign Currency
Currently all of our sales and expenses are denominated in U.S. dollars and
as a result we have experienced no foreign exchange gains and losses to date.
While we do expect to effect some transactions in foreign currencies during
2000, we do not anticipate that foreign exchange gains or losses will be
significant. We have not engaged in foreign currency hedging activities to
date.
22
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On November 12, 1999, DoubleClick filed a lawsuit against us in the United
States District Court for the Eastern District of Virginia. The lawsuit was
moved to the United States District Court for the Southern District of New
York in March 2000. For a description of the lawsuit, please see PART I, ITEM
3 (LEGAL PROCEEDINGS), in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999, previously filed with the Securities and
Exchange Commission.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
Upon the consummation of our initial public offering on February 2, 2000,
all outstanding shares of our preferred stock were automatically converted
into an aggregate of 5,276,156 shares of common stock. These shares were
issued in reliance upon the exemption provided for by Section 3(a)(9) of the
Securities Act.
On February 2, 2000, DigaComm (L90), L.L.C. exercised a warrant on a
cashless basis and purchased 276,825 shares of our common stock. The shares
issued upon exercise of this warrant were issued in reliance upon the
exemption provided for by Section 3(a)(9) of the Securities Act. On January
31, 2000, Development Ventures (Two) Inc. exercised a warrant and purchased an
aggregate of 674,029 shares of our common stock at an aggregate purchase price
of $3,093,793. The shares issued upon exercise of this warrant were issued in
reliance upon the exemption provided for by Section 4(2) of the Securities
Act, based upon the fact that we issued the shares in a sale not involving a
public offering. On February 2, 2000, Rare Medium Group, Inc. exercised a
warrant on a cashless basis and purchased 486,652 shares of our common stock.
The shares issued upon exercise of this warrant were issued in reliance upon
the exemption provided for by Section 3(a)(9) of the Securities Act. On
January 28, 2000, William Apfelbaum exercised a warrant on a cashless basis
and purchased 274,422 shares of our common stock. The shares issued upon
exercise of this warrant were issued in reliance upon the exemption provided
for by Section 3(a)(9) of the Securities Act. In addition, Mr. Apfelbaum
exercised a warrant on January 27, 2000, and purchased 438,593 shares of our
common stock at an aggregate purchase price of $750,000. The shares issued
upon exercise of this warrant were issued in reliance upon the exemption
provided for by Section 4(2) of the Securities Act, based upon the fact that
we issued the shares in a sale not involving a public offering.
On February 27, 2000, we issued to Entertaindom, Inc. a warrant to purchase
an aggregate of 50,000 shares of our common stock at a purchase price per
share of $15.00. This warrant was issued and sold in reliance upon the
exemption provided for by Section 4(2) of the Securities Act, based on the
fact that we issued this warrant in a sale not involving a public offering.
During the period covered by this Report, we issued and sold 365,967 shares
of our common stock to employees, consultants, officers and directors upon the
exercise of options for an aggregate consideration of $231,338. All shares of
our common stock issued upon exercise of these options were issued and sold in
reliance upon the exemption provided for under Rule 701 promulgated under the
Securities Act of 1933, as amended.
Use of Proceeds
The effective date of the registration statement related to our initial
public offering of shares of common stock was January 28, 2000 (SEC
Registration No. 333-87607). Through our initial public offering in February
2000, we sold 7,475,000 shares of our common stock, inclusive of the
underwriters' over allotment, at an initial public offering price of $15.00
per share. Our initial public offering was managed by SG Cowen Securities
Corporation, Banc of America Securities LLC, CIBC Oppenheimer Corp. and Wit
Capital Corporation. The initial public offering resulted in gross proceeds of
approximately $112.1 million, approximately $7.8 million of which was applied
toward the underwriting discount and commission. Expenses related to the
offering totaled approximately $1.7 million. Our net proceeds from the
offering were approximately $102.6 million. From the time of receipt through
March 31, 2000, these net proceeds have been applied toward general corporate
purposes. Pending these uses, the net proceeds have been invested in short-
term, investment grade, interest-bearing securities.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits. The following exhibits are filed as part of this Report.
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation, previously filed with
the Securities and Exchange Commission (the "Commission") as Exhibit 3.1
to L90's Annual Report on Form 10-K for the year ended December 31,
1999, which is incorporated herein by reference.
10.1 Warrant No. W-WB1 dated January 27, 2000, issued to Entertaindom, Inc.,
previously filed with the Commission as Exhibit 10.33 to L90's Annual
Report on Form 10-K for the year ended December 31, 1999, which is
incorporated herein by reference.
10.2 Payment Schedule Contract dated November 30, 1999 between L90 and Oracle
Credit Corporation, previously filed with the Commission as Exhibit
10.34 to L90's Annual Report on Form 10-K for the year ended December
31, 1999, which is incorporated herein by reference.
10.3 Master Lease Agreement dated January 5, 1999 between L90 and Sun
Microsystems Finance, previously filed with the Commission as Exhibit
10.35 to L90's Annual Report on Form 10-K for the year ended December
31, 1999, which is incorporated herein by reference.
27.1 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended March 31,
1999.
24
<PAGE>
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.
L90, INC.
Dated: May 12, 2000 /s/ John C. Bohan
By: _________________________________
Name:John C. Bohan
Title:President & Chief Executive
Officer
Dated: May 12, 2000 /s/ Thomas A. Sebastian
By: _________________________________
Name:Thomas A. Sebastian
Title:Chief Financial Officer,
Senior Vice
President and Assistant
Secretary
25
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation, previously filed
with the Securities and Exchange Commission (the "Commission") as
Exhibit 3.1 to L90's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated herein by reference.
10.1 Warrant No. W-WB1 dated January 27, 2000, issued to Entertaindom,
Inc., previously filed with the Commission as Exhibit 10.33 to L90's
Annual Report on Form 10-K for the year ended December 31, 1999,
which is incorporated herein by reference.
10.2 Payment Schedule Contract dated November 30, 1999 between L90 and
Oracle Credit Corporation, previously filed with the Commission as
Exhibit 10.34 to L90's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated herein by reference.
10.3 Master Lease Agreement dated January 5, 1999 between L90 and Sun
Microsystems Finance, previously filed with the Commission as Exhibit
10.35 to L90's Annual Report on Form 10-K for the year ended December
31, 1999, which is incorporated herein by reference.
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 105,561,259
<SECURITIES> 0
<RECEIVABLES> 8,185,351
<ALLOWANCES> 957,200
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<CURRENT-ASSETS> 1,779,979
<PP&E> 7,602,921
<DEPRECIATION> 731,653
<TOTAL-ASSETS> 121,440,657
<CURRENT-LIABILITIES> 10,514,916
<BONDS> 1,825,096
0
0
<COMMON> 123,065,841
<OTHER-SE> (13,965,196)
<TOTAL-LIABILITY-AND-EQUITY> 109,100,645
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<TOTAL-REVENUES> 8,583,470
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