Why we burning up so much cash?
August 18, 2000
BURST COM (IVDO.OB)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the financial condition and results of operations of Burst.com, Inc. should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto for the year ended December 31, 1999 included in the Company's Form 10/A and S-1 Registration Statement filed with the SEC.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q include forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, including, among other things:
o implementing our business strategy;
o attracting and retaining customers;
o delivering quality product that meets customer expectations;
o obtaining and expanding market acceptance of the products and services we offer;
o responding quickly to technological challenges from third parties;
o forecasts of Internet usage and the size and growth of relevant markets;
o rapid technological changes in our industry and relevant markets; and
o competition in our market.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions. These statements are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results, levels of activity, performance, achievements and events may vary significantly from those implied by the forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our results to differ materially from those discussed. These risks and uncertainties include, but are not limited to, those described under the caption "Factors That May Impact Future Results" below. Additional information concerning factors that may impact future results can be found in the Risk Factors section of the above referenced S-1 Registration Statement filed on August 11, 2000. These forward-looking statements are made as of the date of this report, and except as required under applicable securities law, we assume no obligation to update them or to explain the reasons why actual results may differ.
We believe that period-to-period comparisons of our operating results, including our revenues, cost of sales, gross margins, expenses, and capital expenditures may not necessarily provide meaningful results and should not be relied upon as indications of future performance. We do not believe that our historical growth rates are indicative of future growth or trends.
We have incurred significant losses since our inception, and as of June 30, 2000, we had an accumulated deficit of $47,495,207. There can be no assurance that we will achieve or sustain profitability and we believe that we will continue to incur net losses in 2000.
Overview
We are an independent provider of client/server network software for the delivery of video and audio information over networks. Our principal executive offices are located in San Francisco, California and we have a number of additional sales offices in several domestic metropolitan areas. Our software manages the delivery of video and audio content over various networks, including the Internet and corporate intranets, optimizing network efficiency and quality of service. Our Burstware(R) suite of software products
enables companies to transmit video and audio files at Faster-Than-Real-Time(TM) speed, which is accomplished by utilizing available bandwidth capacity to send more video or audio data to users than the players are demanding. This data is stored on the users' machine for playing on demand, thus isolating the user from noise and other network interference. The result is high quality, full-motion video and CD-quality audio to the end-user. Our revenue is derived from fees for software licenses, content hosting and other consulting services.
Results of Operations
Net revenues were $311,136 and $386,149 for the three month and six month periods ended June 30, 2000, respectively, versus none in the same periods in 1999. We completed the commercial release of our Burstware(R) suite of products in November 1999 and commenced shipments in February 2000. During the six months ended June 30, 2000, we also introduced our content hosting service, which enables our customers to store their audio-video content on our Burstware servers for delivery to their employees, customers or other end-users over broadband networks. Orders for approximately $357,073, consisting of software license fees and hosting and other consulting services were taken during the quarter. Revenues of $45,937 not recognized or deferred relate to establishment of a returns reserve, deferral of customer support, hosting and other services that will be recognized as services are provided. The product cost of revenue recorded for the six months ended June 30, 2000 consisted primarily of the cost of equipment purchased from a third-party, which was resold to a customer in connection with a software sale. Resale of equipment is not part of our sales strategy, and we do not plan to make such sales to any significant degree in the future. During the six months ended June 30, 2000, our customer Interzest accounted for 72% of revenues. No other single customer accounted for more than 10% of our revenues.
Operating expenses were $6,477,582 and $10,392,503 for the three month and the six month periods ended June 30, 2000, respectively, as compared to $2,621,256 and $4,200,377 during the same periods in 1999. This resulted in total operating expenses increasing by $3,856,326 and $6,192,166 for the three month and six month periods ended June 20, 2000, respectively, over the same periods in 1999. The increases were $817,107 and $1,290,180 for research and development, $2,237,876 and $3,516,341 for sales and marketing and $801,343 and $1,385,605 in general administrative for the three month and six month periods ended June 30, 2000, respectively, over the same periods in 1999. The increased costs were primarily a result of an overall increase in business activity and the establishment and expansion of our sales force and marketing programs in particular, as more fully explained below.
Sales and Marketing
Sales and marketing expenses were $3,356,785 for the three months ended June 30, 2000 as compared to $1,118,909 for the three months ended June 30, 1999. For the six months ended June 30, 2000, sales and marketing expenses were $5,084,068, as compared to $1,567,727 for the six months ended June 30, 1999. Sales and marketing expenses consist primarily of advertising and other marketing related expenses, compensation and employee-related expenses, sales commissions, and travel costs. The increase in absolute dollars is primarily attributable to an increase in advertising and distribution costs associated with our aggressive brand-building strategy and increases in compensation expense associated with growth in its direct sales force and marketing personnel. We anticipate that sales and marketing expenses in absolute dollars will increase in future periods as we continue to pursue an aggressive brand-building strategy through advertising, expanding international operations, and building a direct sales organization.
Research and Development
Research and development expenses were $1,284,763 for the three months ended June 30, 2000 as compared to $467,656 for the three months ended June 30, 1999. For the six months ended June 30, 2000, research and development expenses were $2,218,738 as compared to $928,558 for the six months ended June 30, 1999. Research and development expenses consist primarily of payroll and related expenses incurred for enhancements to and maintenance of our Burstware(R) technology and other operating costs. The increase in absolute dollars is primarily attributable to increases in the number of engineers that develop and enhance our software technologies. We believe that significant investments in research and development are required to remain competitive. Consequently, we expect to incur increased research and development expenditures in absolute dollars in future periods.
General and Administrative
General and administrative expenses were $1,836,034 for the three months ended June 30, 2000 as compared to $ 1,034,691 for the quarter ended June 30, 1999. For the six months ended June 30, 2000, general and administrative expenses were $3,089,697 as compared to $1,704,092 for the six months ended June 30, 1999. General and administrative expenses consist primarily of compensation and fees for professional services, and the increase in absolute dollars is primarily attributable to increases in these
areas. We believe that the absolute dollar level of general and administrative expenses will increase in future periods, as a result of an increase in personnel and increased fees for professional services.
We had net loss from operations of $6,166,446 and $10,036,626 for the three month and six month periods ended June 30, 2000, respectively, as compared to $2,621,256 and $4,200,377 during the same periods in 1999. This was a 235% and 239% increase for the three month and six month periods ended June 30, 2000, respectively, over the same periods in 1999. The increased loss resulted from the increased expenditures discussed above. Total other income (expense), net was ($93,818) and ($22,687) for the three and six month periods ended June 30, 2000, respectively, as compared to $24,353 and $30,975 for the same periods in 1999. The $118,171 and $53,662 decreases were primarily due to non-cash expense recorded in connection with the equity financing closed during 2000 offset by interest on the proceeds of that financing.
Liquidity and Capital Resources
Although we have been successful in our fundraising efforts to meet previous operating requirements, there can be no guarantee that we will be successful in future fundraising efforts. In January 2000, we raised approximately $13,899,000 in gross proceeds and converted $5,335,000 of debt (including $430,000 in new debt raised in January 2000), by issuing 4,808,375 shares of our common stock and warrants to purchase 4,808,375 shares of our common stock. In connection with these transactions and the conversion of our remaining preferred to common stock, we incurred approximately $1,103,000 in transaction costs. As of June 30, 2000 we had cash reserves of approximately $3.7 million, which will meet current operating requirements for approximately two months at our current spending rate, assuming no revenue. However, we have begun earning revenues in 2000. Based on projected revenues and our ability to reduce expenditures as required, we believe operating requirements could be met for three months without the need for additional financing. We are currently in negotiations to obtain additional outside funding through the sale of shares of our common stock in a private placement directed at both "strategic" and "financial" investors. Any new funding raised may have a dilutive effect on our existing shareholders. In the event we were to be unsuccessful in our additional fundraising efforts and projected revenues were significantly lower than expected, we would be required to reduce significantly cash outflows through the reduction or elimination of marketing and sales, development, capital, and administrative expenditures resulting in decreased potential revenue and potential profitability.
We expect to have material capital expenditures for computer and network equipment of approximately $2,000,000 in 2000 as we add employees and expand our hosting services infrastructure, software test lab and training capabilities. We will also incur significant marketing promotion expenses as we attempt to gain market awareness and will continue to incur increasing research and development costs as we continue to develop and upgrade our Burstware(R) product line and follow-on products. In addition, space requirements at our San Francisco headquarters location continue to grow as we take on additional staff. We are currently seeking additional space nearby. Due to the high demand versus supply of comparable office space in this area, we are anticipating a significant increase in space costs later in this fiscal year. There is no assurance that we will be able to find a location offering acceptable terms and conditions, which could result in a costly move or the dispersal of our employees among different locations.
Changes in Financial Position
As of June 30, 2000, we had working capital of $1,457,060 as compared to a deficit of $6,226,515 at December 31, 1999. This $7,683,575 increase reflects a $3,701,461 increase in current assets and a decrease in current liabilities of $3,982,114. The reason for the increase was the closing of the equity financing and conversion of notes payable that netted $18,137,718, including cash and note conversions, partially offset by our $6,260,264 net loss for the quarter.
Net cash used in operating activities totaled $13,979,173 during the six months ended June 30, 2000, as compared to net cash used in operating activities of $2,827,536 during the six months ended June 30, 1999, primarily as the result of the increased operating loss.
Net cash used in investing activities during the six months ended June 30, 2000 totaled $1,211,561 as compared to $421,186 during the six months ended June 30, 1999. Investing activities in both periods consisted of purchases of personal property and equipment.
Cash flow provided by financing activities during the six months ended June 30, 2000 totaled $18,365,050 as compared to $1,521,064 during the same period in 1999. This increase was primarily the result of $18,059,992 net cash proceeds from the sale of common stock and $435,000 from issuance of convertible notes in 2000, vs. approximately $2.0 million received from the exercise of options and warrants and proceeds from the Series B convertible stock offering in 1999.
Although $5,335,000 in debt converted to common stock, the Company paid down no debt in cash in 2000; while it paid down $22,736 during the six months ended June 30, 1999.
Factors That May Impact Future Results
We develop complex software for media delivery, content management and storage. We have recently commenced sales of our first commercial product released late last year and have yet to achieve very large commercial deployments. Despite testing, software errors have been found in our product and, in some cases, our product's performance when initially deployed has not met customer expectations. To date, we believe that all of the errors in question have been resolved. However, there can be no assurance that other errors will not occur, as errors such as these are common in the development of any software product. Additional errors in our product could result in, among other things, a delay in recognition or loss of revenues, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. As a young company that recently commenced a new product line, we face risks and uncertainties relating to our ability to implement our business plan successfully.
Our future success depends on the growing use and acceptance of video applications for PCs and set-top boxes, including the growth of video on the Internet. The market for these applications is new, and may not develop to the extent necessary to enable us to expand our business. We have recently invested and expect to continue to invest significant time and resources in the development of new products for this market. If the target markets for our products do not grow, we may not obtain any benefits from these investments.
Our products are technologically complex and are designed to interface effectively with third-party products such as Microsoft's Windows Media Player (WMP) and the QuickTime Player using publicly published application program interfaces (APIs). Modifications to the publicly published APIs for these third-party products could require further development effort on our part to continue to make the interface work properly or, in some cases, could disallow our products interoperability. There is no assurance that these kinds of changes will not occur or that we can develop new products effectively and quickly enough to avoid loss of revenues or market share.
Prospective customers generally must make a significant commitment to test and evaluate our software and to integrate it into their products. As a result, our sales process is often subject to delays associated with lengthy approval processes. For these and other reasons, the initial sales cycles of our new software products has been lengthy, recently averaging approximately four to six months from initiation in late 1999 to completion in 2000. We expect that future sales will also experience lengthy sales cycles.
It has been our experience that our product is often embedded in our customers' web pages. Since the proper development of video enabled web pages takes a high level of sophistication, we may be required to provide professional service support to our customers in this area. There can be no assurance that we will be able to adequately staff for and deliver the level of professional services required, or that we will be able to charge the customer fully for this work. The result could be further impediments to sales and possibly higher than anticipated cost of sales.
Delivery of video using the Internet is an emerging business. Many of our customers are new companies that are innovating and counting on Burstware(R) to provide a technical edge. Because many of these companies are early stage enterprises without revenues, they may delay payment or fail to pay our invoices. For this reason, we have deferred a substantial portion of revenue booked until collectibility has been assured. There is no assurance that this revenue will ultimately be collected and recognized, or that future bookings may also be deferred.
We have increased our focus on the Internet applications for our product. Competitors at times will provide their products at little or no cost to customers in order to establish market share. There is a risk that we may be forced to lower our prices substantially, at least initially, to gain market share. This may negatively impact our own revenue and earnings potential in the near future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000 we had approximately $3,477,000 invested in two different money market funds. The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time achieving a market rate of return without significant risk. Since these funds are available immediately, a 10% movement in market interest rates would not have a material impact on the total fair value of our portfolio as of June 30, 2000. |
