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 September 30, 2003
OR
|X| 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: 000-31559
E-CENTIVES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1988332
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6901 Rockledge Drive
6th Floor
Bethesda, Maryland
(Address of principal executive offices)
20817
(Zip Code)
(240) 333-6100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of October 31, 2003, there were 39,509,284 shares of the registrant's common
stock outstanding.
E-CENTIVES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION ................................................2
Item 1. Financial Statements ..............................................2
Condensed Consolidated Balance Sheets as
of September 30, 2003 (unaudited) and December 31, 2002 ..............2
Condensed Consolidated Statements of Operations
(unaudited) for the three and nine months ended
September 30, 2003 and 2002 ...........................................3
Condensed Consolidated Statements of Cash Flows (unaudited
for the nine months ended September 30, 2003 and 2002 .................4
Notes to Condensed Consolidated Financial Statements (unaudited) ......5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................15
Item 3. Qualitative and Quantitative Discussion of Market Risk ...........23
Item 4. Controls and Procedures ..........................................24
PART II - OTHER INFORMATION ..................................................24
Item 1. Legal Proceedings ................................................24
Item 2. Changes in Securities and Use of Proceeds ........................25
Item 4. Submission of Matters to a Vote of Security Holders .............26
Item 6. Exhibits and Reports on Form 8-K .................................27
SIGNATURES ...................................................................28
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E-CENTIVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 308,157 $ 2,317,354
Accounts receivable, net of allowance for doubtful accounts of
$55,072 and $75,108 at September 30, 2003 and December 31, 2002,
respectively 588,236 2,973,129
Other receivables 3,639 140,169
Prepaid expenses 111,447 297,888
Restricted cash 16,184 635,049
Other - 16,203
------------ -------------
Total current assets 1,027,663 6,379,792
Property and equipment, net 1,129,263 2,281,155
Other intangible assets, net 2,540,212 3,185,213
Restricted cash 110,000 110,000
Deferred financing fee 600,000 720,000
Other assets - 14,790
------------- -------------
Total assets $5,407,138 $12,690,950
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $1,598,153 $1,957,590
Accrued expenses 1,072,982 1,254,773
Accrued restructuring costs 77,276 717,079
Deferred revenue 249,082 1,095,613
Current portion of capital leases 252,037 224,914
Other liabilities 166,523 90,552
------------- -------------
Total current liabilities 3,416,053 5,340,521
Capital leases, net of current portion 149,585 245,614
Long-term debt 1,950,000 -
Other long-term liabilities 55,712 -
------------- -------------
Total liabilities 5,571,350 5,586,135
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Series A convertible preferred stock (voting), $.01 par value,
9,600,000 shares of preferred stock authorized, 1,784,000
and 2,000,000 shares issued and outstanding at September 30,
2003 and December 31, 2002, respectively 17,840 20,000
Series B convertible preferred stock (voting), $.01 par value,
400,000 shares of preferred stock authorized, issued, and
outstanding at September 30, 2003 and December 31, 2002 4,000 4,000
Common stock, $.01 par value, 120,000,000 shares authorized
39,509,284 and 37,349,284 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively 395,093 373,493
Additional paid-in capital 123,652,012 123,452,566
Accumulated other comprehensive gain 3,386 3,386
Accumulated deficit (124,236,543) (116,748,630)
------------- -------------
Total stockholders' equity (deficit) (164,212) 7,104,815
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 5,407,138 $ 12,690,950
------------- -------------
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
2
E-CENTIVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------------------------------- --------------------------------
(unaudited) (unaudited)
Revenue $1,457,411 $2,645,321 $4,459,803 $5,908,177
Operating expenses:
Cost of revenue 692,454 (242,207) 2,234,485 3,752,489
Product development, exclusive
of stock-based compensation 582,046 774,684 2,067,244 3,298,389
General and administrative,
exclusive of stock-based
compensation 1,582,066 2,067,622 5,359,989 8,775,240
Sales and marketing, exclusive
of stock-based compensation 504,766 735,393 1,830,118 3,158,893
Network partner fees - 57 - 2,271
Restructuring and impairment charges (163,023) - 1,146,726
Stock-based compensation:
Product development 12,649 16,747 36,625 57,124
General and administrative 49,952 30,904 80,762 80,375
Sales and marketing 31,532 42,022 101,500 153,567
Loss from operations (1,998,054) (616,878) (7,250,920) (14,516,897)
Interest expense (154,514) (8,299) (246,936) (27,841)
Interest income 1,244 31,352 9,943 278,171
Loss before income taxes (2,151,324) (593,825) (7,487,913) (14,266,567)
Income taxes - (14,527) - (33,587)
Net loss applicable to common
stockholders $(2,151,324) $(608,352) $(7,487,913) $(14,300,154)
Basic and diluted net loss per
common share ($0.05) ($0.02) ($0.19) ($0.38)
Shares used to compute basic
and diluted net loss per
common share 39,450,534 37,349,284 38,743,478 37,349,276
- -------------------------------------------------------------------------------------------------------------------------------
EBITDA calculated as follows: $(1,234,380) $185,010 $(4,751,975) $(8,324,968)
------------ ------------ ------------ ------------
Net loss excluding: (2,151,324) (608,352) (7,487,913) (14,300,154)
interest expense and
interest income 153,270 (23,053) 236,993 (250,330)
other income - - - -
income tax - 14,527 - 33,587
depreciation and amortization 669,541 875,238 2,280,058 4,495,907
foreign exchange (gain)/loss - - - 258,230
stock-based compensation 94,133 89,673 218,887 291,066
restructuring and impairment
charges - (163,023) - 1,146,726
- --------------------------------------------------------------------------------
"(1) Adjusted EBITDA is not a measurement of financial performance under
accounting principles generally accepted in the United States of America and may
not be comparable to other similarly titled measures of other companies.
E-centives uses adjusted EBITDA as a financial metric to measure the financial
performance of the business excluding the impact of non-cash expenses and
restructuring charges given the significant restructuring initiatives that have
taken place during the past two years. For this reason, E-centives believes
adjusted EBITDA will also be useful to others, including its stockholders, as a
valuable financial metric.
E-centives believes that adjusted EBITDA is a performance measure and not a
liquidity measure, and a reconciliation between net loss and adjusted EBITDA is
provided in the financial results. Adjusted EBITDA should not be considered as
an alternative to operating or net income as an indicator of performance or as
an alternative to cash flows from operating activities as an indicator of cash
flows, in each case as determined in accordance with accounting principles
generally excepted in the United States of America, or as a measure of
liquidity."
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
3
E-CENTIVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------------------------------
(unaudited)
Cash flows from operating activities:
Net loss $(7,487,913) $(14,300,154)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,280,058 4,495,907
Amortization of deferred financing fee 120,000 -
Stock-based compensation 218,887 291,066
Provision for doubtful accounts 34,097 35,263
Restructuring charge - (951,104)
Foreign currency loss on notes receivable - 258,230
(Increase) decrease in:
Accounts receivable 2,350,796 723,420
Prepaid expenses and other current assets 202,644 (34,909)
Other receivable 136,530 597,068
Increase (decrease) in:
Accounts payable (334,604) (323,175)
Deferred revenue (846,531) (2,253,560)
Accrued expenses and other liabilities (1,005,912) (2,384,933)
------------ -------------
Net cash used in operating activities (4,331,948) (13,846,881)
------------ -------------
Cash flows from investing activities:
Decrease in restricted cash 618,865 1,007,282
Acquisition of property and equipment (17,071) (314,170)
Decrease (increase) in security deposits 14,790 79,232
Refund of purchase of property and equipment 25,050 -
Purchase of intangible asset (55,057) -
Acquisition of BrightStreet.com - (34,254)
------------ -------------
Net cash provided by investing activities 586,577 738,090
------------ -------------
Cash flows from financing activities:
Payments on obligations under capital lease (213,826) (154,733)
Proceeds from issuance of debt 1,950,000 -
Net proceeds from rights offering - (27,855)
Proceeds from notes receivable - 10,318,953
Exercise of stock options - 105
------------ -------------
Net cash provided by financing activities 1,736,174 10,136,470
------------ -------------
Net decrease in cash and cash equivalents (2,009,197) (2,972,321)
Cash and cash equivalents, beginning of period 2,317,354 8,902,259
------------ -------------
Cash and cash equivalents, end of period $308,157 $5,929,938
------------ -------------
Supplemental disclosure of cash flow information: -------------------------------
Cash paid for interest $26,653 $27,840
------------ -------------
Supplemental disclosure of non-cash investing and financing activities:
During January 2003, the Company entered into a capital lease for
approximately $24,000 for telephone related equipment.
During September 2003, the Company entered into a capital lease for
approximately $114,000 for hardware.
From March 2003 through July 2003, 216,000 shares of the Company's
series A convertible preferred stock was converted into 2,160,000
shares of the Company's common stock.
As of September 30, 2003, $316,000 of purchased intangibles is included
in accrued expenses
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
4
E-CENTIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
E-centives, Inc. ("E-centives" or the "Company") was established as
Imaginex, Inc. on August 2, 1996, through incorporation in the State of
Delaware. During October 1996, the Company amended its articles of incorporation
to change its name to Emaginet, Inc. and again, in March 1999, the Company
amended its articles of incorporation to change its name to E-centives, Inc.
E-centives provides interactive direct marketing technologies and services
for global marketers. The Company offers a complete suite of technologies,
including several patented components, which enable businesses to acquire and
retain relationships with their audiences. The Company's current principal
products are the Interactive Database Marketing System, the Promotions System,
the E-mail Marketing System and advertising and e-commerce related services
provided through its ConsumerREVIEW.com division.
The Company operates in a highly competitive environment and inherent in the
Company's business are various risks and uncertainties, including its limited
operating history and unproven business model. The Company's success may depend
in part upon the continuance of the Internet as a communications medium,
prospective product and service development efforts, and the acceptance of the
Company's offerings by the marketplace.
One of the Company's Interactive Database Marketing System customers,
Reckitt Benckiser PLC, contributed 47% and 45%, respectively, of the Company's
revenue for the three and nine month periods ended September 30, 2003, while it
contributed 85% and 62%, respectively, of the Company's revenue for the three
and nine month periods ended September 30, 2002. This customer's initial
contract expired in October 2002, its first renewal agreement with the Company
expired in October 2003, and this customer has now entered into a subsequent
renewal agreement with the Company which expires in October 2004. However, due
to the lower scope of work to be performed by the Company, and the customer's
savings through automation, the fixed fees associated with the most recent
contract renewal are approximately one-half of the fixed fees associated with
the renewal contract that expired in October 2003. Such fees may increase with
the addition of new countries, brands and services with the customer, which
additions are currently under negotiation. Loss of this customer, or failure to
complete negotiations to increase the fixed fees associated with the renewal
contract to pre-November 2003 levels could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
The Company's management believes that its existing cash resources will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures into the second quarter of 2004. This is based on the current
remaining available line of credit of up to $3 million, structured in the form
of a three-year convertible promissory note that was issued during the first
quarter of 2003. Should future revenue be insufficient to cover the Company's
operating costs, the Company will need to secure additional funds to ensure
future viability. The Company may need to raise additional funds sooner than
anticipated to fund its future expansion, to develop new or enhanced products or
services, to respond to competitive pressures or to make acquisitions. To the
extent that the Company's existing funds and funds from the convertible
promissory note are not sufficient to enable the Company to operate into the
second quarter of 2004 and beyond, Friedli Corporate Finance provided a written
commitment to provide the Company with a capital infusion of up to $20 million,
of which $6 million was the recent convertible promissory note, further
described in Note 3. However, no formal terms and conditions have been agreed
upon, other than the terms of the $6 million convertible promissory note.
(b) Basis of Presentation
These unaudited Condensed Consolidated Financial Statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures required in the financial statements included in the
Company's Form 10-K. Accordingly, these financial statements and related notes
should be read in conjunction with the financial statements and related notes in
the Company's Form 10-K for fiscal year 2002.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements reflect all normal recurring adjustments
necessary to present fairly the Company's balance sheet position as of September
30, 2003 and the results of operations for the three and nine month periods
ended September 30, 2003 and 2002 and cash flows for the nine month periods
ended September 30, 2003 and 2002.
The results of operations for the interim periods presented may not be
comparable due to the December 2002 acquisition of the ConsumerREVIEW.com
division and the closing of the Commerce Division and the PerformOne Network
during 2002.
5
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year or for
future periods.
(c) Revenue Recognition
Revenue is generated by providing promotions marketing services, database
marketing services, e-mail marketing services and various other consulting
services, as well as licensing the Company's software products. The Company's
current products are principally the Interactive Database Marketing System, the
Promotions System and the E-mail Marketing System, as well as advertising and
e-commerce services provided through the ConsumerREVIEW.com division. Although
the Company eliminated the offerings of the PerformOne Network, the Commerce
Engine and the Commerce Network during 2002, these products contributed revenue
during the three and nine month periods ending September 30, 2002.
The Company's Interactive Database Marketing System, which represented 53%
and 54%, respectively, of the Company's revenue for the three and nine month
periods ended September 30, 2003, is a solution targeted at consumer packaged
goods companies that allows businesses to establish direct consumer
relationships through a set of integrated tools that include targeted e-mail
marketing, a customer transaction database, a data warehouse, a micro site and
survey generator and a patented coupon promotion system. Revenue is generated by
charging fees for system licensing, data hosting, site hosting, database
management, account management, strategy services, creative services, e-mail
delivery and management services, coupon delivery and management services, as
well as tracking and analytical services. Revenue related to licensing fees is
recognized ratably over the license period, one-time service fees for setting up
the customer are recognized ratably over the expected term of the customer
relationship and all other revenue, other than performance-based incentive fees,
is recognized when the service is provided. For agreements that include a
performance-based incentive fee component that is not finalized until a
specified date, the Company recognizes the amount that would be due under the
formula at interim reporting dates as if the contract was terminated at that
date. This policy does not involve a consideration of future performance, but
does give rise to the possibility that fees earned by exceeding performance
targets early in the measurement period may be reversed due to missing
performance targets later in the measurement period. The Company's only client
with a performance-based incentive fee had an original contract that expired in
October 2002. Although this agreement expired prior to the beginning of the
three and nine month periods ended September 30, 2003, this agreement produced
$0 and $96,000, respectively, of performance-based incentive fees due to the
fact that a portion of the underlying data used to determine the fees was not
determinable and available until subsequent to the contract end date. No
performance-based fees were recognized during the three and nine month periods
ended September 30, 2002 due to the fact that the underlying data used to
determine the fees was not yet validated by the client. The client's renewal
agreement, which began in November 2002 and expired in October 2003, also
includes performance-based incentive fees that are estimated to be approximately
$265,000; however, the terms were not defined in the renewal agreement and are
to be defined through an amendment to the agreement prior to the expiration of
the renewal agreement. Accordingly, no revenue related to this potential
performance-based incentive fee has been recognized. It is anticipated that any
additional revenue, upon agreement with the customer, will be recognized during
the fourth quarter of 2003. The most recent renewal agreement with such client
does not contain any performance incentive components.
The Company's Promotions System enables companies to create, manage,
deliver and track promotional vehicles, such as print-at-home online coupons.
The system's printable coupons can be individually tailored with relevant
content and different incentive values based on the respective recipients,
enabling manufacturers to target coupons much more efficiently and
cost-effectively than traditional methods. In addition, the system has high
tracking capabilities, including individually coded offers that can be
cross-referenced against specific consumer profiles. The technology can also be
used to build knowledge about consumers, such as their prior product purchases
and loyalty data, and to get a more accurate measure of the actual impact of
online marketing expenditures on sales. For the quarters ended September 30,
2003 and 2002, and for the nine months ended September 30, 2003 and 2002,
revenues from the Promotions System have been included in revenues generated
from the Interactive Database Marketing System.
The Company's E-mail Marketing System, which represented 4% and 3%,
respectively, of the Company's revenue for the three and nine month periods
ended September 30, 2003, allows businesses to conduct e-mail marketing without
having to acquire or develop their own e-mail infrastructure. Revenue is
generated by charging fees for list management and hosting services, strategy
and creative services, e-mail delivery and management services, as well as
tracking and analytical services. Revenue related to one-time service fees for
setting up the customer is recognized ratably over the expected term of the
customer relationship, while all other revenue is recognized when the service is
provided.
6
The ConsumerREVIEW.com division, which was acquired in December 2002,
manages web communities around common product interests. The web properties are
dedicated to meeting the needs of consumers who are researching products on the
web. Revenue is predominantly generated through advertising and e-commerce fees.
Advertising revenue is derived from the sale of advertisements on pages
delivered to community members of the Company's websites. This revenue is
recognized in the period in which the advertisements are delivered. E-commerce
fees are derived from on-line performance-based programs and are earned on
either a lead referral basis or on an affiliate commission basis. For on-line
performance-based programs, the Company earns a contractually specified amount
based on the number of users of the Company's websites that respond to a
commerce link by linking to a customer's websites ("lead referral") or the
amount of sales generated by the users ("affiliate commissions"). For lead
referral programs, customers are charged on a cost-per-click basis, and revenue
is recognized when the click occurs. For affiliate commissions programs, revenue
is recognized when the commission is earned, which is when the transaction
occurs. ConsumerREVIEW.com represented 43% and 43%, respectively, of the
company's total revenue for the three and nine month periods ended September 30,
2003.
For the three and nine month periods ended September 30, 2003, one of the
Company's Interactive Database Marketing System customers contributed $688,000
and $2,019,000, respectively, in revenue, or 47% and 45%, respectively, of the
Company's revenue. This customer's original agreement expired in October 2002
and the customer's subsequent renewal agreement expired in October 2003. This
customer also represented 22%, or approximately $128,000, of the $588,000 net
accounts receivable balance as of September 30, 2003. The Company does not
believe there is a significant risk of uncollectibility due to the customer's
payment history and credit-worthiness.
(d) Cost of Revenue
Cost of revenue consists primarily of expenses related to providing the
Company's services, including related personnel costs, depreciation of servers,
as well as network and hosting charges.
(e) Basic and Diluted Net Loss per Share
The Company computes net income (loss) applicable to common shares in
accordance with FAS 128, Earnings Per Share, and SEC Staff Accounting Bulletin
No. ("SAB") 98. Under the provisions of FAS 128 and SAB 98, basic net income
(loss) available per share is computed by dividing the net income (loss)
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. Diluted net income (loss)
available per share is computed by dividing the net income (loss) for the period
by the weighted average number of common and dilutive common equivalent shares
outstanding during the period. As the Company had a net loss in each of the
periods presented, basic and diluted net income (loss) available per share is
the same.
(f) Restricted Cash
Bethesda, Maryland Office
As part of the amended and modified lease agreement dated June 29, 2000 for
the Company's headquarters office space lease in Bethesda, Maryland, the Company
was required to have an irrevocable letter of credit as a security deposit
throughout the lease term of five years. In the event that the letter of credit
was drawn upon, the Company established a certificate of deposit for an
equivalent amount, which served as collateral for the letter of credit. The
$449,579 letter of credit, which was reduced from the first year value of
$542,984 on June 29, 2001, was to be reduced by 20% on the first day of each
subsequent lease year. However, in accordance with a September 25, 2002 partial
lease termination agreement, which provided for early termination of half of the
office space, a new letter of credit was established with a provision that
permitted a partial draw by the landlord of $309,579 any time after January 1,
2003 as partial consideration for the new agreement. Per the new agreement, in
April 2003 the required security deposit for the remaining office space was
reduced to $70,000; therefore, the letter of credit and the associated
certificate of deposit was also reduced to that amount. As of September 30,
2003, the balance was $70,000 and it will remain at that value until the
expiration of the lease.
Foster City, California Office
In November 2002, the Company entered into a two-year sublease agreement for
office space in Foster City, California. As part of the sublease agreement, the
Company is required to have an irrevocable letter of credit in the amount of
$40,000 as a security deposit throughout the lease term and has therefore
established a certificate of deposit for this amount.
7
D&O Insurance
In October 2002, the Company established a $280,247 certificate of deposit
to serve as collateral for a letter of credit commitment related to its D&O
insurance policy. As the Company makes its monthly payments on the policy, the
certificate of deposit is reduced by the corresponding amount and the money is
transferred to its operating account. Due to a renegotiation of the D&O policy,
the Company's rates were reduced and the required letter of credit was reduced.
As a result, in June 2003, an additional $39,000 was transferred out of the
certificate of deposit that serves as collateral for the letter of credit
commitment. At September 30, 2003, the remaining balance of the letter of credit
was $16,184, and subsequent to September 30, 2003, the amount was transferred to
the Company's operating account. No letter of credit is required for the current
renewal of the D&O policy.
(g) Recent Accounting Pronouncements
In July 2002, the FASB issued FAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. If fair value cannot be reasonably
estimated, the liability shall be recognized initially in the period in which
fair value can be reasonably estimated. Under Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
The provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted the provisions of FAS 146
on January 1, 2003. The adoption did not have a significant impact on the
Company's business, financial condition, results of operations or cash flow.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. See Note 6.
In November 2002, the EITF reached consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables on a model to be used to determine when
a revenue arrangement with multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identified accounting units. The EITF
also reached a consensus that this guidance should be effective for all revenue
arrangements entered into during fiscal periods beginning after June 15, 2003.
The adoption did not have a significant impact on the Company's business,
financial condition, results of operations or cash flow.
In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amended FAS 123 Accounting for
Stock-Based Compensation. The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, the statement amends the
disclosure requirements of FAS 123 to require prominent disclosures in the
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002 and the applicable required disclosures have been
made in these unaudited condensed consolidated financial statements. The Company
has elected to continue to follow the intrinsic value method in accounting for
its stock-based employee compensation arrangement as defined by APB 25,
Accounting for Stock Issued to Employee as allowed under FAS 123. Had
compensation expense for the Company's stock option plan been determined based
upon the fair value methodology under FAS 123, the Company's net loss would have
increased to these pro forma amounts:
8
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------------------------- -------------------------------
Net loss, as reported $ (2,151,324) $ (608,352) $ (7,487,913) $(14,300,154)
Add: Total stock-based
employee compensation expense
included in reported net loss,
net of related tax effects 94,133 89,673 218,887 291,066
Deduct: Total stock-based
employee compensation expense
as determined under fair value
based method for all awards,
net of related tax effects (292,489) (231,899) (1,136,346) (601,708)
------------- ----------- ------------- -------------
Pro forma net income $ (2,349,680) $ (750,578) $ (8,405,372) (14,610,796)
------------- ----------- ------------- -------------
Basic and diluted net
loss per share:
As reported $ (0.05) $ (0.02) $ (0.19) $ (0.38)
Pro forma (0.06) (0.02) (0.22) (0.39)
In January 2003, the FASB issued FASB Interpretation No.46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variabale interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance it activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied by the company as of
the end of first interim or annual period ending after December 15, 2003. The
adoption of the provisions relative to variable interest entities created or
acquired after January 31, 2003 did not have a material impact on the Company's
results of operations or financial position. Management does not believe that
the adoption of the provisions of FIN 46 relative to variable interest entities
created or acquired prior to February 1, 2003 will have a material impact on the
Company's results of operations or financial position.
In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. FAS 150
establishes standards for how certain free standing financial instruments with
characteristics of both liabilities and equity are classified and measured.
Financial instruments within the scope of FAS 150 are required to be recorded as
liabilities, or assets in certain circumstances, which may require
reclassification of amounts previously reported in equity. FAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The cumulative effect of a change in accounting principle
should be reported for financial instruments created before the issuance of this
Statement and still existing at the beginning of the period of adoption. There
was no impact on the Company related to FAS 150 as of September 30, 2003.
(h) Reclassification
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
(2) RESTRUCTURING AND IMPAIRMENT CHARGES
During 2002, the Company's management approved plans to terminate the lease
for the Redwood Shores office facility, close the Commerce Division, shut down
the UK office, sign a partial lease termination agreement for the Bethesda
office facility and close the PerformOne Network. In conjunction with shutting
down the UK office, the Company expects that the cost to terminate the UK office
lease will consist of monthly rental through September 30, 2002 and forfeiture
of the Company's security deposit of approximately $102,000. This is based on
the Company's best estimate, however, the landlord of the UK office facility has
not responded to requests to enter into a termination agreement. If the landlord
of the UK office facility does not agree to a termination agreement, the Company
could face a potential additional liability of approximately $364,000 for rental
payments through September 2004. No communication has been received by the
landlord; therefore, the Company believes that their exposure to the potential
liability is limited. The UK subsidiary is the signing party to the UK lease and
there are no parent company guarantees.
9
The following table shows the balance, as of September 30, 2003, of the
accrued restructuring/impairment charges recorded in 2002.
Employee
severance
Termination of and other Disposal of
Total facility leases related costs tangible assets
----- --------------- ------------- ---------------
Balance at December 31, 2002 717,079 750,563 11,108 (44,592)
Cash (payments)/receipts (639,803) (685,298) (3,115) 48,610
---------- ---------- -------- ---------
Balance at September 30, 2003 $ 77,276 $ 65,265 $ 7,993 $ 4,018
---------- ---------- -------- ---------
(3) CONVERTIBLE PROMISSORY NOTES
In March 2003, the Company executed convertible promissory notes in favor of
Friedli Corporate Finance, a financial consultant and investor relations advisor
to the Company, and InVenture, Inc., a stockholder of the Company, for an
aggregate sum of up to $6 million. The Company may draw down against the
available principal of up to $6 million at any time and in any amount during the
first two years of the notes. As of September 30, 2003, the Company has not
drawn down on the note. The terms of each of the notes include, among other
things:
o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
each note will automatically convert to the Company's common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the notes were issued (with a maximum of 30%); and
o a security interest in substantially all of the Company's assets.
Subsequent to the issuance of the promissory notes in March 2003, the
Company, Friedli Corporate Finance and InVenture, Inc. agreed to assemble a
syndicate of third parties to whom the Company would issue convertible
promissory notes on terms similar to the March 2003 $6 million convertible
promissory note that the Company issued to Friedli Corporate Finance and
InVenture, Inc. in March 2003. The aggregate dollar amount of the convertible
promissory notes that the Company issues to third parties through syndication
will reduce, on a dollar-for-dollar basis, the $6 million convertible promissory
note of Friedli Corporate Finance and InVenture, Inc. and the balance, if any,
will continue to be available to the Company under Friedli Corporate Finance's
and InVenture, Inc.'s initial $6 million commitment. The six convertible
promissory notes that the Company issued during the second and third quarters of
2003 (as noted below) are the initial steps of the syndication process.
During the second and third quarters of 2003, the Company received an
aggregate of $1,950,000 in connection with the issuance of six convertible
promissory notes to third parties. The terms of each of the promissory notes are
substantially similar to the promissory notes issued in March 2003, as noted
above. The Company intends to use the funds for working capital and general
corporate purposes.
As part of the investment advising services provided by Mr. Friedli, a
stockholder and director of the Company, to the Company by agreement, the
Company customarily provides a fee based on any financing placed by Mr. Friedli.
In the second and third quarters, Mr. Friedli placed $1,950,000 in convertible
debt in six promissory notes. Mr. Friedli was paid $195,000 for his services in
connection with these financings.
(4) ACQUISITION
(a) ConsumerREVIEW.com
On December 4, 2002, the Company acquired substantially all of Consumer
Review Inc.'s assets and certain of its liabilities through an Asset Purchase
Agreement. The cost of the acquisition was approximately $2.7 million,
consisting of 400,000 shares of Series B convertible preferred stock valued at
approximately $2.1 million, $290,000 in cash and about $320,000 in acquisition
related costs. At closing, the Series B convertible preferred stock was placed
into escrow. If the Company experiences a change in control, as defined in the
Asset Purchase Agreement, before the one year anniversary of the closing, each
share of the Series B convertible preferred stock will immediately be converted
into ten shares of the Company's common stock and shall be released from escrow.
Upon the one year anniversary of the closing date, provided that a change of
control has not occurred, the conversion rate for each share of the Series B
convertible preferred stock shall be determined based upon the achievement of
contractually defined revenue during the calculation period and will be adjusted
pursuant to the schedule below. The stock consideration will then be disbursed
in accordance with the terms of the Escrow Agreement entered into with Consumer
Review, Inc. regarding such shares of stock.
10
REVENUES DURING THE CALCULATION PERIOD CONVERSION RATE
-------------------------------------- ---------------
Less than $1,000,000 4 to 1
More than $1,000,000, but less than 6 to 1
$2,000,000
More than $2,000,000, but less than 8 to 1
$3,000,000
More than $3,000,000, but less than 10 to 1
$4,000,000
More than $4,000,000, but less than 12 to 1
$6,000,000
$6,000,000 or more 14 to 1
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price was preliminarily allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
acquisition date. The Company engaged a third-party appraiser to perform a
valuation of the Series B convertible preferred stock and the intangible assets.
The Company is amortizing the identifiable intangible assets on a straight-line
basis over three years. The total purchase price of $2,677,902 was preliminarily
allocated as follows:
Cash $ 352,097
Fixed assets, net 231,834
Accounts receivable, net 284,082
Technology 1,789,001
Tradenames 116,218
Other liabilities (95,330)
-----------
Total consideration $2,677,902
-----------
(b) BrightStreet.com
On December 3, 2001, the Company entered into an Asset Purchase Agreement
with BrightStreet.com, Inc. ("BrightStreet.com"), whereby the Company acquired
substantially all of BrightStreet.com's assets and certain of its liabilities.
The Company acquired BrightStreet.com for approximately $2.2 million, consisting
of approximately $1.7 million in cash, a guaranteed warrant to purchase 500,000
shares of the Company's common stock valued at approximately $185,000, a
contingent performance-based warrant to purchase up to 250,000 shares of the
Company's common stock and approximately $369,000 in acquisition related costs.
The performance-based warrant was exercisable, in whole or in part, from June 4,
2003 to December 3, 2005 based upon the achievement of certain performance
targets; however, the performance targets were not met and the warrant was
therefore not earned.
In conjunction with the Asset Purchase Agreement, the Company entered into a
Patent Assignment Agreement (the "Assignment") with BrightStreet.com. Pursuant
to the Assignment, BrightStreet.com has agreed to assign to the Company all
rights, title and interest in and to all the issued and pending BrightStreet.com
patents (collectively, the "Patents"), subject to certain pre-existing rights
granted by BrightStreet.com to third parties ("Pre-existing Rights"), provided
the Company makes a certain payment to BrightStreet.com by December 3, 2005 (the
"Payment"). If the Company makes such Payment by that date, the Company shall
own all rights, title and interest in and to the Patents, subject to the
Pre-existing Rights. Until such Payment is made, the Company has, subject to the
Pre-existing Rights, an exclusive, worldwide, irrevocable, perpetual,
transferable, and sub-licensable right and license under the Patents, including
the rights to control prosecution of the Patents and Patent applications and the
right to sue for the infringement of the Patents. Until the Company takes formal
title to the Patents, it may not grant an exclusive sublicense to the Patents to
any unaffiliated third party. In the event the Company does not make the Payment
by December 3, 2005, the Company shall retain a license to the Patents, but the
license shall convert to a non-exclusive license, and other rights to the
Patents and Patent applications shall revert to BrightStreet.com or its
designee. In exchange for the rights granted under the Assignment, beginning
December 2002, the Company is obligated to pay BrightStreet.com ten percent of
revenues received that are directly attributable to (a) the licensing or sale of
products or functionality acquired from BrightStreet.com, (b) licensing or
royalty fees received from enforcement or license of the Patents covered by the
Assignment, and (c) licensing or royalty fees received under existing licenses
granted by BrightStreet.com to certain third parties. If the total transaction
compensation paid, as defined by the Assignment, at any time prior to December
3, 2005 exceeds $4,000,000, the Payment will be deemed to have been made.
Additionally, the Company has the right, at any time prior to December 3, 2005,
to satisfy the Payment by paying to BrightStreet.com the difference between the
$4,000,000 and the total compensation already paid. Any transaction compensation
payments will be accounted for as an addition to the purchase price when they
are earned. As of September 30, 2003, the Company has recorded approximately
$55,000 related to the transaction compensation.
11
(5) SEGMENT INFORMATION
(a) Operating Segments
Starting in December 2002, with the acquisition of substantially all of the
assets of Consumer Review, Inc., the Company has two reportable operating
segments: E-centives and ConsumerREVIEW.com. For the three and nine months ended
September 30, 2003, E-centives includes the services of the Interactive Database
Marketing System and the E-mail Marketing System, while ConsumerREVIEW.com
includes the advertising and e-commerce services that are provided through its
network of web communities.
Information as to the operations of the segments of the Company as of and
for the three months ended September 30, 2003 and for the nine months ended
September 30, 2003 is set forth below based on the nature of the products and
services offered. The Company's chief operating decision maker evaluates
performance based primarily on operating profit. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. The asset, other unallocated amounts, represents corporate
assets that consist of cash and cash equivalents, restricted cash and deferred
financing fees.
OTHER
SEGMENT UNALLOCATED CONSOLIDATED
E-CENTIVES CONSUMERREVIEW.COM TOTALS AMOUNTS TOTAL
---------- ------------------ ------- ----------- ------------
AS OF AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2003:
Operating revenue $ 824,918 $ 632,493 $ 1,457,411 $ - $ 1,457,411
Operating loss (1,764,229) (233,825) (1,998,054) - (1,998,054)
Depreciation and amortization 470,316 199,225 669,541 - 669,541
Capital expenditures 101,562 - 101,562 - 101,562
Total Assets 2,193,674 1,863,123 4,056,797 1,034,341 5,091,138
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003:
Operating revenue $ 2,557,369 $1,902,434 $ 4,459,803 $ - $ 4,459,803
Operating loss (6,736,217) (514,703) (7,250,920) - (7,250,920)
Depreciation and amortization 1,682,507 597,551 2,280,058 - 2,280,058
Capital expenditures 107,611 4,497 112,108 - 112,108
(b) Customers
For the three and nine month periods ended September 30, 2003, one of the
Company's Interactive Database Marketing System customers, Reckitt Benckiser
PLC, contributed $688,000 and $2,018,000, respectively, in revenue, or 47% and
45%, respectively, of the Company's revenue. This customer's original agreement
expired in October 2002 and the customer's most recent renewal agreement expires
in October 2004. This customer also represented 22%, or approximately $128,000,
of the $588,000 net accounts receivable balance as of September 30, 2003. The
Company does not believe there is a significant risk of uncollectibility due to
the customer's payment history and credit-worthiness.
No other customer represented 10% or more of the Company's revenue for the
three and nine month periods ended September 30, 2003.
(6) GUARANTEES AND INDEMNIFICATIONS
The Company adopted FIN 45 effective December 31, 2002. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
certain guarantees and indemnifications issued or modified after December 31,
2002. Accordingly, any contractual guarantees or indemnifications the Company
issues or modifies subsequent to December 31, 2002 will be evaluated and, if
required, a liability for the fair value of the obligation undertaken will be
recognized. The adoption of FIN 45 did not have a material effect on the
Company's financial position or results of operations.
The Company guarantees the payment of sublease rentals to its Landlord on
the property that it sublets. As of September 30, 2003, the maximum guarantee on
this property is approximately $566,000. This sub-lease expires in September
2005.
The Company sometimes indemnifies certain of its customers against damages,
if any, they might incur as a result of a claim brought against them related to
patent infringement from the use of the Company's products. The Company is
unable to estimate the maximum exposure of such indemnifications due to the
inherent uncertainty and the varying nature of the contractual terms.
12
(7) LITIGATION
The Company is subject to legal proceedings and claims, which arise in the
ordinary course of business. Other than the matters described below, as of
September 30, 2003, management is not aware of any asserted or pending
litigation or claims against the Company that would have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
On or about April 1, 2002 the trustee for Debtor, CyberRebate ("Trustee")
filed suit against E-centives in the United States Bankruptcy Court, Eastern
District of New York ("Bankruptcy Court") for recovery of $210,000 allegedly
paid to E-centives as an avoidable preference under U.S. Bankruptcy laws. On or
about February 20, 2003, the parties agreed to a settlement and entered into a
stipulation and order for Bankruptcy Court approval, whereby E-centives and the
Trustee settled the claim whereby the Company will pay a total of $189,000 in
2003, which amount is accrued for. To date, the Company have paid Trustee
approximately $142,000. In exchange for such payments, the Trustee shall fully
release all claims against E-centives and dismiss the suit against E-centives
with prejudice, and E-centives will have a general unsecured claim against the
Debtor's estate in the amount of $21,000.
On September 24, 2002, Trifocal, LLC instituted the case Trifocal v.
e-centives in the Superior Court of the State of California, for monetary
damages along with an accounting and costs of approximately $80,000, based upon
Trifocal's allegations that they have performed their portion of two alleged
agreements with the Company. The Company believes it has valid defenses to each
of Trifocal's claims. Since this lawsuit is in its formation stages, no
statement about the prospects of the case may be made at this time.
There were no other material additions to, or changes in status of, any
ongoing, threatened or pending legal proceedings during the nine months ended
September 30, 2003, including no changes in the status of the settlement with
coolsavings.com, Inc. ("coolsavings"). The terms of the settlement with
coolsavings provide for a cross-license between the Company and coolsavings for
each of the patents currently in dispute. There are no royalties or other
incremental payments involved in the cross-license. Pursuant to this settlement,
the Company may have to make payments of up to $1.35 million to coolsavings as
follows:
o $650,000, which was paid to coolsavings on September 29, 2000, was due
at the signing of the settlement documents.
o $250,000, which was accrued for during 2001, was due if, within one year
from the date of entry of the Stipulated Order of Dismissal filed on or
about March 3, 2000, Catalina Marketing Corporation prevailed in a
motion for summary judgment in a separate litigation between it and
coolsavings, involving the coolsavings' patent currently in dispute.
However, a dispute has arisen between the parties regarding whether this
portion of the license fee is actually due, despite Catalina Marketing
Corporation not prevailing in its motion. This dispute is based in part
on the fact that the Company may be entitled to a license under the
coolsavings' patent at issue as a result of the Company's acquisition of
the assets of BrightStreet.com, which acquisition included the
settlement of infringement litigation between coolsavings and
BrightStreet.com regarding the same coolsavings patent at issue in the
Company's settled litigation. As such, the parties are currently in
discussions regarding the resolution of this issue.
o Up to $450,000 if and to the extent the coolsavings' patent currently in
dispute survives the pending reexamination proceedings at the Patent and
Trademark Office that were initiated by a third party. This component of
the settlement arrangement has not been accrued for because, in the
opinion of management, the possibility of the Company having to make
this payment continues to remain remote.
(8) EQUITY OFFERINGS
(a) Warrants
On October 8, 2002, the Company's board of directors authorized the issuance
of 6,000,000 warrants (the "Warrants") to four investors (the "Investors") as
consideration for a $20 million financing commitment (the "Financing
Commitment"), which was memorialized in a letter to the Company, by Friedli
Corporate Finance, dated September 12, 2002 (the "Commitment Letter"). In the
Commitment Letter, Friedli Corporate Finance, a financial advisor to the
Company, agreed to provide the Company with the Financing Commitment. The
Warrants were issued to the Investors in January 2003 in connection with Friedli
Corporate Finance agreeing to provide the Financing Commitment. The Warrants
were issued to the Investors in offshore transactions pursuant to Regulation S
promulgated under the Securities Act of 1933. The Warrants entitle each Investor
to purchase one share of the Company's common stock, $0.01 per value per share,
for an initial exercise price of CHF 0.19 per share during the exercise period.
Pursuant to an amendment to the Warrants, the exercise period began three months
from January 6, 2003 and will end on April 7, 2008 at 5:00 P.M. Eastern time.
The fair value of these warrants, using the Black-Scholes pricing model on the
date they were granted, is estimated to be approximately $720,000 and was
recorded as a deferred financing fee. This deferred financing fee is being
amortized, to interest expense, over the three-year life of the $6 million
convertible promissory note, dated March 18, 2003, that was issued in relation
to these Warrants.
13
(b) Series B Convertible Preferred Stock
During December 2002, the Company issued 400,000 shares of Series B
convertible preferred stock as part of the Company's acquisition of
substantially all of the assets of Consumer Review, Inc.
(c) Series A Convertible Preferred Stock
During the nine months ended September 30, 2003, 216,000 shares of the
Company's Series A convertible preferred stock that were issued in conjunction
with our October 2001 rights offering were converted into 2,160,000 shares of
the Company's common stock.
(9) COMPREHENSIVE INCOME (LOSS)
The functional currency of the Company's international operation was the
local currency. Accordingly, all assets and liabilities of its U.K. subsidiary,
which was closed during 2002, were translated using exchange rates in effect at
the end of the period, and revenue and costs were translated using weighted
average exchange rates for the period. The related translation adjustments were
reported in accumulated other comprehensive income (loss) in stockholders'
equity (deficit).
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------------------------- -------------------------------
Net loss $(2,151,324) $ (608,352) $(7,487,913) $(14,300,154)
Other comprehensive income
(loss):
Foreign currency
translation adjustments - 20,839 - 21,619
------------ ----------- ------------ -------------
Comprehensive loss $(2,151,324) $ (587,513) $(7,487,913) $(14,278,535)
------------ ----------- ------------ -------------
(10) RECENT DEVELOPMENTS
(a) Convertible Promissory Notes
As part of the syndication process, as discussed in Note 3, during October
2003 and November 2003 the Company issued two convertible promissory notes to
InVenture, Inc., a stockholder of the Company, and another private investor,
both with principal amounts of $500,000. As part of the investment advising
services provided by Mr. Friedli, a stockholder and director of the Company, to
the Company by agreement, the Company customarily provides a fee based on any
financing placed by Mr. Friedli. In the fourth quarter, Mr. Friedli placed the
$1,000,000 in promissory notes and was paid $115,000 for his services in
connection with these financings. The terms of the notes include, among other
things:
o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
the note will automatically convert to the Company's common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the dates the notes were issued (with a maximum of 30%); and
o a security interest in substantially all of the Company's assets.
(b) Options
During the fourth quarter of 2003, the Company plans to issue approximately
7.8 million options to its current employees. The options contain both a fixed
component and a variable component. The Company expects that the fixed component
will result in a fourth quarter charge of approximately $2.5 million and the
variable component cannot be estimated as it is subject to fluctuations in the
Company's stock price.
(c) Renewal of Reckitt Renckiser PLC Contract
During the fourth quarter of 2003, the Company renewed its agreement with
Reckitt Benckiser PLC through October 2004. The first renewal agreement with the
Company, which expired in October 2003, contributed 47% and 45%, respectively,
of the Company's revenue for the three and nine month periods ended September
30, 2003. However, due to the lower scope of work to be performed by the
Company, and the customer's savings through automation, the fixed fees
associated with the most recent contract renewal are approximately one-half of
the fixed fees associated with the renewal contract that expired in October
2003. Such fees may increase with the addition of new countries, brands and
services with the customer, which additions are currently under negotiation.
Loss of this customer, or failure to complete negotiations to increase the fixed
fees associated with the renewal contract to pre-November 2003 levels could have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flow.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Financial
Statements and the notes thereto presented in "Item 1 - Financial Statements."
The matters discussed in this report on Form 10-Q include forward-looking
statements that involve risks or uncertainties. While forward-looking statements
are sometimes presented with numerical specificity, they are based on current
expectations and various assumptions made by management regarding future
circumstances over which we may have little or no control. These statements are
inherently predictive, speculative and subject to risk and uncertainties, and it
should not be assumed that they will prove to be correct. A number of important
factors, including those identified under the caption "Risk Factors" in our
registration statement on Form S-1 (SEC File No. 333-64578), our registration
statement on Form S-3 (SEC file No. 333-73900), our registration statement on
Form S-3 (SEC File No. 333-106726) and our reports on Forms 10-K and 10-Q filed
with the SEC, which are all hereby incorporated by reference, as well as factors
discussed elsewhere in this Form 10-Q, could cause our actual results to differ
materially from those in forward-looking statements or forward-looking financial
information. Actual results may differ from forward-looking results for a number
of reasons, including market acceptance of our services, adverse market
conditions affecting the Internet sector, retention of major clients,
competitive factors, failure to keep pace with changing technologies and failure
to protect our intellectual property. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, our
actual results may vary materially from those anticipated, estimated or
projected. These forward looking statements are made only as of the date hereof,
and we undertake no obligation to update or revise these forward looking
statements, whether as a result of new information, future events or otherwise.
OVERVIEW
GENERAL
We provide interactive direct marketing technologies and services.
Businesses rely on our broad range of solutions to acquire and retain customers.
We provide online marketing and commerce capabilities and solutions for
companies across a range of industries. With our proprietary technology, we
power acquisition and retention solutions for companies that do business with
millions of Internet users every day. Our current services include the
Interactive Database Marketing System, the Promotions System, the E-mail
Marketing System, as well as advertising and e-commerce services that are
provided through our ConsumerREVIEW.com division.
To date we have not been profitable, incurring net losses of $7.5 million
for the nine months ended September 30, 2003 and net losses of $17.1 million,
$45.0 million and $29.9 million for the years ended December 31, 2002, 2001 and
2000, respectively. We have undertaken a series of cost-cutting measures to
preserve cash and we continue to examine ways to manage our human and capital
resources more efficiently. In addition to the restructuring plans that took
place during 2001 and 2002, and the elimination of 14 positions during the first
two quarters of 2003, we have undertaken efforts to reduce marketing and general
overhead expenses, and are continually looking prudently at all expenditures in
order to reduce our ongoing operating costs.
Beginning in December 2002, with the acquisition of substantially all of the
assets of Consumer Review, Inc., we have two reportable operating segments:
E-centives and ConsumerREVIEW.com. For the three and nine months ended September
30, 2003, E-centives includes the services of the Interactive Database Marketing
System and the E-mail Marketing System, while ConsumerREVIEW.com includes the
advertising and e-commerce services that are provided through its network of web
communities.
During the fourth quarter of 2003, the Company renewed its agreement with
Reckitt Benckiser PLC through October 2004. The first renewal agreement with the
Company, which expired in October 2003, contributed 47% and 45%, respectively,
of the Company's revenue for the three and nine month periods ended September
30, 2003, while it contributed 85% and 62%, respectively, of the Company's
revenue for the three and nine month periods ended September 30, 2002. However,
due to the lower scope of work to be performed by the Company, and the
customer's savings through automation, the fixed fees associated with the most
recent contract renewal are approximately one-half of the fixed fees associated
with the renewal contract that expired in October 2003. Such fees may increase
with the addition of new countries, brands and services with the customer, which
additions are currently under negotiation. Loss of this customer, or failure to
complete negotiations to increase the fixed fees associated with the renewal
contract to pre-November 2003 levels could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
15
OUR PRODUCTS AND SERVICES
We launched our direct marketing services in November 1998 by delivering
e-centives (promotions including such items as digital coupons, sales notices,
free shipping offers, minimum purchase discounts and repeat purchase incentives)
through our PerformOne Network (previously called Promotions Network). While we
were introducing our PerformOne Network between November 1998 and June 1999, we
allowed marketers to use the system at no charge. We then began generating
revenue in the third quarter of 1999. In conjunction with the acquisition of the
Commerce Division, the Commerce Engine and Commerce Network began generating
revenue in late March 2001. In July 2001, we started producing revenue from our
E-mail Marketing System. With the acquisition of the Promotions System from
BrightStreet.com in December 2001, we began generating revenue by providing
services from the Interactive Database Marketing System. During 2002, we decided
to suspend offering our Commerce Division's products and services, as well as
the offerings of our PerformOne Network. With the acquisition of substantially
all of the assets of Consumer Review, Inc. in December 2002, we began generating
revenue from advertising fees and e-commerce transaction fees from our
ConsumerREVIEW.com division.
Currently, our principal products and services include the Interactive
Database Marketing System, the Promotions System, the E-mail Marketing System
and advertising and e-commerce related services provided through our
ConsumerREVIEW.com division.
INTERACTIVE DATABASE MARKETING SYSTEM
With the acquisition of substantially all of BrightStreet.com's assets in
December 2001, we combined the acquired Promotion System, our E-mail Marketing
System, our data warehousing system and our online reporting system, and began
offering the services of our Interactive Database Marketing System. This
technology and infrastructure, which is primarily targeted at consumer packaged
goods companies, allows companies to establish direct consumer relationships
through a set of integrated tools that include targeted e-mail marketing, a
customer transaction database, a data warehouse, a micro site and survey
generator and our patented coupon promotion system. This system enables
companies to acquire consumers, collect consumers' brand preference and usage
information, segment consumers within loyalty categories, communicate with
consumers via e-mail marketing, deliver coupons, track individual usage of each
coupon, as well as track and report every consumer interaction with the system.
For the three and nine months ended September 30, 2003, we generated 53% and
54%, respectively, of our revenue from our Interactive Database Marketing
System, while for the three and nine months ended September 30, 2002 our
Interactive Database Marketing System generated 68% and 66%, respectively, of
our revenue. Approximately 83% and 93% of our aggregate Interactive Database
Marketing System revenue for the nine months ended September 30, 2003 and 2002,
respectively, was generated from our contract with Reckitt Benckiser PLC.
PROMOTIONS SYSTEM
Our Promotions System enables companies to create, manage, deliver and track
promotional vehicles, such as print-at-home online coupons. Our system's
printable coupons can be individually tailored with relevant content and
different incentive values based on the respective recipients, enabling
manufacturers to target coupons much more efficiently and cost-effectively than
traditional methods. In addition, our system has high tracking capabilities,
including individually coded offers that can be cross-referenced against
specific consumer profiles. Our technology can also be used to build knowledge
about consumers, such as their prior product purchases and loyalty data, and to
get a more accurate measure of the actual impact of online marketing
expenditures on sales. For the quarters ended September 30, 2003 and 2002, and
for the nine months ended September 30, 2003 and 2002, revenues from our
Promotions System has been included in revenues generated from our Interactive
Database Marketing System.
E-MAIL MARKETING SYSTEM
Our E-mail Marketing System allows companies to build ongoing, personalized
dialogs with their audiences by outsourcing their e-mail marketing needs to us.
It lets businesses cost-effectively conduct e-mail marketing without having to
acquire or develop their own e-mail infrastructure and manage the process. This
system consists of list management and hosting, strategy and creative services,
e-mail delivery and management, as well as tracking and analytical services. It
is designed to help build an ongoing, personalized communication with the
client's intended audience and maximize effectiveness through segmentation and
targeting. For the quarters ended September 30, 2003 and 2002 we generated 4%
and 3%, respectively, of our revenue from our E-mail Marketing System, and for
the nine months ended September 30, 2003 and 2002 our E-mail Marketing System
represented 3% and 5%, respectively, of our revenue.
16
CONSUMERREVIEW.COM
Our ConsumerREVIEW.com division is a leading source of user-generated buying
advice for outdoor sporting goods and consumer electronics. Consumers visit to
learn, interact, and buy or sell the products showcased within our network of
web communities, including sites like AudioREVIEW.com and MtbREVIEW.com. Users
find the products they are interested in, read and write reviews, participate in
discussions, compare prices, and shop online. Our ConsumerREVIEW.com division's
services primarily include advertising and e-commerce referrals. For the three
and nine months ended September 30, 2003, we generated 43% and 43%,
respectively, of our revenue from ConsumerREVIEW.com. There was no associated
revenue during the three and nine months ended September 30, 2002, as the
division was acquired in early December 2002.
ACQUISITION
On December 4, 2002, we acquired substantially all of Consumer Review Inc.'s
assets and certain of its liabilities through an Asset Purchase Agreement. The
cost of the acquisition was approximately $2.7 million, consisting of 400,000
shares of Series B convertible preferred stock valued at approximately $2.1
million, $290,000 in cash and about $320,000 in acquisition costs. At closing,
the Series B convertible preferred stock was placed into escrow. If we
experience a change in control before the one year anniversary of the closing,
each share of the Series B convertible preferred stock will immediately be
converted into ten shares of our common stock and shall be released from escrow.
Upon the one year anniversary of the closing date, provided that a change of
control has not occurred, the conversion rate for each share of the Series B
convertible preferred stock shall be determined based upon the achievement of
contractually defined revenue during the calculation period and will be adjusted
pursuant to the schedule below. The stock consideration will then be disbursed
in accordance with the terms of the Escrow Agreement entered into with Consumer
Review, Inc. regarding such shares of stock. Based upon the actual and projected
revenue with respect to ConsumerReview.com, we believe that the conversion rate
for each share of Series B convertible preferred stock shall be adjusted to 8 to
1 following the one year anniversary of the closing date.
REVENUES DURING THE CALCULATION PERIOD CONVERSION RATE
- -------------------------------------- ---------------
Less than $1,000,000 4 to 1
More than $1,000,000, but less than $2,000,000 6 to 1
More than $2,000,000, but less than $3,000,000 8 to 1
More than $3,000,000, but less than $4,000,000 10 to 1
More than $4,000,000, but less than $5,000,000 12 to 1
$6,000,000 or more 14 to 1
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition
date. We engaged an independent third-party appraiser to perform a valuation of
the Series B convertible preferred stock and intangible assets associated with
the acquisition.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described fully in Note 2 to our
consolidated financial statements included in our annual report on Form 10-K for
the fiscal year ended December 31, 2002. We consider a number of accounting
policies to be critical to the understanding of our results of operations. These
accounting policies relate to revenue recognition, estimating the allowance for
doubtful accounts, impairment of long-lived and amortizable intangible assets,
and restructuring charges. These policies are discussed in Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies" of our annual report on Form 10-K
for the fiscal year ended December 31, 2002. The impact of any associated risks
related to these policies on our business operations is discussed in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section where these policies affect our reported and expected
financial results. Our preparation of financial statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued FAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS 146 requires
17
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. If fair value cannot be reasonably
estimated, the liability shall be recognized initially in the period in which
fair value can be reasonably estimated. Under Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
The provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. We adopted the provisions of FAS 146 on
January 1, 2003 and we do not expect that the adoption of this accounting
standard will have a material adverse effect on our business, financial
condition, results of operations and cash flow.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 31, 2002. The adoption of FIN 45 is not
expected to have a material adverse effect on our business, financial condition,
results of operations and cash flow. We have certain guarantees disclosable
under FIN45:
o We guarantee the payment of sublease rentals to our Landlord on the
property that we sublet. As of September 30, 2003, the maximum guarantee
on this property is approximately $566,000. This sub-lease expires in
September 2005.
o We sometimes indemnify certain of our customers against damages, if any,
they might incur as a result of a claim brought against them related to
patent infringement from the use of our products. We are unable to
estimate the maximum exposure of such indemnifications due to the
inherent uncertainty and the varying nature of the contractual terms.
In November 2002, the EITF reached consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables, on a model to be used to determine when
a revenue arrangement with multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identified accounting units. The EITF
also reached a consensus that this guidance should be effective for all revenue
arrangements entered into during fiscal periods beginning after June 15, 2003.
The adoption did not have a significant impact on our business, financial
condition, results of operations or cash flow.
In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amended FAS 123 Accounting for
Stock-Based Compensation. The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, the statement amends the
disclosure requirements of FAS 123 to require prominent disclosures in the
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002. We have elected to continue to follow the
intrinsic value method in accounting for our stock-based employee compensation
arrangement as defined by APB 25, Accounting for Stock Issued to Employee, and
as allowed under FAS 123 and have made the applicable disclosures in Notes to
the unaudited condensed consolidated financial statements as required by FAS
148.
In January 2003, the FASB issued FASB Interpretation No.46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variabale interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance it activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied by the company as of
the end of first interim or annual period ending after December 15, 2003. The
adoption of the provisions relative to variable interest entities created or
acquired after January 31, 2003 did not have a material impact on our results of
operations or financial position. We do not believe that the adoption of the
provisions of FIN 46 relative to variable interest entities created or acquired
prior to February 1, 2003 will have a material impact on our results of
operations or financial position.
18
In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. FAS 150
establishes standards for how certain free standing financial instruments with
characteristics of both liabilities and equity are classified and measured.
Financial instruments within the scope of FAS 150 are required to be recorded as
liabilities, or assets in certain circumstances, which may require
reclassification of amounts previously reported in equity. FAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The cumulative effect of a change in accounting principle
should be reported for financial instruments created before the issuance of this
Statement and still existing at the beginning of the period of adoption. There
was no impact related to FAS 150 as of September 30, 2003.
RESULTS OF OPERATIONS
The following presents our financial position and results of operations as
of and for the three months ended September 30, 2003 and 2002.
REVENUE. The third quarter 2003 revenue of $1,457,000, of which 47% was
attributable to one customer, reflects a $1,188,000 decrease from
$2,645,000 for the three months ended September 30, 2002.
Our Interactive Database Marketing System contributed $773,000 in revenue
during the three months ended September 30, 2003, a decrease of
$1,652,000 from the same period last year. Revenue for 2002 included
approximately $1.1 million related to revenue earned in prior periods for
variable revenue components and performance-based incentive fees that
were not recognizable until the third quarter of 2002 subject to approval
by E-centives' client.
The ConsumerREVIEW.com division, which was acquired in December 2002,
contributed $632,000 in revenue for the three months ended September 30,
2003, while our E-mail Marketing System generated $51,000, a decrease of
$26,000 from the same period last year. This decrease was due to the loss
of a few E-Mail Marketing System clients. For the quarter ended September
30, 2002, the Commerce Division and the PerformOne Network contributed
$142,000 in revenue, but due to the closure of these divisions during
2002, they contributed no revenue during 2003.
We will continue to focus on increasing the revenue generated from our
Interactive Database Marketing System, our Promotions System, our
ConsumerREVIEW.com division and our E-mail Marketing System.
COST OF REVENUE. Cost of revenue consists primarily of expenses related to
providing our services, including related personnel costs, depreciation
of servers, network and hosting charges, and revenue share payments. The
$692,000 in cost of revenue for the three months ended September 30, 2003
was an increase of $935,000 over the $242,000 credit for the three months
ended September 30, 2002. The credit for the third quarter of 2002 was
caused by the reversal of $676,000 in expenses due to favorable
settlements of liabilities for costs incurred during 2001. The remaining
increase can primarily be attributed to the ConsumerREVIEW.com division,
which added approximately $234,000 in cost of revenue following its
acquisition in December 2002.
Our cost of revenue will fluctuate based on future revenue activity. As
revenue increases, our cost of revenue margin will improve as a
significant percentage of our cost of revenue relates to fixed costs for
hosting assets and personnel allocations.
PRODUCT DEVELOPMENT. Product development consists primarily of expenses
related to the development and enhancement of our technology and
services, including payroll and related expenses for personnel, as well
as other associated expenses for our technology department. We expense
product development costs as incurred. Product development expenses
decreased by $193,000 to $582,000 for the three months ended September
30, 2003, compared to $775,000 for the three months ended September 30,
2002. Although the addition of the ConsumerREVIEW.com division added
approximately $97,000 in expenses, the net decrease was primarily
attributable to the reduction in product development personnel resulting
from our 2002 plans to stop offering the services of our Commerce
Division and our PerformOne Network, as well as other organizational
efficiency initiatives, including staff reductions.
Our product development expenses are expected to remain at current
levels, as we do not expect to hire additional personnel or incur
additional product development related expenses.
19
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
payroll and related expenses for accounting, finance, legal, human
resources, and administrative personnel, as well as selected executives.
In addition, general and administrative expenses include fees for
professional services, occupancy related costs, and all other corporate
costs, including depreciation and amortization. General and
administrative expenses decreased by $486,000 to $1,582,000 for the three
months ended September 30, 2003, compared to $2,068,000 for the three
months ended September 30, 2002. Although the addition of the
ConsumerREVIEW.com division added approximately $255,000 in expenses
(including $159,000 in amortization of the intangible assets acquired as
part of the acquisition), the overall decrease in expense can primarily
be attributed to the reduction in staff and the other steps we have taken
to streamline our business and eliminate unnecessary expenditures. We do
not anticipate that our general and administrative expenses will vary
much in future quarters.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
payroll, sales commissions and related expenses for personnel engaged in
sales, marketing and customer support, as well as advertising and
promotional expenditures. Sales and marketing expenses decreased by
$231,000 to $505,000 for the three months ended September 30, 2003,
compared to $735,000 for the three months ended September 30, 2002. While
the ConsumerREVIEW.com division added approximately $143,000 in new
costs, the reduced costs associated with the closure of the Commerce
Division and the overall reduction in the sales and marketing staff more
than offset these additional costs.
As we have undertaken a series of cost-cutting measures to reduce our
ongoing operating expenditures, we have significantly reduced advertising
and promotional expenditures. The reduction in the number of sales and
marketing personnel (a reduction of 6 personnel when comparing the staff
at September 30, 2003 to September 30, 2002) associated with the
reduction in product offering and our cost-cutting efforts greatly
contributed to our lower costs for the quarter ended September 30, 2003.
Our sales and marketing expenses are expected to stay at the current
levels until future business conditions warrant increasing these costs to
support our continued growth.
STOCK-BASED COMPENSATION. Stock-based compensation expense consists of the
difference between the fair value of our common stock and the exercise
price of certain performance-based options prior to the measurement date
and the difference between the estimated fair value of our common stock
and the exercise price of stock options issued to employees recognized
ratably over the vesting period. Stock-based compensation expense was
$94,000 for the three months ended September 30, 2003, compared to
$90,000 for the three months ended September 30, 2002. The variability of
this expense was the result of more options, for employees who had not
fully vested due to termination of employment, being cancelled in 2002
than in 2003. This caused a larger reversal of historical stock-based
compensation expense for non-vested options for terminated employees for
the three months ended September 30, 2002 than the corresponding period
in 2003.
INTEREST EXPENSE. Interest expense for the three months ended September 30,
2003 primarily consisted of interest related to financing agreements and
the convertible promissory notes we issued during the second quarter of
2003, as well as $60,000 in deferred financing fee amortization, while
for the three months ended September 30, 2002 interest expense primarily
consisted of interest related to financing agreements. As a result,
interest expense increased by $146,000 to $154,000 for the three months
ended September 30, 2003 when compared to $8,000 for the three months
ended September 30, 2002.
INTEREST INCOME. Interest income primarily consists of income on our cash
balances. Due to lower cash balances, interest income decreased by
$30,000 to $1,000 for the three months ended September 30, 2003, compared
to $31,000 for the three months ended September 30, 2002.
NET LOSS. Net loss of $2,151,000 for the three months ended September 30,
2003 increased by $1,543,000 when compared to $608,000 for the three
months ended September 30, 2002. As described above, revenue was lower by
$1,188,000 primarily due to revenue recognized in the third quarter of
2002 that was earned in prior periods for variable revenue components and
performance-based incentive fees. Also contributing to the increased net
loss was the $676,000 one-time adjustment to cost of revenue in 2002
related to a settlement of prior year related expenses.
20
The following presents our financial position and results of operations as
of and for the nine months ended September 30, 2003 and 2002.
REVENUE. Revenue of $4,460,000 for the first nine months of 2003 reflected a
$1,448,000 decrease from the $5,908,000 for the nine months ended
September 30, 2002. The majority of the decrease is the result of 2002
revenue including approximately $1.6 million of variable revenue
components and performance-based incentive fees for the Reckitt Benckiser
PLC contract that expired in October 2002, while the renewed contract
that expired in October 2003, and which has been subsequently renewed for
another year, did not contain a significant variable and performance
based revenue criteria. The closures of the Commerce Division and the
PerformOne Network during 2002 also contributed $1.7 million to the lower
revenue, as they added no corresponding revenue during 2003. However, the
ConsumerREVIEW.com division, which was acquired in December 2002,
contributed $1.9 million in new revenue for the nine months ended
September 30, 2003.
COST OF REVENUE. Cost of revenue decreased by $1,518,000 to $2,234,000 for
the nine months ended September 30, 2003 when compared to $3,752,000 for
the nine months ended September 30, 2002. This decrease can primarily be
attributed to our 2002 restructuring plans to suspend the offering of the
Commerce Division and the PerformOne Network. These restructuring plans
contributed to the lower depreciation of $1,407,000 (as a result of the
write-off of assets), the lower network and hosting charges of
approximately $851,000, and lower revenue share payments of $37,000.
These lower costs for 2003 were offset by the 2002 reversal of $676,000
in expenses due to favorable settlements of liabilities for costs
incurred in the previous year.
PRODUCT DEVELOPMENT. Product development expense for the nine months ended
September 30, 2003 was $2,067,000, a decrease of $1,231,000 when compared
to the nine months ended September 30, 2002. Although the
ConsumerREVIEW.com division added new expenses to 2003, this increase was
more than offset by the decrease that resulted from our 2002 plans to
suspend the offerings of our Commerce Division and our PerformOne
Network, as well as other organizational efficiency initiatives.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine
months ended September 30, 2003 of $5,360,000 represented a decrease of
$3,415,000 when compared to the $8,775,000 for the nine months ended
September 30, 2002. As a result of our 2002 restructuring plans to close
the Commerce Division and the PerformOne Network and reduce our overall
workforce, general and administrative expenses were lower by
approximately $1,198,000. Depreciation and amortization decreased by
$683,000, reflecting the net effect of the write-off of tangible and
intangible assets (associated with our 2002 restructuring plans) and the
additional tangible and intangible assets related to the
ConsumerREVIEW.com division. In addition, approximately $738,000 of the
decrease was due to lower rent expense associated with the termination of
the Redwood Shores, California and UK facility leases, as well as the
partial termination of the Bethesda, Maryland facility lease. Also
contributing to the difference in general and administrative expense was
the $258,000 foreign exchange loss incurred during the second quarter of
2002.
SALES AND MARKETING. Sales and marketing expenses decreased by $1,329,000 to
$1,830,000 for the nine months ended September 30, 2003, compared to
$3,159,000 for the nine months ended September 30, 2002. While the
December 2002 addition of the ConsumerREVIEW.com division added $422,000
in new expenses, the closure of the Commerce Division resulted in overall
lower expenses of $629,000. The reduction in the number of sales and
marketing personnel, as well the reduction in advertising and promotional
expenditures associated with our reduced product offering and our
cost-cutting efforts contributed to the remaining portion of the
decreased costs.
STOCK-BASED COMPENSATION. Stock-based compensation expense was $219,000 for
the nine months ended September 30, 2003, compared to a $291,000 for the
nine months ended September 30, 2002. The variability of this expense was
the result of more options, for employees who had not fully vested due to
termination of employment, being cancelled in 2003 than in 2002. This
caused a larger reversal of historical stock-based compensation expense
for non-vested options for terminated employees for the nine months ended
September 30, 2003 than the corresponding period in 2002.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
2003 primarily consisted of fees related to financing agreements and the
convertible promissory notes issued during the second quarter of 2003, as
well as $120,000 in deferred financing fee amortization recognized during
the second and third quarters of 2003, while for the nine months ended
September 30, 2002 it primarily consisted of interest related to
financing agreements. As a result, interest expense increased by $219,000
to $247,000 for the nine months ended September 30, 2003 when compared to
$28,000 for the nine months ended September 30, 2002.
21
INTEREST INCOME. Interest income for 2003 consisted only of income on our
cash balances, while interest income for 2002 also included interest from
our promissory notes. Interest income decreased by $268,000 to $10,000
for the nine months ended September 30, 2003, compared to $278,000 for
the nine months ended September 30, 2002.
NETLOSS. Net loss of $7,4880,000 for the nine months ended September 30,
2003 decreased by $6,812,000 when compared to $14,300,000 for the nine
months ended September 30, 2002. Overall, total operating costs decreased
by $8,714,000 when compared to prior year. Approximately $1,147,000 of
the lower operating costs was due to the restructuring and impairment
charges recorded during 2002. The remaining lower operating costs can be
primarily attributable to the closure of the Commerce Division and the
PerformOne Network during 2002, as well as other organizational
efficiency initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception through December 31, 2000, we funded our operations
primarily from the private sale of our convertible preferred stock and common
stock, as well as our initial public offering on the SWX Swiss Exchange. Through
these financing activities, we raised net proceeds of approximately $82.5
million. In late 2001, we consummated our rights offering in which we received
approximately $12.6 million in net proceeds during 2001. The remaining net
proceeds, of $9.6 million, associated with promissory notes delivered as part of
the rights offering purchase price consideration was received during the second
quarter of 2002.
In March 2003, we executed convertible promissory notes in favor of Friedli
Corporate Finance, our financial consultant and investor relations advisor, and
InVenture, Inc., one of our stockholder, for an aggregate sum of up to $6
million. We may draw down against the available principal of up to $6 million at
any time and in any amount during the first two years of the notes. As of
September 30, 2003 we have not drawn down any funds.
Subsequent to the issuance of the promissory notes in March 2003, we,
Friedli Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of
third parties to whom we would issue convertible promissory notes on terms
similar to the $6 million convertible promissory note that we issued to Friedli
Corporate Finance and InVenture, Inc. in March 2003. The aggregate dollar amount
of the convertible promissory notes that we issue to third parties through
syndication will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory note of Friedli Corporate Finance and InVenture, Inc. and
the balance, if any, will continue to be available to us under Friedli Corporate
Finance's and InVenture, Inc.'s initial $6 million commitment. The six
convertible promissory notes that we issued during second and third quarters of
2003 are the initial steps of the syndication process. In addition, during
October 2003 and November 2003 we issued two additional convertible $500,000
promissory notes, for a total of $1,000,000 as part of the syndication.
During the second and third quarters of 2003, we received $1,950,000 through
the issuance of six convertible promissory notes to third parties. As part of
the investment advising services provided by Mr. Friedli, one of our
stockholders and directors, to us by agreement, we customarily provide a fee
based on any financing placed by Mr. Friedli. In the second and third quarters,
Mr. Friedli placed $1,950,000 in convertible debt in six promissory notes. Mr.
Friedli was paid $195,000 for his services in connection with these financings.
On September 30, 2003, we held $308,000 in cash and cash equivalents. In
addition, we had restricted cash of $126,000 in the form of three certificates
of deposit. Two of the certificates of deposit serve as collateral for letter of
credit commitments to secure our lease payment obligations for our Bethesda,
Maryland and our Foster City, California offices. The third certificate of
deposit serves as collateral for a letter of credit commitment related to our
D&O insurance policy. As we make our monthly payments on the insurance policy,
the certificate of deposit is reduced by the corresponding amount and such
amount is transferred to our operating account. Our renewal policy does not
require a letter of credit; therefore, subsequent to September 30, 2003 the
certificate of deposit reductions no longer occur.
Cash used in operating activities for the nine months ended September 30,
2003 was $4.3 million, a decrease of $9.5 million over the $13.8 million for the
nine months ended September 30, 2002. Net cash flows used in operating
activities for both periods primarily reflect our net losses for the period.
Investing activities for the nine months ended September 30, 2003 and
September 30, 2002 provided $587,000 and $738,000, respectively, in cash. Cash
provided by investing activities for the nine months ended September 30, 2003
included the reduction in restricted cash of $619,000 offset by $72,000 used to
purchase property and equipment and intangible assets. The majority of the cash
provided by investing activities for 2002 is due to the decrease of $1 million
22
in restricted cash resulting from the certificate of deposit, which was used as
collateral for the letter of credit commitment associated with the Redwood
Shores, California office, being converted to cash. The cash was subsequently
transferred to Inktomi Corporation, in accordance with the amendment to the
sublease agreement that provided for an early termination of the sublease (which
was part of our 2002 restructuring plan). The cash provided by investing
activities also includes $314,000 used to purchase property and equipment, the
increase in security deposits of $79,000 and $34,000 in cash outflows related to
the BrightStreet.com acquisition.
For the nine months ended September 30, 2003, the net cash provided by
financing activities of $1,736,000 represented $1,950,000 received related to
the issuance of five convertible promissory notes, offset by $214,000 in
payments under capital lease obligations. The net cash provided by financing
activities of $10,136,000, for the nine months ended September 30, 2002,
reflects the $10.3 million net proceeds from the notes receivable from
stockholders that were issued in conjunction with our October 2001 rights
offering, offset by the $155,000 in payments under capital lease obligations.
We believe that our existing cash resources, along with our current
remaining available line of credit of up to $3 million (as discussed above) will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures into the third quarter of 2004. Should future revenue be
insufficient to cover our operating costs, we will need to secure additional
funds to ensure future viability. We may need to raise additional funds sooner
to fund our future expansion, to develop new or enhanced products or services,
to respond to competitive pressures or to make acquisitions. We cannot be
certain that additional financing will be available to us on acceptable terms,
or at all. If adequate funds are not available, or not available on acceptable
terms, we may not be able to expand our business. To the extent that our
existing funds are not sufficient to enable us to operate into the second
quarter of 2004 and beyond, Friedli Corporate Finance has provided a written
commitment to provide us with a capital infusion of up to an additional $14
million for continued operations and future business expansion purposes.
However, no formal terms and conditions have been agreed upon for the additional
$14 million.
RECENT DEVELOPMENTS
Convertible Promissory Notes
As part of the syndication process, as discussed above, during October 2003
and November 2003, we issued a convertible promissory note to each of InVenture,
Inc. and another private investor, each with principal amounts of $500,000. As
part of the investment advising services provided by Mr. Friedli, one of our
stockholders and directors, to us by agreement, we customarily provide a fee
based on any financing placed by Mr. Friedli. In the fourth quarter, Mr. Friedli
has placed $1,000,000 in promissory notes and has been paid $115,000 for his
services in connection with these financings. The terms of the notes include,
among other things:
o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
that the note will automatically convert to the our common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the note was issued (with a maximum of 30%); and
o a security interest in substantially all of the our assets.
Options
During the fourth quarter of 2003, we plan to issue approximately 7.8
million options to current employees. The options contain both a fixed component
and a variable component .We expect that the fixed component will result in a
fourth quarter charge of approximately $2.5 million and the variable component
cannot be estimated as it is subject to fluctuations in the our stock price.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. We maintain instruments subject to
interest rate and foreign currency exchange rate risk. We categorize all of our
market risk sensitive instruments as non-trading or other instruments.
(a) Interest Rate Sensitivity
We maintain a portfolio of cash equivalents in a variety of
securities. Substantially all amounts are in money market and certificates
of deposit, the value of which is generally not subject to interest rate
changes. We believe that a 10% increase or decline in interest rates would
not be material to our interest income or cash flows.
23
(b) Foreign Rate Sensitivity
We primarily operate in the United States; although during 2001 we
expanded our operations to include a sales office in London, United
Kingdom. However, in conjunction with closing our Commerce Division during
2002, we closed our office in London. As a result of this sales office, we
were exposed to foreign currency rate fluctuations by having sales in
foreign currencies. However, we have recorded insignificant sales in
foreign currencies.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report.
(b) There have been no changes in our internal controls that have materially
affected or are reasonably likely to materially affect these controls subsequent
to the date of the evaluation referenced in paragraph (a) above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 24, 2002, Trifocal, LLC instituted the case Trifocal v.
E-centives in the Superior Court of the State of California, for monetary
damages of approximately $80,000, plus interest, attorney's fees and costs due
to them. Trifocal's claims are based on different breach of contract and other
theories. Trifocal claims that they have performed their portion of two alleged
sales consulting agreements with us, and that we failed to pay any portion of
their fees. We believe we have valid defenses to each of Trifocal's claims.
Since this lawsuit is in its formation stages, no statement about the prospects
of the case can be made at this time.
On or about February 6, 2003, Marketex Storage Systems, Inc. filed suit
against us in California Superior Court, County of Santa Clara alleging that
$53,514 plus interest, attorney's fees and costs is due to them. Their claims
are based on different breach of contract and related theories for various
maintenance and support services. The parties have now settled this dispute and
entered into a formal settlement agreement whereby we have agreed to pay a total
of $53,514 in equal installments over nine months until December 1, 2003. We
have made installment payments through October, 2003. Upon our final payment,
the agreement provides for a full release of claims against us.
On or about November 14, 2002, we filed a joint patent infringement action
with Black Diamond CCT Holding, LLC against Coupons, Inc. in the Federal
District Court of Maryland. In this suit, we allege infringement of two U.S.
patents relating to online coupons, rights of which we acquired from
BrightStreet.com. Coupons, Inc. has answered our complaint by denying
infringement and has raised affirmative defenses of non-infringement,
invalidity, estoppel, laches and/or estoppels and defenses under 35 U.S.C.
section 373. No counter claims were filed against us by Coupons, Inc.
On or about October 10, 2002, we received a demand letter from Orrick,
Herrington & Sutcliffe, LLP, ("Orrick"), a law firm representing Bowne of New
York City ("Bowne"), a financial printing company, demanding payment of $91,527
for financial printing services allegedly rendered by Bowne. The demand letter
also indicated that if the matter was not amicably resolved, Bowne would
commence legal proceedings. The parties have now settled this dispute and
entered into a formal settlement agreement whereby we have agreed to pay a total
of $71,734 in equal installments over six months until July 15, 2003. Two more
installment payments are to be made. Upon our final payment, the agreement
provides for a full release of claims against us.
On or about April 1, 2002 the trustee for Debtor, CyberRebate ("Trustee")
filed suit against us in the United States Bankruptcy Court, Eastern District of
New York ("Bankruptcy Court") for recovery of $210,000 allegedly paid to us as
an avoidable preference under U.S. Bankruptcy laws. On or about February 20,
2003, the parties agreed to a settlement and entered into a stipulation and
order ("Stipulation and Order") for Bankruptcy Court approval, whereby we and
the Trustee settled the claim in accordance with the following:
o We shall pay a total of $189,000 (the "Settlement Amount");
24
o Commencing on February 24, 2003, and on the first business day of each
successive month thereafter, we shall pay equal monthly installments of
$15,750 into escrow until the stipulation and order entered into by the
parties is finally approved by the Bankruptcy Court, after which time
all remaining payments shall be made to the Official Committee of
Unsecured Creditors ("OCUC"), with the final payment of $31,500 made no
later than the first business day of December, 2003;
o Notwithstanding the payment schedule set forth above, in the event the
Bankruptcy Court enters an Order confirming a plan of liquidation or
dismissing the Debtor's case (the "Triggering Events"), then we shall
have until the later of (i) 10 days from entry of such an Order with
respect to any of the Triggering Events, or, (ii) June 1, 2003, to pay
to the OCUC an amount equal to the difference between the Settlement
Amount and the aggregate amount of payments previously made to the
Trustee.
In exchange for such payments, the Trustee shall fully release all claims
against us and dismiss the suit against us with prejudice, and we will have a
general unsecured claim against the Debtor's estate in the amount of $21,000. To
date, we have paid Trustee approximately $142,000.
There were no other material additions to, or changes in status of, any
ongoing, threatened or pending legal proceedings during the nine months ended
September 30, 2003, including no changes in the status of the settlement with
coolsavings.com, Inc. ("coolsavings). The terms of the settlement with
coolsavings provide for a cross-license between coolsavings and us for each of
the patents currently in dispute. There are no royalties or other incremental
payments involved in the cross-license. Pursuant to this settlement, we may have
to make payments of up to $1.35 million to coolsavings as follows:
o $650,000, which was paid to coolsavings on September 29, 2000, was due
at the signing of the settlement documents.
o $250,000, which was accrued for during 2001, was due if, within one year
from the date of entry of the Stipulated Order of Dismissal filed on or
about March 3, 2000, Catalina Marketing Corporation prevailed in a
motion for summary judgment in a separate litigation between it and
coolsavings, involving the coolsavings' patent currently in dispute.
However, a dispute has arisen between the parties regarding whether this
portion of the license fee is actually due, despite Catalina Marketing
Corporation not prevailing in its motion. This dispute is based in part
on the fact that the we may be entitled to a license under the
coolsavings' patent at issue as a result of our acquisition of the
assets of BrightStreet.com, which acquisition included the settlement of
infringement litigation between coolsavings and BrightStreet.com
regarding the same coolsavings patent at issue in our settled
litigation. As such, the parties are currently in discussions regarding
the resolution of this issue.
o Up to $450,000 if and to the extent the coolsavings' patent currently in
dispute survives the pending reexamination proceedings at the Patent and
Trademark Office that were initiated by a third party. This component of
the settlement arrangement has not been accrued for because, in the
opinion of management, the possibility of us having to make this payment
continues to remain remote.
Depending on the amount and timing, an unfavorable resolution of some or all
of these matters could materially adversely affect our business, financial
condition, results of operations and cash flow in a particular period.
In addition, from time to time, we are a party to various legal proceedings
incidental to our business. None of these proceedings is considered by
management to be material to the conduct of our business, operations or
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Series A Convertible Preferred Stock
During the first two quarters of 2003, 192,500 shares of our Series A
convertible preferred stock that were issued in conjunction with our October
2001 rights offering were converted into 1,925,000 shares of our common stock.
During the third quarter of 2003, an additional 23,500 shares of our Series A
convertible preferred stock were converted into 235,000 shares of our common
stock.
25
Series B Convertible Preferred Stock
In December 2002, in connection with our purchase of substantially all of
the assets of Consumer Review, Inc., we issued into escrow 400,000 shares of our
Series B convertible preferred stock as part of the consideration for the
acquisition. If we experience a change in control before the one year
anniversary of the closing, each share of the Series B convertible preferred
stock will immediately be converted into ten shares of our common stock and
released from escrow. Upon the one year anniversary of the closing date,
provided that a change of control has not occurred, the conversion rate for each
share of the Series B convertible preferred stock shall be determined, based
upon the achievement of contractually defined revenue during the calculation
period, and will be convertible pursuant to the table in Item 2 on page 16. It
is our current intention to register the Series B convertible preferred stock
within fifteen months of the closing. The Series B convertible preferred stock
was issued to debentureholders of Consumer Review, Inc. pursuant to Regulation D
and Regulation S promulgated under the Securities Act of 1933.
Warrants
On October 8, 2002, the board of directors approved the issuance of
6,000,000 warrants (the "Warrants") to four investors (the "Investors") as
consideration for a $20 million financing commitment (the "Financing
Commitment"), which was memorialized in a letter to us, by Friedli Corporate
Finance, dated September 12, 2002 (the "Commitment Letter"). In the Commitment
Letter, Friedli Corporate Finance, a financial advisor to us, agreed to provide
us with the Financing Commitment. The Warrants were issued to the Investors in
connection with Friedli Corporate Finance agreeing to provide the Financing
Commitment. The Warrants were issued to the Investors in offshore transactions
pursuant to Regulation S promulgated under the Securities Act of 1933.
The Warrants entitle each Investor to purchase one share of our common
stock, $0.01 par value per share, for an initial exercise price of CHF 0.19 per
share during the exercise period. Pursuant to an amendment to the Warrants, the
exercise period will begin three months from January 6, 2003 and end on April 7,
2008 at 5:00 P.M. Eastern time.
Options
During the nine months ended September 30, 2003, we granted options to
purchase a total of 736,350 shares of common stock, of which 243,310 are
performance based, under the amended and restated Stock Option and Incentive
Plan to certain of our employees. During that period, no options were exercised
to purchase shares of common stock, and options to purchase 430,150 shares of
common stock were forfeited by employees leaving the company. We plan to issue
approximately 7.8 million options to current employees during the forth quarter
of 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on August 28, 2003. At the
meeting, the stockholders elected three directors to our Board of Directors for
the ensuing year and until their successors are elected. Results of the voting
were as follows:
Name of nominees For Withheld Against
- ------------------ ----------------- ----------------- ----------------
Kamran Amjadi 33,454,392 0 --
Mehrdad Akhavan 33,454,392 0 --
Peter Friedli 33,454,392 30 --
In addition, at such meeting the stockholders ratified the designation of
KPMG LLP as our independent certified public accountants. Results of the voting
were as follows:
For: 33,454,392
Against: 0
Witheld: 0
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
- ---------------------- ---------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished
under Exhibit 32 of Item 601 of Regulation S-K.
32.2 Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished
under Exhibit 32 of Item 601 of Regulation S-K.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed on August 8, 2003, reporting under Item 9
- Regulation FD Disclosure (Information furnished pursuant to Item 12 -
Results of Operations and Financial Condition) that E-centives, Inc.
issued a press release announcing its financial results for the quarter
ended June 30, 2003 and regarding adjusted EBITDA information included
in such press release. A copy of the press release was filed as an
exhibit to such Form 8-K.
27
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 this 14th day of November, 2003.
E-CENTIVES, INC.
By: /s/ David A. Samuels
---------------------------------------------
David A. Samuels
Chief Financial Officer (Duly
Authorized Representative and
Principal Financial and
Accounting Officer)
28
EXHIBIT 31.1
CERTIFICATIONS
I, Kamran Amjadi, certify that:
1) I have reviewed this quarterly report on Form 10-Q of E-centives, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based upon such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Date: November 14, 2003
By: /s/ Kamran Amjadi
---------------------------------------
Kamran Amjadi
Chairman and Chief Executive Officer
1
EXHIBIT 31.2
I, David A. Samuels, certify that:
1) I have reviewed this quarterly report on Form 10-Q of E-centives, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based upon such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is likely to materially affect, the registrant's
internal control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Date: November 14, 2003
By: /s/ David A. Samuels
-----------------------
David A. Samuels
Chief Financial Officer
1
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of E-centives, Inc. (the "Company")
on Form 10-Q for the fiscal quarter ended September 30, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigned's knowledge:
(a) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(b) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated this 14th day of November, 2003
E-CENTIVES, INC.
/s/ Kamran Amjadi
------------------------------------
Kamran Amjadi
Chairman and Chief Executive Officer
* A signed original of this written statement required by Section 906 has been
provided to of E-centives, Inc. and will be retained by of E-centives, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
1
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of E-centives, Inc. (the "Company")
on Form 10-Q for the fiscal quarter ended September 30, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigned's knowledge:
(a) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(b) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated this 14th day of November, 2003
E-CENTIVES, INC.
/s/ David A. Samuels
----------------------------------
David A. Samuels
Chief Financial Officer
* A signed original of this written statement required by Section 906 has been
provided to of E-centives, Inc. and will be retained by of E-centives, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
2