Internet companies burn through cash in such a routine fashion that it's become an integral part of their business plans. But increasingly, some are finding there's precious little cash left to burn.
The Internet IPO boom of the past couple of years has fueled the growth of hundreds of start-ups. But now that investor interest in Internet stock offerings is on the wane, some Net-related companies are feeling the pressure to get cash-flow positive -- or just get some cash, period -- before their piggy bank empties out.
It's a phenomenon that isn't going unnoticed by investors. "Cash burn rate is ultraimportant," says Robert Mohn, portfolio manager of the
Acorn USA fund.
Unlike traditional companies that meet their cash needs by selling products and services, Mohn says, the Internet companies of the new economy have to hit the capital markets. But how long will the markets be there for them? "I can't make any prediction when and if their ability to access what is essentially zero-cost capital will go away," Mohn says, "but there certainly is that possibility."
Several Internet companies have less than six months' worth of cash on hand to fund their negative cash flows.
Take a look, for example, at
, an in-flight airline catalog company that makes 15% of its revenue from Web sites. At the end of June, SkyMall had $761,000 in cash, compared with a negative cash flow from operations of $4.2 million for the second quarter -- suggesting the retailer had only a month's worth of cash on hand. It also had $2.2 million available from a partially used line of credit, worth another month and a half. The company said in April it planned to spend $27 million this year on e-commerce and other growth initiatives.
SkyMall has access to an additional credit line of $5 million, but only if it obtains another $15 million in subordinated debt or equity. "A failure to secure such capital may be detrimental to the company and cause it to reduce or eliminate its growth initiatives," the company disclosed. "Although we haven't delved into secondary or IPO markets right now, we're very comfortable with what we're seeing from other sources -- venture capital, investment funds, et cetera," says CFO Steve Peterson.
Also short on cash is infomercial company
. As of June 30, the company reported $1.9 million of cash and cash equivalents, and negative cash flows from operations of $11.9 million for the first fiscal quarter ending that date. At that rate, the company had about a half a month of unrestricted cash on hand to fund operations. e4L, which sells products like the
exerciser and owns nearly half of the
Web site, also had $1.6 million available from a credit facility as of July 31.
Bruce Goodman, an executive vice president at e4L, says that judging his company by one quarter's results overlooks the delay between money spent on inventory and television time before related revenue is generated. Nonetheless, the company notes in a recent filing that its cash position "continues to be pressured."
Another company looking out for cash is Internet security company
, which had $607,000 cash on hand as of June 30 plus $2 million from a subsequent investment in the company, compared with second-quarter negative cash flow from operations of $1.5 million, suggesting only five months' worth of cash. CFO Margaret Grayson says the company is raising $7 to $9 million in preferred equity securities.
Grayson says she doesn't think conditions are necessarily getting worse for Internet companies looking for scratch. "I think it's always hard for companies to raise money," she says. "The job of the company is to have something that will produce and perform and provide results."
Another of those early stage companies is e-tailer
5th Avenue Channel
. Two months ago, the company had $574,000 of cash to burn, compared with a quarterly cash burn of $459,000. The company, best known for selling
cosmetics, says in a filing it "intends to sell equity, debt or convertible debt to affiliates and other third parties." Company executives did not respond to requests for comment.
Of course, not all companies low on cash will run out of it. Online retailer
had $8 million in cash and short-term securities at the end of April, compared with a monthly cash burn of $1.8 million, implying a cash stash that would run out mid-September.
CFO Don Alvarez says that calculation ignores $14.1 million in longer-maturing corporate bonds that the company had on its balance sheet at that time. "They're very liquid investments," he says. The company had a total of $13.6 million in cash and investments at the end of July.
And companies can still raise money. As of June 30, health site
had less than five months' worth of cash on hand. But last week, the company sold $20.7 million of stock in a secondary offering, giving OnHealth at least 10 more months of cash if it were spending at its current rate of $1.8 million a month.
It appears, though, that OnHealth hasn't been planning to spend money at its current rate but to increase it. In July, it announced the launch of a $25 million ad campaign expected to last from nine months to a year, according to Scott Rich, director of equity research at St. Louis-based
, who follows the stock.
OnHealth's offering spotlights another problem: Companies may still be able to raise money, but perhaps not as much as they want. Originally, OnHealth planned to sell 6 million shares of stock at once. Instead, the company went for a shelf registration to sell 6.9 million shares from time to time. It sold 3.1 million shares last week as the first installment.
"While it's certainly not the best scenario, it is a positive that they raised the necessary capital to fund the next nine months of their marketing campaign," says Rich. His firm hasn't done any underwriting for OnHealth, though it was going to be part of the syndicate for the secondary offering before it was converted to a shelf registration.
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