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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2004
  OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission file number 000-50698 GREENFIELD ONLINE, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    06-1440369
(I.R.S. Employer Identification No.)
 21 River Road, Wilton, CT 06897
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (203) 834-8585 N/A 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x  No  o Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x Number of shares of Common Stock outstanding as of November 1, 2004 was
16,471,435 shares.




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##### Table of Contents



GREENFIELD ONLINE, INC. FORM 10-Q
TABLE OF CONTENTS PagePart I Financial InformationItem 1. Financial StatementsUnaudited Consolidated Balance Sheets at September 30, 2004 and December 31, 2003
    
    
    1Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003
    
    
    2Unaudited Consolidated Statements of Changes in Convertible Preferred Stock and StockholdersEquity (Deficit) for the nine months ended September 30, 2004
    
    
    3Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    4Unaudited Notes to Consolidated Financial Statements
    
    
    5Item 2.Managements Discussion and Analysis of Financial Condition and Result of Operations
    
    
    14Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.Controls and Procedures
    
    
    28Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 2. Changes in Securities; Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    31AMENDMENT NO.7 TO ACCOUNTS RECEIVABLE FINANCING AGREEMENTCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION




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GREENFIELD ONLINE, INC. 
 CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
(Unaudited) September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash, restricted cash and cash equivalents
    
    $
    38,431
    
    
    $
    3,721Accounts
receivable trade (net of allowances of $238 and $219 at September 30, 2004
and December 31, 2003, respectively)
    
    
    8,403
    
    
    
    4,234Prepaid expenses and other current assets
    
    
    1,467
    
    
    
    498Total current assets
    
    
    48,301
    
    
    
    8,453Property and equipment, net
    
    
    3,872
    
    
    
    2,420Other intangible assets, net
    
    
    262
    
    
    
    311Security deposits
    
    
    873
    
    
    
    745Other long term assets
    
    
    34
    
    
    
    Total assets
    
    $
    53,342
    
    
    $
    11,929LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    2,538
    
    
    $
    1,563Accrued expenses and other current liabilities
    
    
    4,417
    
    
    
    4,579Current portion of capital lease obligations
    
    
    1,120
    
    
    
    874Deferred revenues
    
    
    371
    
    
    
    394Total current liabilities
    
    
    8,446
    
    
    
    7,410Long-term debt
    
    
    
    
    
    
    Capital lease obligations
    
    
    914
    
    
    
    705Other long-term liabilities
    
    
    23
    
    
    
    84Series C-2 redeemable preferred stock (aggregate liquidation preference of none and
$2,053 at September 30, 2004 and December 31, 2003, respectively)
    
    
    
    
    
    
    943Total liabilities
    
    
    9,383
    
    
    
    9,142Series B convertible preferred stock; par value $0.0001 per share; 30,211,595 shares
authorized, issued and outstanding as of December 31, 2003; zero authorized, issued
and outstanding as of September 30, 2004
    
    
    
    
    
    
    9,114Commitments and contingenciesStockholders deficit:Series A convertible preferred stock; par value $0.0001 per share; 40,874,511 shares
authorized; zero and 40,874,511 shares issued and outstanding (aggregate liquidation
preference of none and $5,953) as of September 30, 2004 and December 31, 2003,
respectively
    
    
    
    
    
    
    4Series C-1 convertible preferred stock; par value $0.0001 per share; zero and
74,627,182 shares authorized, issued and outstanding (aggregate liquidation
preference of none and $9,127) as of September 30, 2004 and December 31, 2003,
respectively)
    
    
    
    
    
    
    7Common stock; par value $0.0001 per share; 100,000,000 shares authorized; 16,471,435
and 2,054,485 shares issued and outstanding at September 30, 2004 and December 31,
2003, respectively
    
    
    2
    
    
    
    Additional paid-in capital
    
    
    128,186
    
    
    
    82,440Accumulated deficit
    
    
    (81,094
    )
    
    
    (84,389
    )Unearned stock-based compensation
    
    
    (3,004
    )
    
    
    (4,258
    )Treasury stock, at cost; Common stock  9,643 and zero shares at September 30, 2004
and December 31, 2003, respectively
    
    
    (131
    )
    
    
    Note receivable from stockholder
    
    
    
    
    
    
    (131
    )Total stockholders equity (deficit)
    
    
    43,959
    
    
    
    (6,327
    )Total liabilities, temporary equity and stockholders equity (deficit)
    
    $
    53,342
    
    
    $
    11,929
 The accompanying notes are an integral part of these consolidated financial statements. 1




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GREENFIELD ONLINE, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    12,015
    
    
    $
    7,048
    
    
    $
    30,867
    
    
    $
    17,587Cost of revenues (including stock-based compensation of $50 and
$4, respectively for the three months ended September 30, 2004 and
2003, and $156 and $13, respectively for the nine months ended
September 30, 2004 and 2003 and excluding depreciation shown
below)
    
    
    2,515
    
    
    
    2,574
    
    
    
    7,508
    
    
    
    6,061Gross profit
    
    
    9,500
    
    
    
    4,474
    
    
    
    23,359
    
    
    
    11,526Operating expenses:Selling, general and administrative (including stock-based
compensation of $200 and $273, respectively for the three months
ended September 30, 2004 and 2003, and $942 and $817,
respectively for the nine months ended September 30, 2004 and
2003)
    
    
    5,884
    
    
    
    3,237
    
    
    
    15,247
    
    
    
    8,126Panel acquisition expenses
    
    
    599
    
    
    
    311
    
    
    
    1,771
    
    
    
    1,058Depreciation and amortization
    
    
    388
    
    
    
    279
    
    
    
    851
    
    
    
    812Research and development
    
    
    308
    
    
    
    167
    
    
    
    789
    
    
    
    451Total operating expenses
    
    
    7,179
    
    
    
    3,994
    
    
    
    18,658
    
    
    
    10,447Operating income
    
    
    2,321
    
    
    
    480
    
    
    
    4,701
    
    
    
    1,079Other income (expense):Interest income (expense), net
    
    
    36
    
    
    
    (99
    )
    
    
    (94
    )
    
    
    (338
    )Related party interest expense, net
    
    
    (1,053
    )
    
    
    (29
    )
    
    
    (1,093
    )
    
    
    (27
    )Other income (expense), net
    
    
    (10
    )
    
    
    
    
    
    
    (26
    )
    
    
    600Total other income (expense)
    
    
    (1,027
    )
    
    
    (128
    )
    
    
    (1,213
    )
    
    
    235Income before income taxes
    
    
    1,294
    
    
    
    352
    
    
    
    3,488
    
    
    
    1,314Provision for income taxes
    
    
    51
    
    
    
    17
    
    
    
    193
    
    
    
    80Net income
    
    
    1,243
    
    
    
    335
    
    
    
    3,295
    
    
    
    1,234Less: Accretion of Series C-2 redeemable preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63
    )Charge to common stockholders for Series B convertible
preferred stock
    
    
    (28,054
    )
    
    
    
    
    
    
    (28,054
    )
    
    
    Cumulative dividends on Series B convertible preferred stock
    
    
    (46
    )
    
    
    (168
    )
    
    
    (382
    )
    
    
    (504
    )Income allocable to participating preferred securities
    
    
    (131
    )
    
    
    (139
    )
    
    
    (1,564
    )
    
    
    (556
    )Net income (loss) available to common stockholders
    
    $
    (26,988
    )
    
    $
    28
    
    
    $
    (26,705
    )
    
    $
    111Net income (loss) per share available to common stockholders:Basic
    
    $
    (1.91
    )
    
    $
    0.01
    
    
    $
    (4.39
    )
    
    $
    0.05Diluted
    
    $
    (1.91
    )
    
    $
    0.01
    
    
    $
    (4.39
    )
    
    $
    0.05Weighted average shares outstanding:Basic
    
    
    14,145
    
    
    
    2,054
    
    
    
    6,084
    
    
    
    2,054Diluted
    
    
    14,969
    
    
    
    2,439
    
    
    
    6,799
    
    
    
    2,263
 The accompanying notes are an integral part of these consolidated financial statements. 2




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GREENFIELD ONLINE, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
(In thousands)
(Unaudited) Series A
    
    Series C-1Convertible
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    

    NotePreferred Stock
    
    Preferred Stock
    
    Common Stock
    
    Additional
Paid-In
    
    Receivable
FromShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    OfficerBalance at December 31,
2003
    
    
    40,875
    
    
    $
    4
    
    
    
    74,627
    
    
    $
    7
    
    
    
    2,054
    
    
    $
    
    
    
    $
    82,440
    
    
    $
    (131
    )Nine Months ended
September 30, 2004:Net income for the periodRepossession of shares in
payment of note
receivable from officer
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (38
    )
    
    
    131Cumulative dividends on
Series B convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (382
    )Exercise of stock options.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Stock option forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )Conversion of preferred
shares into common at
initial public offering
    
    
    (40,817
    )
    
    
    (4
    )
    
    
    (74,627
    )
    
    
    (7
    )
    
    
    10,422
    
    
    
    2
    
    
    
    9Issuance of shares
pursuant to the initial
public offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    46,310Amortization of unearned
stock based compensationBalance at September 30,
2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    16,471
    
    
    $
    2
    
    
    $
    128,186
    
    
    $
    
   [Continued from above table, first column(s) repeated] Treasury StockSeries A Preferred
    
    Common Stock
    
    Unearned
Stock Based
    
    Accumulated
    
    Total
StockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    Compensation
    
    Deficit
    
    Equity (Deficit)Balance at December 31,
2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    (4,258
    )
    
    $
    (84,389
    )
    
    $
    (6,327
    )Nine Months ended
September 30, 2004:Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,295
    
    
    
    3,295Repossession of shares in
payment of note
receivable from officer
    
    
    58
    
    
    
    (56
    )
    
    
    5
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )Cumulative dividends on
Series B convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (382
    )Exercise of stock options.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Stock option forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    Conversion of preferred
shares into common at
initial public offering
    
    
    (58
    )
    
    
    56
    
    
    
    4
    
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of shares
pursuant to the initial
public offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,310Amortization of unearned
stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,098
    
    
    
    
    
    
    
    1,098Balance at September 30,
2004
    
    
    
    
    
    $
    
    
    
    
    9
    
    
    $
    (131
    )
    
    $
    (3,004
    )
    
    $
    (81,094
    )
    
    $
    43,959
 The accompanying notes are an integral part of these consolidated financial statements. 3




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GREENFIELD ONLINE, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited) Nine MonthsEndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,295
    
    
    $
    1,234Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,126
    
    
    
    1,016Amortization of contract asset
    
    
    17
    
    
    
    150Amortization of stock based compensation
    
    
    1,098
    
    
    
    830Non-cash interest expense
    
    
    1,093
    
    
    
    27Loss on sale of property and equipment
    
    
    1
    
    
    
    Gain on sale of Custom Research Business
    
    
    
    
    
    
    (600
    )Provision for doubtful accounts and other sales allowances
    
    
    60
    
    
    
    (6
    )Changes in assets and liabilities, net:Accounts receivable
    
    
    (4,229
    )
    
    
    (1,087
    )Deferred project costs
    
    
    (74
    )
    
    
    28Other current assets
    
    
    (806
    )
    
    
    (602
    )Security deposits
    
    
    (256
    )
    
    
    65Other assets
    
    
    (34
    )
    
    
    Accounts payable
    
    
    975
    
    
    
    72Accrued expenses and other current liabilities
    
    
    (162
    )
    
    
    1,477Deferred project revenues
    
    
    (23
    )
    
    
    5Net cash provided by operating activities
    
    
    2,081
    
    
    
    2,609Cash flows from investing activities:Proceeds from sale of Custom Research Business
    
    
    
    
    
    
    600Proceeds from sale of property and equipment
    
    
    2
    
    
    
    Additions to property and equipment and intangibles
    
    
    (1,180
    )
    
    
    (259
    )Net cash provided by (used in) investing activities
    
    
    (1,178
    )
    
    
    341Cash flows from financing activities:Proceeds from borrowings under credit facility
    
    
    1,000
    
    
    
    Repayments under credit facility
    
    
    (1,000
    )
    
    
    (1,216
    )Other long-term liabilities
    
    
    (61
    )
    
    
    (243
    )Proceeds of options exercised
    
    
    3
    
    
    
    1Proceeds from subscriptions receivable from management
    
    
    
    
    
    
    2Net proceeds from initial public offering
    
    
    46,310
    
    
    
    Payment of Series C-2 liquidation preference
    
    
    (2,052
    )
    
    
    Payment of Series B dividend liquidation preference
    
    
    (9,496
    )
    
    
    Principal payments under capital lease obligations
    
    
    (897
    )
    
    
    (616
    )Net cash provided by (used in) financing activities
    
    
    33,807
    
    
    
    (2,072
    )Net increase in cash and cash equivalents
    
    
    34,710
    
    
    
    878Cash restricted cash and cash equivalents at beginning of the period
    
    
    3,721
    
    
    
    1,864Cash restricted cash and cash equivalents at end of the period
    
    $
    38,431
    
    
    $
    2,742Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    219
    
    
    $
    365Income taxes
    
    
    251
    
    
    
    28Supplemental Schedule of Non-cash Investing and Financing Activities:Purchase of equipment and internal use software financed through capital lease obligations
    
    $
    1,352
    
    
    $
    75Repossession of shares in payment of note receivable from officer
    
    
    169
    
    
    
    Cumulative dividends on Series B convertible preferred stock
    
    
    382
    
    
    
    505Accretion of Series C-2 redeemable preferred stock dividends
    
    
    
    
    
    
    63
 The accompanying notes are an integral part of these consolidated financial statements. 4




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GREENFIELD ONLINE, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Note 1 Basis of Presentation: Basis of Presentation References herein to we, us or our refer to Greenfield Online, Inc.
and its consolidated subsidiaries unless the context specifically requires
otherwise. The accompanying unaudited consolidated financial statements of Greenfield
Online, Inc. and its wholly-owned subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in compliance with the rules and
regulations of the Securities and Exchange Commission, all significant
intercompany accounts and transactions have been eliminated in consolidation.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, these financial
statements reflect all adjustments, consisting of normal recurring adjustments
necessary to present fairly these financial statements. Operating results for
the three and nine-month periods ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our prospectus
filed on July 16, 2004 pursuant to Rule 424(b)(4) of the Securities Act of
1933, as amended (the Securities Act) for the year ended December 31, 2003,
which include unaudited interim consolidated financial statements as of and for
the three months ended March 31, 2004 and 2003. Reverse Stock Split and Initial Public Offering These consolidated financial statements
give effect to a reverse one-for-14 split of our outstanding common stock that
was effected on July 7, 2004. In July 2004, we completed the
initial public offering of our common stock at a public
offering price of $13.00 per share, including the sale of 4 million shares by
us and 1.75 million shares by certain selling stockholders. All shares of our
Series C-2 Redeemable Non-Voting Preferred Stock, par value $0.0001 (Series
C-2), were redeemed and all outstanding shares of the remaining series of
Preferred Stock were converted into shares of our common stock on a one-for-14
basis. Net proceeds to us from the initial public offering totaled
approximately $34.8 million, after payment of underwriters commissions of $3.6
million, the mandatory conversion and dividend payment of approximately $9.4
million to the holders of our Series B Convertible Participating Preferred
Stock, par value $0.0001 (Series B), the mandatory redemption of all
outstanding shares of our Series C-2 for approximately $2.1 million and costs
associated with the initial public offering amounting to approximately $2.1
million. The remaining proceeds will be utilized for working capital and other
general corporate purposes, including potential acquisitions. 5




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International Expansion  India, Europe and Canada In July 2003, we incorporated Greenfield Online Private Limited in
Gurgaon, India (GFOL India) for the purpose of providing us with data
processing and survey programming services. In August 2003, we incorporated
under the laws of the United Kingdom, through our wholly-owned subsidiary
Greenfield Online Europe, Ltd. (GFOL Europe) to provide us with a presence in
Europe to meet the expected increase in demand for our Internet survey
solutions in Europe. In April 2004, we began operations in Canada through our
wholly-owned subsidiary Greenfield Online Canada, Ltd. (GFOL Canada) to meet
the expected increase in demand for our Internet survey solutions in Canada. Note 2  Summary of Significant Accounting Policies: Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission
and the instructions to Form 10-Q. The accounting policies we follow are set
forth in our recently filed prospectus filed on July 16, 2004 pursuant to Rule
424(b)(4) of the Securities Act in the notes to our consolidated financial
statements for the year ended December 31, 2003, and have not materially
changed. Panelist Incentives.Our panelists receive incentives for participating
in our surveys, which are earned by the panelist when we receive a timely
survey response. A panelist has the right to claim his or her incentive payment
at any time prior to its expiration, which is generally one year. We accrue
incentives as incurred, and reverse expirations to the statement of operations
as the expirations occur. Unclaimed incentives historically have represented less than 10%
of total incentives incurred, however, for the three and nine months ended
September 30, 2004, unclaimed incentives represented approximately 22% and 12%,
respectively, of total incentives incurred. This increase in the percentage of
unclaimed incentives is due primarily to the shift in our incentive program
away from cash payments to a program emphasizing prize-based incentives, which
we instituted in April 2004. As a result of this shift, the amount of unclaimed
incentives resulting from our historically cash-based program has increased
relative to the diminishing amount of cash incentives we award. The amount of
unclaimed incentives is representative of unclaimed incentives experienced in
prior periods, but fluctuations in the amount of unclaimed incentives may
affect our results of operations in future periods. Concentration of Credit Risk.Financial instruments, which potentially
subject us to concentrations of credit risk, consist principally of trade
accounts receivable. We periodically review our accounts receivable for
collectibility and provide for an allowance for doubtful accounts to the extent
that amounts are not expected to be collected. Two customers under common
control accounted for more than 10% of our net sales. GfK-Custom Research, Inc.
and GfK-ARBOR, LLC, on a combined basis, accounted for approximately 13% and
15%, respectively of our net sales for each of the three and nine months ended
September 30, 2004. Stock-Based Compensation.We have awarded certain stock option and
warrant grants in which the fair value of our underlying stock on the date of
grant exceeded the exercise price. As a result, we have recorded unearned
stock-based compensation, which is being amortized over the service period,
generally four years. Accordingly, we have amortized $1.1 million and $830,000
of stock based compensation expense in the statement of operations for the nine
months ended September 30, 2004 and 2003, respectively, related to these option
grants. Stock-based compensation cost for the nine months ended September 30,
2004 totaled $1.1 million, including compensation cost of zero related to the
notes receivable from stockholder. Stock-based compensation expense for the
nine months ended September 30, 2003 totaled $830,000, including compensation
cost of $48,000 related to the notes receivable from stockholders. In
connection with options forfeited during the nine months ended September 30,
2004, we wrote-off $156,000 of unearned stock-based compensation as a reduction
of additional paid-in capital. 6




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##### Table of Contents



We account for stock-based compensation using the intrinsic-value method
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees(APB No. 25), and related interpretations, and
have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS
No. 123) as amended by Statement of Financial Accounting Standards No. 148
Accounting for Stock-Based Compensation, Transition and Disclosure, an
amendment of SFAS 123(SFAS No. 148), for such awards. If we had elected to
recognize compensation expense using a fair value approach, and therefore
determined compensation based on the value as determined by the modified
Black-Scholes option pricing model, our pro-forma income (loss) and income
(loss) per share for the three and nine months ended September 30, 2004 and
2003 would have been as follows: 7




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##### Table of Contents



Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income as reported
    
    $
    1,243
    
    
    $
    335
    
    
    $
    3,295
    
    
    $
    1,234Add: Stock-based employee compensation expense included in net
income as recorded
    
    
    251
    
    
    
    277
    
    
    
    1,098
    
    
    
    830Deduct: Total stock-based employee compensation expense determined
under the fair value method for all awards, net of related tax
effects
    
    
    (1,888
    )
    
    
    (763
    )
    
    
    (3,099
    )
    
    
    (2,729
    )Pro forma net income (loss)
    
    
    (394
    )
    
    
    (151
    )
    
    
    1,294
    
    
    
    (665
    )Less: Accretion of Series C-2 redeemable preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63
    )Charge to common stockholders for Series B
convertible
preferred stock
    
    
    (28,054
    )
    
    
    
    
    
    
    (28,054
    )
    
    
    Cumulative dividends on Series B convertible preferred stock
    
    
    (46
    )
    
    
    (168
    )
    
    
    (382
    )
    
    
    (504
    )Income allocable to participating preferred securities
    
    
    
    
    
    
    
    
    
    
    (1,129
    )
    
    
    Pro forma net loss available to common stockholders
    
    $
    (28,494
    )
    
    $
    (319
    )
    
    $
    (28,271
    )
    
    $
    (1,232
    )Net income (loss) per share as reported:Basic
    
    $
    (1.91
    )
    
    $
    0.01
    
    
    $
    (4.39
    )
    
    $
    0.05Diluted
    
    $
    (1.91
    )
    
    $
    0.01
    
    
    $
    (4.39
    )
    
    $
    0.05Pro forma loss per share:Basic
    
    $
    (2.01
    )
    
    $
    (0.16
    )
    
    $
    (4.65
    )
    
    $
    (0.60
    )Diluted
    
    $
    (2.01
    )
    
    $
    (0.16
    )
    
    $
    (4.65
    )
    
    $
    (0.60
    )
 Note 3  Sale of Custom Research Business: We entered into an asset purchase agreement (the Asset Purchase
Agreement) to sell the assets of our custom research business (the Custom
Research Business) to Taylor Nelson Sofres Operations, Inc. (TNSO), which
was completed on January 31, 2002. For the sale, we received approximately
$2,000,000 at closing and an additional $600,000 during 2003, when certain
conditions in the Asset Purchase Agreement were met. The sale of the Custom
Research Business included the conveyance of 19 full-time employees, all
contracts of the Custom Research Business and a sublease of certain office
space. Further, we gave up our right to perform custom research for end-user
clients for a period of three years. Contemporaneously with the execution of the Asset Purchase Agreement, we
entered into an Alliance, License and Supply Agreement (the Alliance
Agreement) with Taylor Nelson Sofres Intersearch (TNSI), an affiliate of
TNSO, originally scheduled to expire on January 30, 2007. During the term of
the Alliance Agreement, TNSI was required to allow us to service substantially
all of its U.S.-based custom marketing research and Internet sample
requirements, with a contractual minimum of $200,000 per month of qualifying
revenue (as defined in the Alliance Agreement) from purchases of sample and
other services in the first year, increasing to a minimum of $300,000 per month
in the second year, for a total of $5.4 million in guaranteed payments over the
first two years. The Alliance Agreement also specified that no payments would
be made for the first three months services in 2002. Because we were required
to provide the services, we treated $600,000 of the cash received upon sale of
the Custom Research Business as an advance deposit on the first three months of
services under the Alliance Agreement. Accordingly, we viewed the total
contractual payments for the Alliance Agreement to be approximately $6.0
million. In December 2003, the minimum purchases, as required under the
Alliance Agreement, were satisfied by TNSI. 8




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##### Table of Contents



We determined that the two agreements with TNSO and TNSI constituted a
multiple element arrangement in which the stipulated proceeds from the sale,
and the stipulated guaranteed payments in the Alliance Agreement, are required
to be allocated between the sale transaction and the Alliance Agreement. We
obtained an independent valuation of the Custom Research Business sold and the
Alliance Agreement. We also compared the pricing in the Alliance Agreement to
that of similarly situated customers using the guidance in EITF 00-21. In
determining the most appropriate allocation of fair value, we weighted most
significantly the value of our research services sold separately to these
customers based upon the fact that our prices for services to third parties are
more objective and verifiable than estimating the value of the business
disposed of. Accordingly, at the time, we determined that the fair value of the
future services amounted to approximately $5.6 million. The $400,000 difference
between the contractual amount of $6.0 million and the fair value of the
services of $5.6 million was recorded as a contract asset upon sale of the
Custom Research Business and the simultaneous signing of the Alliance
Agreement. This asset was amortized against revenue on a straight-line basis,
which is substantially similar to the pattern in which the services were
provided. Therefore, $17,000 and $150,000 was amortized during the nine months
ended September 30, 2004 and 2003, respectively. We recorded a pre-tax gain on
the sale of the Custom Research Business in the amount of $1.5 million and
$600,000 in year ended December 31, 2002 and 2003, respectively, as a result of
this transaction. The $600,000 gain was recorded in 2003, when the associated
contingencies lapsed and the cash was received, which is included in other
income (expense) in the accompanying statement of operations. On November 26, 2003, we and TNSI amended the Alliance Agreement to
provide that: the term would expire on December 31, 2006, with no automatic
renewal rights; that we would be allowed to sell Internet data collection
services to end-users; and that during the term of the Alliance Agreement, TNSI
and NFO Worldgroup, Inc (NFO), which Taylor Nelson Sofres plc, the parent
company of TNSO, had acquired in 2003, would provide us with an opportunity to
bid on substantially all of TNSI and NFOs third-party U.S.-based Internet
consumer sample business. Note 4  Prepaid expenses and other current assets: Prepaid expenses and other current assets consisted of the following at
September 30, 2004 and December 31, 2003 ($ in thousands): September 30,
    
    December 31,2004
    
    2003Prepaid expenses
    
    $
    598
    
    
    $
    350Prepaid insurance
    
    
    533
    
    
    
    5Other non-trade receivables
    
    
    11
    
    
    
    28Deferred project costs
    
    
    143
    
    
    
    68Contract asset (Note 3)
    
    
    
    
    
    
    17Other
    
    
    182
    
    
    
    30$
    1,467
    
    
    $
    498
 In an effort to manage the additional risks of being a public company, we
increased our insurance coverage, contemporaneously with the completion of the
initial public offering. 9




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##### Table of Contents



Note 5  Property and Equipment, net: Property and equipment, net consisted of the following at September 30,
2004 and December 31, 2003 ($ in thousands): EstimatedUseful
    
    September 30,
    
    December 31,Life-Years
    
    2004
    
    2003Computer and data processing equipment
    
    
    3 - 5
    
    
    $
    6,740
    
    
    $
    5,423Leasehold improvements
    
    
    2 - 7
    *
    
    
    1,426
    
    
    
    1,366Furniture and fixtures
    
    
    7
    
    
    
    1,485
    
    
    
    1,097Telephone system
    
    
    5
    
    
    
    813
    
    
    
    281Automobiles
    
    
    4
    
    
    
    88
    
    
    
    8810,552
    
    
    
    8,255Less: Accumulated depreciation
    
    
    
    
    
    
    (6,680
    )
    
    
    (5,835
    )Property and equipment, net
    
    
    
    
    
    $
    3,872
    
    
    $
    2,420
    Depreciation expense amounted to $851,000 and $746,000 for the nine months
ended September 30, 2004 and 2003, respectively, including amounts recorded
under capital leases. Included in property and equipment above are assets acquired under capital
leases, which are summarized below at September 30, 2004 and December 31, 2003
($ in thousands): September 30,
    
    December 31,2004
    
    2003Computer and data processing equipment
    
    $
    3,861
    
    
    $
    3,030Furniture and fixtures
    
    
    947
    
    
    
    947Telephone system
    
    
    762
    
    
    
    241Automobile
    
    
    58
    
    
    
    585,628
    
    
    
    4,276Accumulated depreciation
    
    
    (3,509
    )
    
    
    (3,024
    )Assets under capital leases, net
    
    $
    2,119
    
    
    $
    1,252
 Note 6  Other intangible assets, net: Other intangible assets consists of the following at September 30, 2004
and December 31, 2003 ($ in thousands): EstimatedUseful
    
    September 30,
    
    December 31,Life-Years
    
    2004
    
    2003Internal use software
    
    
    2
    
    
    $
    2,273
    
    
    $
    2,047Panel members (fully amortized at December 31,
2003)*
    
    
    4
    
    
    
    712
    
    
    
    7122,985
    
    
    
    2,759Less: Accumulated amortization
    
    
    
    
    
    
    (2,723
    )
    
    
    (2,448
    )Other intangible assets, net
    
    
    
    
    
    $
    262
    
    
    $
    311
    10




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##### Table of Contents



Amortization of internal use software amounted to $275,000 and $204,000
for the nine months ended September 30, 2004 and 2003, respectively, which is
included in cost of revenues in the accompanying statement of operations.
Amortization of other intangible assets (excluding internal use software)
amounted to zero and $66,000 for the nine months ended September 30, 2004 and
2003, respectively. Note 7  Accrued expenses and other current liabilities: Accrued expenses and other current liabilities consisted of the following
at September 30, 2004 and December 31, 2003 ($ in thousands): September 30,
    
    December 31,2004
    
    2003Accrued payroll and commissions
    
    $
    1,376
    
    
    $
    1,499Panelist incentives
    
    
    835
    
    
    
    1,118Accrued panel costs
    
    
    674
    
    
    
    214Other
    
    
    1,532
    
    
    
    1,748$
    4,417
    
    
    $
    4,579
 For the nine months ended September 30, 2004 and 2003, we reversed
panelist incentives accrual of $243,000 and $191,000, respectively, for the
expirations of the incentives. We have arrangements with Microsoft Corporation through Microsoft Network
(MSN). Through these arrangements, we pay MSN for network traffic routed to
our website where participants respond to our surveys. We also incur a fee to
MSN for surveys completed and delivered to clients. Fees for first time traffic
routed to our website through MSN, which are included in panel acquisition
expense, amounted to $111,000 and $1.1 million for the nine months ended
September 30, 2004 and 2003, respectively. In 2003, MSN began charging us fees
for surveys completed and delivered through MSN referrals. Such fees for
completed surveys, which are included in cost of revenues, amounted to $633,000
and $21,000, respectively for the nine months ended September 30, 2004 and
2003. Note 8  Related Parties: Notes receivable from Stockholder In May 1999, Hugh O. Davis, one of our executive officers, borrowed
$75,000 from us in order to purchase shares of our common stock. In connection
with the loan, Mr. Davis executed and delivered to us (i) a promissory note
maturing on May 17, 2004 in the principal amount of $75,000, with a compounding
annual interest rate of 5.3% and (ii) a pledge agreement under which he pledged
as collateral for the loan all of his shares of our stock and any cash or
securities received in respect of such securities. In connection with our sale
of stock to Greenfield Holdings and other existing stockholders in March 2001,
Mr. Davis borrowed an additional $56,000 from us in order to purchase
securities from Greenfield Holdings (which securities were later exchanged for
shares of our Series A Preferred Stock in connection with our recapitalization
in December 2002). In connection with the second loan, (i) Mr. Davis executed
and delivered to us a promissory note maturing on May 17, 2004 in the principal
amount of $56,000 with a compounding annual interest rate of 8% and (ii) the
pledge agreement was amended to include the additional securities acquired by
Mr. Davis as collateral for the loans. Mr. Davis failed to repay the notes on
May 17, 2004. We provided Mr. Davis with a notice of default and, on May 23,
2004, we repossessed a portion of the shares pledged as collateral pursuant to
the pledge agreement with a value equal to the amounts due under the notes,
including interest thereon. The repossession of the shares was recorded as
treasury stock, offsetting the note receivable from stockholder. Since March
2001, we have not modified the terms of these arrangements with Mr. Davis. 11




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##### Table of Contents



Note 9  Revolving Credit Facility: We have a credit facility (the SVB Credit Facility) with Silicon Valley
Bank (SVB) in the amount of $1,875,000 at September 30, 2004 and December 31,
2003 based upon an 80% advance rate on eligible accounts receivable (the
Borrowing Base). The SVB Credit Facility bears interest at a rate equal to
the prime rate plus 1%, plus a collateral handling fee of 0.375% of the monthly
average daily financed receivable balance. The SVB Credit Facility is
collateralized by our general assets, matures on August 22, 2005 and is subject
to a covenant, which requires us to achieve certain performance targets each
quarter that the SVB Credit Facility is outstanding. Although we had
outstanding borrowings during each period, we did not have an outstanding
balance at September 30, 2004 or December 31, 2003. In addition, we incurred
interest expense in the amount of $82,000 and $103,000, respectively, for each
of the nine months ended September 30, 2004 and 2003 associated with the SVB
Credit Facility. On July 15, 2004, we amended the SVB Credit Facility to allow us to
maintain our primary depository account outside of SVB until October 15, 2004.
On October 15, 2004, we further amended the SVB Credit Facility to convert our
previously monthly-based performance covenants to quarterly-based covenants,
and to allow us to maintain our primary depository account outside of SVB until
December 31, 2004, when a portion of our excess funds will be deposited with
SVB, the amount of which will later be determined between us and SVB. Prior to
these amendments, we were required to maintain our primary depository account
with SVB. Upon the completion of our initial public offering, we deposited the
net proceeds in a cash management account maintained outside of SVB. Note 10  Earnings per share: Net income (loss) per share.We report net income (loss) per share in
accordance with Statement of Financial Accounting Standards No. 128 Earnings
per Share (SFAS 128). Under SFAS 128, basic earnings per share, which
excludes dilution, is computed by dividing net income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could be exercised or converted into common shares, and is
computed by dividing net income or loss available to common stockholders by the
weighted average of common shares outstanding plus the dilutive potential
common shares. Diluted earnings per share includes in-the-money stock options
and warrants using the treasury stock method and also includes the assumed
conversion of preferred stock using the if-converted method if dilutive. Due to
the participation features of our Series A, Series B and Series C-1 Preferred
Stock, basic and diluted earnings per share has been calculated using the
two-class method, which is an earnings allocation formula that determines
earnings per share for each class of common stock and participating security
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. In loss periods, no amounts are allocated to the
participating securities. During a loss period, the assumed exercise of
in-the-money stock options and warrants and the conversion of convertible
preferred stock noted above has an anti-dilutive effect and therefore, these
instruments are excluded from the computation of dilutive earnings per share.
Weighted average potential common shares of 12,000 and 24,000, respectively for
the three months ended September 30, 2004 and 2003 and 9,000 and 24,000,
respectively for the nine months ended September 30, 2004 and 2003 were
excluded from the computation of diluted earnings per share as they would be
anti-dilutive. Net loss available to common stockholders for the three and nine
months ended September 30, 2004 includes a $28.1 million charge to common
stockholders related to the liquidation preference of our Series B. This
charge for the liquidation preference reflects the difference between the
carrying value of the Series B and the value received by the Series B
stockholders when the Series B was converted to common stock at the initial
public offering. 12




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##### Table of Contents



The following is a reconciliation of basic number of common shares
outstanding to diluted number of common and common stock equivalent shares
outstanding (in thousands): Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Weighted average number of common and potential common shares
outstanding:Basic number of common shares outstanding
    
    
    14,145
    
    
    
    2,054
    
    
    
    6,084
    
    
    
    2,054Dilutive effect of stock option grants
    
    
    795
    
    
    
    249
    
    
    
    686
    
    
    
    209Dilutive effect of warrants
    
    
    29
    
    
    
    136
    
    
    
    29
    
    
    
    Diluted number of common and potential common shares outstanding
    
    
    14,969
    
    
    
    2,439
    
    
    
    6,799
    
    
    
    2,263
 Note 11  Preferred
Stock: Immediately
prior to the initial public offering, the Company had four classes of
preferred stock issued and outstanding. The Series A Convertible
Participating Preferred Stock (Series A), the
Series B Convertible Preferred Stock
(Series B), the Series C-1 Convertible
Participating Preferred Stock (Series C-1), and the
Series C-2 Redeemable Non-Voting Preferred Stock
(Series C-2). In July 2004, upon completion of the
initial public offering the Series A converted into
2,915,559 shares of common stock; the shares of Series B
were redeemed for a combination of cash and common stock. In
accordance with EITF topic D-42, The Effect of the Calculation of
Earnings per Share for the Redemption or Induced Conversion of
Preferred Stock, $28.1 million was recognized as a charge
against income available to common shareholders, representing the
excess of the fair value of the consideration given to extinguish the
Series B preferred shares (cash and common stock) over the
carrying value (plus accrued and unpaid dividends) of the preferred
shares at the date of redemption; the Series C-1 was converted
into 5,330,526 shares of common stock; and the Series C-2
was redeemed for approximately $2.1 million. Note 12  Commitments and Contingencies:  Legal Contingencies: From time to time, in the ordinary course of business, we are subject to
legal proceedings. While it is not possible to determine the ultimate outcome
of such matters, it is managements opinion that the resolution of any pending
issues will not have a material adverse effect on our consolidated financial
position, cash flows or results of operations. NOTE 13  Subsequent
Events: OpinionSurveys.com Panel Acquisition.On October 21 2004, we completed the
purchase of certain Internet-based survey panel assets from The Dohring Company
(Dohring) for a total purchase price of $3.0 million in cash. The assets we
acquired in this acquisition include the complete OpinionSurveys.com panel,
certain profile information contained in its database, title to the domain
names OpinionSurveys.com and OpinionSurvey.com, as well as certain
intellectual property associated with the OpinionSurveys.com panel. The
acquisition was effected pursuant to an Asset Purchase Agreement by and among
us, Dohring and Doug C. Dohring dated as of August 18, 2004. Amendment
to SVB Credit Facility. In July 2004, the Company amended the SVB
Credit Facility to allow the Company to maintain its primary
depositary account outside of SVB until October 15, 2004. On
October 15, 2004, the Company further amended the SVB Credit
Facility to convert its previously monthly-based performance
covenants to quarterly-based covenants, and to allow the Company to
maintain its primary depositary account outside of SVB until
December 31, 2004, when a portion of our excess funds will be
deposited with SVB, the amount of which will later be determined
between the Company and SVB. 13




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##### Table of Contents



Item 2. 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this quarterly
report. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed in the section entitled Risk Factors in our
prospectus filed with the Securities and Exchange Commission on July 16, 2004 pursuant to Rule424(b)(4)of the Securities
Act and in thisForm 10-Q. See Cautionary Note Regarding Forward-Looking
Statements. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
conformity with GAAP in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. On an on-going basis, we
evaluate our estimates and judgments. We base our estimates on historical
experience, independent instructions, known trends and events and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. For further information regarding our critical accounting policies, please
refer to the Managements Discussion and Analysis section of our final
prospectus filed with the SEC on July 16, 2004 pursuant to Rule 424(b)(4).
There have been no material changes during the nine months ended September 30,
2004. Results of Operations Quarter
Ended September 30, 2004 Versus Quarter Ended September 30,
2003
Nine Months Ended September 30, 2004 Versus Nine Months Ended September
30, 2003 Net Revenues.Net revenues for the three months ended September 30, 2004
were $12.0 million, compared to $7.0 million for the three months ended
September 30, 2003, an increase of $5.0 million, or 70.5%. Net revenues for the
nine months ended September 30, 2004 were $30.9 million, compared to $17.6
million for the nine months ended September 30, 2003, an increase of $13.3
million, or 75.5%. Net revenues increased due to an increase in the number of
survey projects completed. This increase was seen primarily in the full-service
and sample-only solutions and, to a lesser extent, in tracking studies. In
addition, increased demand for our services was driven by market factors,
including the need for customers to improve profitability by using less costly
Internet-based marketing research data and the impact of the Do Not Call
registry on marketing research firms, which had previously relied heavily on
telephone-based data collection methods. We believe that the revenue growth
from our Internet survey solutions will continue to be strong in the remainder
of 2004, although sequential quarterly year over year growth rates may decline. 14




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##### Table of Contents



Gross Profit.Gross profit for the three months ended September 30, 2004
was $9.5 million, compared to $4.5 million for the three months ended September
30, 2003, an increase of $5.0 million, or 112.3%. Gross profit for the three
months ended September 30, 2004 was 79.1% of net revenues, compared to 63.5%
for the three months ended September 30, 2003. Gross profit for the nine months
ended September 30, 2004 was $23.4 million, compared to $11.5 million for the
nine months ended September 30, 2003, an increase of $11.8 million, or 102.7%.
Gross profit for the nine months ended September 30, 2004 was 75.7% of net
revenues, compared to 65.5% for the nine months ended
September 30, 2003. Due to the more productive use of panelist incentives
as a result of a
shift from cash incentive payments to a prized-based program, the
gross margin was positively impacted by approximately 11.5 percentage
points for the three months ended September 30, 2004 and by
approximately 5.5 percentage points for the nine months ended
September 30, 2004. Additionally,
gross margin increased due primarily to a decline in costs related to direct
project personnel as a result of our India expansion, whereby we moved a
significant portion of survey production and data processing to our India
facility during 2003. The shift to our India facility positively
impacted our gross margin by approximately 4.4 percentage points for
the three months ended September 30, 2004 and by approximately
5.2 percentage points for the nine months ended September 30,
2004. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the three months ended September 30, 2004 were $5.9
million, compared to $3.2 million for the three months ended September 30,
2003, an increase of $2.7 million, or 81.8%. Selling, general and
administrative expenses for the nine months ended September 30, 2004 were $15.2
million, compared to $8.1 million for the nine months ended September 30, 2003,
an increase of $7.1 million, or 87.6%. Selling expenses, primarily personnel
costs and related commissions, increased approximately $350,000 and $1.9
million, respectively, for the three and nine months ended September 30, 2004
as a result of hiring new sales and sales-support personnel in order to better
promote our products and services. Personnel costs associated with selling, general and administrative expenses increased approximately $787,000 and $1.8 million,
respectively, for the three and nine months ended September 30, 2004 as a
result of hiring senior executives in panel and marketing management, staffing
required in finance and administration to operate as a public company
and the addition of personnel in panel and administration in our
operations in India. Advertising and promotion increased approximately $240,000 and
$630,000, respectively, in the three and nine months ended September 30, 2004
as we increased our spending in direct mail, print and web advertising and
redesigned our website, logo and collateral marketing materials. General and
administrative expenses, excluding personnel costs, increased approximately
$1.3 million and $2.8 million, respectively, in the three and nine months ended
September 30, 2004 primarily as a result of public company expenses,
recruitment fees for personnel additions, office expansion in India, Europe and
Canada, as well as other professional fees incurred to support our revenue
growth and international expansion. Selling, general and administrative
expenses as a percentage of net revenues increased to 49.0% for
the three months ended September 30, 2004 from 45.9% of the net
revenue for the three months ended September 30, 2003, and
increased to 49.4% for the nine months ended September 30, 2004 from 46.2% of
net revenue for the nine months ended September 30, 2003. We expect selling, general
and administrative expenses to remain relatively consistent as a percentage of
revenues during the remainder of 2004 and expect it to decline as a percentage
of revenues through 2005, as we realize the benefit of low incremental variable
costs associated with future revenue growth. Panel Acquisition Expenses.Panel acquisition expenses were $599,000 for
the three months ended September 30, 2004, compared to $311,000 for the three
months ended September 30, 2003, an increase of $288,000, or 92.6%. Panel
acquisition expenses were $1.8 million for the nine months ended September 30,
2004, compared to $1.1 million for the nine months ended September 30, 2003, an
increase of $713,000, or 67.4%. Panel acquisition expenses increased as a
result of our continuing efforts to expand and diversify our panel, primarily
in Europe and Canada, where we incurred approximately $277,000 and $722,000 of
additional panel acquisition costs for the three and nine months ended
September 30, 2004, respectively. Our panel recruiting through MSN has declined
significantly in the three and nine months ended September 30, 2004 compared to
the three and nine months ended September 30, 2003, primarily as a result of
our continuing efforts to expand the number of our panelist recruiting sources
and to find lower cost alternatives to recruiting through MSN. Depreciation and Amortization Expenses.Depreciation and amortization
expenses for the three months ended September 30, 2004 were $388,000, compared
to $279,000 for the three months ended September 30, 2003, an increase of
$109,000, or 39.1%. Depreciation and amortization expenses for the nine months
ended September 30, 2004 were $851,000, compared to $812,000 for the nine
months ended September 30, 2003, an increase of $39,000, or 4.8%. This increase
in depreciation and amortization expense occurred as a result of the 2004
capital expenditure plan associated with retooling our infrastructure, as well
as the build out of our India facility. 15




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Interest Income (Expense), Net.Net interest income for the three months
ended September 30, 2004 was $36,000, compared to net interest expense of
$99,000 for the three months ended September 30, 2003. Net interest expense for
the nine months ended September 30, 2004 was $94,000, compared to $338,000 for
the nine months ended September 30, 2003, a decrease of $244,000, or 72.2%. The
decreases in interest expense were due primarily to lower debt levels
outstanding during the 2004 period as well as interest earned on invested
proceeds from our initial public offering. Related Party Interest Expense, Net.Related party interest
expense for the three months ended September 30, 2004 was $1.1 million,
compared to related party interest expense of $29,000 for the three months
ended September 30, 2003. Related party interest expense for the nine months
ended September 30, 2004 was $1.1 million, compared to related party interest
expense of $27,000 for the nine months ended September 30, 2003. The increase
in the related party interest expense was due to the acceleration of
unamortized debt discount associated with our Series C-2 Redeemable Non-Voting
Preferred Stock, par value $0.0001 (Series C-2), which was redeemed on July
25, 2004 using proceeds from our initial public offering. Other Income (Expense), Net.Other expense for the three months ended
September 30, 2004 was $10,000, compared to zero for the three months ended
September 30, 2003. Other expense for the nine months ended September 30, 2004
was $26,000, compared to other income of $600,000 for the nine months ended
September 30, 2003. Other expense for the three and nine months ended September
30, 2004 related primarily to the effects of currency translation associated
with our operations in India, Europe and Canada. Other income for the nine
months ended September 30, 2003 related to the contingent gain on the sale of
our Custom Research Business, which was completed in January 2002. The
contingent gain could not be recognized until January 2003, when certain
conditions were met and the cash was collected. For a further discussion of the
sale of our Custom Research Business, see Note 3 to our consolidated financial
statements, included elsewhere in this quarterly report. Provision for Income
Taxes.We recorded an income tax provision for the
three and nine months ended September 30, 2004 of $51,000 and $193,000,
respectively, compared to $17,000 and $80,000, respectively, for the three and
nine months ended September 30, 2003. Our effective tax rate was 3.9% and 5.5%,
respectively, for the three and nine months ended September 30, 2004, compared
to 4.8% and 6.1%, respectively, for the three and nine months ended September
30, 2003. The tax provision was primarily related to federal and state taxes
that could not be offset by net operating loss carry-forwards. We
establish valuation allowances in accordance with the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(FAS 109). At September 30, 2004 and
December 31, 2003, the valuation allowance fully offset the
gross deferred tax asset. Because we were in a cumulative
loss position for the three year period ending September 30,
2004, we do not believe there is sufficient evidence to
release any of our valuation allowance as of
September 30, 2004, however, we will continue to
reassess our need for a valuation allowance in the fourth quarter and
in 2005. As
a result of this reassessment, we may reduce our valuation
allowance when we believe we are more likely than not to
realize such deferred tax assets. Net Income.Our net income for the three and nine months ended September
30, 2004 was $1.2 million and $3.3 million, respectively, compared to $335,000
and $1.2 million, respectively, for the three and nine months ended September
30, 2003. The increase in net income was primarily the result of increased
revenues partially offset by increased selling, general and administrative
expenses and panel acquisition expenses, and acceleration of the unamortized
debt discount on our Series C-2 as more fully described above. Net income per
common share includes the effects of using the two-class method, which
allocates earnings among common stock and participating preferred securities.
Net loss available to common stockholders for the three and nine months ended
September 30, 2004 includes a $28.1 million charge to common stockholders
related to our Series B Convertible Participating Preferred Stock (Series B)
liquidation preference, which arose as a result of our initial public offering.
Net loss available to common stockholders for the three and nine months ended
September 30, 2004 was $1.91 and $4.39, respectively, for basic and diluted, as
compared to net income per share of $0.01 and $0.05, respectively, for basic
and diluted for the three and nine months ended September 30, 2003. Excluding
the $28.1 million charge for our Series B liquidation preference, net income
available to common stockholders would have been $1.1 million and $1.4 million,
respectively, for the three and nine months ended September 30, 2004 and net
income per common share would have been $0.08 and $0.22, respectively, for
basic and $0.07 and $0.20, respectively, for diluted for the three and nine
months ended September 30, 2004. 16




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Liquidity and Capital Resources Since our inception, we have financed our operations primarily through
sales of equity and debt securities, from borrowings under our credit
facilities, from the proceeds from the sale of our Custom Research Business
and, more recently, through cash flows from operations. We have received a
total of $43.0 million from private offerings of our equity and debt
securities. In July 2004, we completed our initial public offering of shares
of our common stock at a public offering price of $13.00 per share, and raised
approximately $34.8 million in net proceeds after payment of underwriters
commissions of $3.6 million, a mandatory conversion and dividend payment of
approximately $9.4 million to the holders of our Series B, a mandatory
redemption of all outstanding shares of our Series C-2 for approximately $2.1
million and costs associated with our initial public offering of
shares of our common stock amounting to
approximately $2.1 million. At September 30, 2004, we had approximately $38.4
million in cash and cash equivalents on hand. Cash provided by
operations for the nine months ended September 30, 2004
was $2.1 million, compared to $2.6 million for the nine months ended September
30, 2003. The decrease in cash flow from operations in the 2004 period was
primarily attributable to an increase in our accounts receivable days sales
outstanding, which was primarily due to our largest client in 2003, TNSI,
moving from terms which required prepayment for services in 2003 to
standard
commercial terms in 2004. For the three months ended September 30, 2003, TNSI
represented 14% of total revenues with effectively zero days sales outstanding.
Days sales outstanding was further affected by the growth of our
revenues associated with
tracking studies, in which we collect data monthly over the course of a year. We
generally recognize revenue from our tracking studies on a monthly basis as the
data is collected, but invoice our customers on a quarterly basis. This
effectively increases our days sales outstanding for our tracking studies as
compared to our other survey solutions. Cash provided by operations was further
decreased due to the net reduction in accounts payable, accrued expenses and
other current liabilities. These decreases were significantly, but not
completely, offset by our increased profitability. Cash used by investing activities was $1.2 million for the nine months
ended September 30, 2004, compared to cash provided by investing activities of
$341,000 for the nine months ended September 30, 2003. This decrease of $1.5
million was due to our capital expenditure program initiated in 2004, which
accounted for approximately $900,000, as well as a one-time $600,000 contingent
gain on sale of our Custom Research Business in 2003. Cash provided by financing activities was $33.8 million for the nine
months ended September 30, 2004, compared to cash used by financing activities
of $2.1 million for the nine months ended September 30, 2003. The difference
was primarily the result of the net proceeds from our initial public offering,
which was completed in July 2004. Our working capital at September 30, 2004 was $39.9 million, compared to
$1.0 million at December 31, 2003, an increase of $38.9 million. The increase
in working capital was primarily due to the net proceeds from our July 2004
initial public offering. Excluding the effect of the increase in
cash, working capital increases resulted from increased accounts
receivable, prepaid expenses and other current assets. The
increase in accounts receivable resulted  from our additional
revenues and the increase in our days sales outstanding as described
above. Although our receivables and corresponding days sales
outstanding increased, a significant portion of this increase
occurred from business generated in September, which resulted in
large accounts receivable balances remaining current as of
September 30, 2004. We believe that based on our history of
insignificant bad debts and our improved accounts
receivable aging, the allowances as recorded are adequate to cover
our estimated potential future bad debts. The increase in prepaid
expenses and other current assets was due primarily to increased
insurance coverage, which we obtained to manage the additional risk of
operating as a public company, to a deposit that was paid to a
specific vendor and to increased deferred project costs. These
increases in working capital were partially offset by an increase in
accounts payable, which resulted from additional expenses incurred
attributable to our increased personnel and costs related thereto;
and to expanded international operations, including overhead costs. We have maintained a banking relationship with Silicon Valley Bank (SVB)
since September 2001. In August 2003, we amended our credit facility with SVB
to extend the maturity date until August 2005 and reduce the applicable
interest rate. This credit facility allows for borrowings of up to $1.9
million, based upon an 80% advance rate on eligible accounts receivable (the
Borrowing Base), and bears interest at a rate equal to the prime rate plus
1%, plus a collateral handling fee of 0.375% of the monthly average daily
financed receivable balance. The credit facility is collateralized by a pledge
of our general assets and contains a covenant that requires us to achieve
EBITDA (as defined in the credit facility) of $1.00 or more during each quarter
that the facility is outstanding. In October 2003, we repaid the entire
outstanding balance under the facility, and at December 31, 2003 the entire
amount was available for borrowing, subject to the sufficiency of the Borrowing
Base. On September 30, 2004, the Borrowing Base was sufficient to allow us to
borrow the entire amount available under the credit facility, although we had
no outstanding borrowings under the credit facility. Interest on the facility
is payable monthly, and the entire balance of the facility, including
principal, interest and unpaid charges, if any, is payable on August 22, 2005.
In April 2004, we amended the credit facility to allow us to incur purchase
money obligations, including capital leases, of up to $2,250,000 in the
aggregate. In July 2004, we amended the credit facility again to allow us to
maintain our primary deposit account outside of SVB through October 15, 2004.
Upon the completion of our initial public offering, we deposited the net
proceeds in a cash management account maintained outside of SVB. On 17




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October 15, 2004, we further
amended the credit facility to convert our previously monthly-based
performance covenants to quarterly-based covenants, and to allow us to maintain
our primary depository account outside of SVB until December 31, 2004, when a
portion of our excess funds will be deposited with SVB, the amount of which
will later be determined between us and SVB. We also maintain an ongoing relationship with Somerset Capital Group Ltd.
(Somerset Capital), a leasing company, to finance the acquisition of
equipment, software and office furniture pursuant to leases, which we have
recorded as capital leases. While we do not have a firm commitment from
Somerset Capital to provide additional financing, Somerset Capital has
indicated that it intends to finance our budgeted capital expenditures for 2004
within the United States if we request it to do so. In the event that Somerset
Capital declined to continue to finance our capital expenditure requirements,
we believe that alternative sources of such funding would be available to us to
satisfy such needs. At September 30, 2004 and December 31, 2003, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such,
we are not exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in such relationships. We have an agreement with MSN under which we pay fees for panelists
recruited via the MSN website, plus fees associated with surveys taken by these
panelists. Our agreement with MSN, as amended, required us to make guaranteed
quarterly payments, which would be credited against recruiting and survey fees.
Our obligation to make these guaranteed payments has lapsed but we continue to
be obligated to make current payments to MSN for panelists they recruit and for
surveys taken by MSN recruited panelists. In 2004 there has been a continued
decline in panel recruitment through MSN and a decline in our use of MSN
recruited panelists, resulting in lower payments to MSN in 2004 as compared to
2003, and we anticipate this decline to continue over the next twelve months.
We anticipate that any increased liquidity associated with this decreasing
reliance on MSN and MSN panelists will be offset by additional expenditures
that we make to gain access to other panel recruiting sources. In the nine months ended September 30, 2004, we incurred capital
expenditures of $761,000 and $1.8 million related to India and North America,
respectively. For the remainder of fiscal 2004, we expect capital expenditures to total
approximately $2.8 million, including approximately $1.0 million for the
construction of our operations facility in India and $1.8 million for our
operations in North America. In the United States, capital expenditures were
applied primarily to upgrade computer servers and networking equipment to
manage increased Internet-based survey production and data collection, to
upgrade personal computers for employees and to purchase new Internet telephony
equipment to facilitate international communications. These capital
expenditures will be funded by a combination of capital leases from Somerset
Capital and cash flow from operations. In India, our 2004 capital expenditures
consisted primarily of leasehold improvements, office furniture, computer
equipment, Internet telephony equipment and other costs associated with
building our Indian facility. These expenditures were funded from our cash flow
from operations and other available financing sources, including our credit
facility. In addition, costs we have incurred and may incur in the development,
enhancement and integration of software programs, technologies and
methodologies, in order to keep pace with technological changes and enhance our
Internet survey solutions, have and will also be funded from our cash flow from
operations and other available financing sources, including our credit
facility. 18




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There were no material changes outside the ordinary course of business in
our contractual obligations during the nine months ending September 30, 2004,
except for the Series C-2 redemption payment and the Series B conversion and
dividend payment made in connection with our initial public offering. The
following table summarizes our contractual obligations at September 30, 2004
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods: Years Ended December 31,Total atSeptember
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 and30, 2004
    
    2004(1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter($ in thousands)Contractual obligations:Loans payable
    
    $
    23
    
    
    $
    1
    
    
    $
    5
    
    
    $
    6
    
    
    $
    6
    
    
    $
    5
    
    
    $
    Capital lease obligations
    
    
    2,034
    
    
    
    357
    
    
    
    948
    
    
    
    500
    
    
    
    229
    
    
    
    
    
    
    
    Non-cancelable operating lease obligations
    
    
    7,365
    
    
    
    414
    
    
    
    1,593
    
    
    
    1,450
    
    
    
    1,378
    
    
    
    1,370
    
    
    
    1,160Total contractual cash obligations
    
    $
    9,422
    
    
    $
    772
    
    
    $
    2,546
    
    
    $
    1,956
    
    
    $
    1,613
    
    
    $
    1,375
    
    
    $
    1,160
   (1)
    
    Includes only the remaining three months of the year ending
December 31, 2004. Based on our current level of operations and anticipated growth, we
believe that our cash generated from operations, amounts available under our
credit facility and future capital leasing arrangements with Somerset Capital,
together with the net proceeds that we received from our initial public
offering, will be adequate to finance our working capital and other capital
expenditure requirements through the foreseeable future, although no assurance
can be given in this regard. Poor financial results, unanticipated expenses,
acquisitions of technologies, businesses or assets or strategic investments
could give rise to additional financing requirements sooner than we expect.
There can be no assurance that equity or debt financing will be available to us
when we need it or, if available, that the terms will be satisfactory to us and
not dilutive to our then-current stockholders. Risk Factors You should carefully consider the risks described below and elsewhere in
this report, which could materially and adversely affect our business, results
of operations or financial condition. If any of the following risks actually
occurs, the market price of our common stock would likely decline. If we are unable to maintain the size or demographic composition of the
Greenfield Online panel, our clients may stop using our products and services. The commercial viability of our marketing research data and our overall
business is dependent on our ability to attract and maintain active panelists
and ensure optimal panel composition to accommodate a broad variety of
marketing research requests. There is currently no historical benchmark by
which to predict the optimal size of research panels to ensure high response
rates and maximum revenue generation per panelist. If we are unable to
accurately determine or build optimal-sized panels, our current panelists may
become overused and unresponsive to our requests to participate in surveys. If
we fail to regenerate our panel with new and active panelists on a regular
basis, the size and demographic diversity of the Greenfield Online panel may
decrease and our clients may reduce or stop using our products and services,
which may lead to a decline in our revenues. If the number of panelists participating in the Greenfield Online panel
decreases, the cost of acquiring new panelists becomes excessive or the
demographic composition of our panel narrows, our ability to provide our
clients with accurate and statistically relevant information could suffer. This
risk is likely to increase as our clients needs expand, and as more
demographically diverse surveys are requested by our clients. 19




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If the rate at which our panelists respond to our surveys decreases, we may not
be able to meet our clients needs. Our panelists participate in our surveys on a voluntary basis only, and
there can be no assurance that they will continue to do so. Our ability to
maintain adequate response rates may be harmed if:  
    
    our email-based survey invitations are not received by our panelists
due to the use of spam-filtering and blocking software by individuals,
corporations and Internet service providers;  
    
    our panelists become dissatisfied with the forms of participation
incentives we offer; or  
    
    our panelists respond less frequently to our surveys, or stop
responding altogether due to excessive requests for participation from
us or other researchers. If we fail to maintain adequate response rates, we may be unable to meet
current or future demand for our products and services and our revenues may
decline. If the rate at which our panelists respond to our surveys decreases, we may be
required to expend additional funds to retain our panelists or provide
additional incentives to encourage panelist participation. In the past, the responsiveness of our panelists has been variable and a
function of the length of the surveys to be completed and the incentives
offered to our panelists in exchange for their participation. The incentives we
offer panelists to participate in surveys generally consist of the opportunity
to enter into sweepstakes and win prizes or direct cash incentives. If we are
required to increase incentives or undertake more costly campaigns to retain
our current panelists, our operating expenses may increase and our operating
income may decline. We derived approximately 25% of our total net revenues from two clients in
fiscal 2003. For the nine months ended September 30, 2004 we derived
approximately 20% of our total net revenues from our top two clients. If we
were to lose, or if there were a material reduction in business from, these
clients or our other significant clients, our net revenues might decline
substantially. In fiscal 2003, we derived approximately 25% of our total net revenues
from two clients that accounted for approximately 13% and 12%, respectively.
Either client may terminate or reduce its use of our products and services at
any time in the future. Our ten largest clients accounted for approximately
39%, of our total net revenues for the nine months ended September 30, 2004. If
we lose business from any of our top ten clients, our net revenues may decline
substantially. We may not be able to successfully compete with marketing research firms and
other potential competitors. The market for our products and services is highly competitive. We compete
for clients with other Internet-based marketing research data collection firms,
such as SPSS Service Bureau and Harris Interactive Service Bureau; firms
offering respondent-only services, such as Survey Sampling, Inc., Zing
Wireless, Inc., Ciao AG and e-Rewards, Inc.; and large marketing research
companies, such as The Kantar Group and Harris Interactive, Inc. We expect to
face intense competition in the future from other marketing research data
collection firms that develop Internet-based products and services. We also expect to face competition from other companies with access to
large databases of individuals with whom they can communicate through the
Internet, such as email service providers and Internet-based direct marketers,
as well as companies that develop and maintain a large volume of Internet
traffic on their websites, such as large Internet portals, networks and search
engines. These companies may, either alone or in alliance with other firms,
enter the Internet-based marketing research data collection market. 20




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Many of our current and potential competitors have longer operating
histories, greater brand recognition and significantly greater financial and
other resources than we do. These competitors may be able to undertake more
extensive sales and marketing campaigns offering their services, adopt more
aggressive pricing policies, and make more attractive offers to potential
employees, strategic partners, panelists and customers than we can. In
addition, these competitors and potential competitors may develop technologies
that are superior to ours, or that achieve greater market acceptance than our
own. If we do not successfully compete with these companies, we might
experience a loss of market share and reduced revenues and profitability. Consolidation in the marketing research industry may result in fewer potential
clients for us and a smaller market in general if companies with existing
Internet-based panels combine with companies without such panels. Consolidations within the marketing research industry in general and among
our clients in particular, such as the acquisition of NFO Worldgroup, Inc. by
Taylor Nelson Sofres, Plc, and the acquisition of ARBOR, Inc., by GfK-AG, could
cause us to lose business from clients that acquire companies with
Internet-based panels of their own. Similarly, our smaller clients could be
acquired by larger marketing research companies that have their own
Internet-based panel such as the recent acquisition of Wirthlin Worldwide by
Harris Interactive, Inc., and their need for our products and services could be
reduced or eliminated as a result. In either case, our net revenues would be
reduced. If our clients develop their own Internet-based panels, we may lose some or all
of their business. Some of our large clients have the financial resources and sufficient need
for Internet survey solutions that they may decide to build their own
Internet-based panels. Should some or all of these clients decide to build
their own Internet-based panels and succeed in doing so, their need for our
products and services could be reduced or eliminated. Additionally, should our
smaller clients consolidate and achieve sufficient scale, it may become
economically feasible for them to build their own Internet-based panels. If
they do so, their need for our products and services could be reduced or
eliminated. In either case, our revenues would decline. If the marketplace significantly slows its migration from traditional data
collection methods to Internet-based marketing research data collection, our
growth may slow or cease altogether. The marketplace must continue to accept the Internet as a medium for
collecting marketing research survey data and convert to Internet data
collection methodologies in order for our business to grow at the rate that we
anticipate. In addition, the success of our business depends on our ability to
develop and market Internet survey solutions that achieve broad market
acceptance and facilitate the transition from traditional data collection
methods. If the marketplace slows its migration to Internet-based data
collection products and services, we may have difficulty obtaining new clients
and our revenues could decline. If we do not keep pace with technological change, we may be unable to implement
our business strategy successfully. The marketing research data collection industry, particularly the
Internet-based marketing research data collection industry, is characterized by
intense competition, rapid new product and service developments and evolving
methodologies. To succeed, we will need to effectively develop and integrate
various software programs, technologies and methodologies required to enhance
and improve our Internet survey solutions. Any enhancements of new products or
services must meet the needs of our current and potential clients and achieve
significant market acceptance. Our success will also depend on our ability to
adapt to changing technologies by continually improving the performance
features and reliability of our products and services. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. We could also incur
substantial costs if we need to modify our products and services or
infrastructure to adapt to these changes. 21




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If we are unable to manage and support our growth effectively, we may not be
able to execute our business strategy successfully. We are rapidly expanding our international operations, but have limited
experience expanding sales and operations facilities in foreign countries. If
we fail to successfully expand our sales and marketing efforts in Europe we
will be unable to address a sizeable portion of the worldwide market for
Internet-based survey data collection and may not be able to grow our business
at the rate we anticipate. We are integrating new personnel to support our
growth, which makes it difficult to maintain our standards, controls and
procedures. Members of our senior management team will be required to devote
considerable amounts of their time and attention to this expansion, which may
reduce the time and attention they will have available to manage our operations
and pursue strategic opportunities. Our employee base has grown from 54 in February 2002 to approximately 271
as of September 30, 2004, including employees of our subsidiaries in India, the
United Kingdom and Canada. If our business continues to grow, we could be
required to hire a significant number of additional employees in the United
States and abroad. The recruiting, hiring, training and integration of a large
number of employees throughout the world will place a significant strain on our
management and operational resources. If we are unable to successfully develop,
implement, maintain and enhance our financial and accounting systems and
controls, integrate new personnel and manage expanded operations, we may not be
able to effectively manage our growth. We are concentrating a significant portion of our operational capacity in
our facility located in India and may open additional facilities elsewhere in
the world. If we fail to successfully build or maintain our operations in India
or elsewhere, we may suffer interruptions in the delivery of our products and
services to our clients. In addition, if we fail in this regard, we may be
required to relocate these international operations to the United States or
elsewhere and thereby incur higher labor costs and additional transitional
costs. If we are unable to achieve international growth of the Greenfield Online panel
or to overcome other risks of international operations, we may be unable to
conduct business on a global level. Expanding our business and the Greenfield Online panel to operate on a
global level could pose the following risks to us:  
    
    more restrictive privacy laws;  
    
    difficulty in recruiting and managing employees in foreign countries;  
    
    aversion to U.S. companies or non-domestic companies in the regions where we plan to expand;  
    
    unexpected changes in regulatory requirements;  
    
    export controls relating to encryption technology;  
    
    currency exchange rate fluctuations;  
    
    problems collecting accounts receivable and longer collection periods;  
    
    potentially adverse tax consequences;  
    
    political instability; and  
    
    Internet access restrictions. 22




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Additionally, in the process of expanding our global operations, we may
encounter more restrictive regulations and laws in Europe or elsewhere,
especially laws related to privacy rights, that could inhibit our ability to
expand the Greenfield Online panel. In particular, we self-certify to the U.S.
Department of Commerce Safe Harbor framework, which is designed to meet the
data privacy rules under the European Commissions Directive on Data Protection
and prohibits the transfer of personal data to non-European Union nations that
do not meet the European adequacy standard for privacy protection. We have
little or no control over the risks listed above and may experience some or all
of these risks. We have significant operations in India that could be limited or prohibited by
changes in the political or economic stability of India or government policies
in India or the United States. We have a substantial team of professionals in India who provide us with
data processing and other services. The development of our operations center in
India has been facilitated partly by the liberalization policies pursued by the
Indian government over the past decade. Recent elections in India have brought
a new government into power. The economic liberalization policies that have
been pursued by previous governments may not continue in the future, the rate
of economic liberalization could change or new laws and policies affecting our
business could be introduced. A significant change in Indias economic
liberalization and deregulation policies could increase our labor costs or
create new regulatory expenses for us. Also, according to the National
Foundation for American Policy, at least 36 states have introduced legislation
aimed at restricting overseas outsourcing and encouraging U.S. businesses to
keep their operations within the United States. The U.S. Senate has recently
approved an amendment that would prohibit companies from using money from
federal contracts to outsource jobs overseas, and would prohibit state contract
work from being performed overseas with money received from federal grants. If
these or similar laws or regulations are enacted, our ability to continue
overseas operations could be harmed and our competitive position would be
damaged. Potential acquisitions or investments in other companies may have a negative
impact on our business and our stock price. As part of our strategy to expand the Greenfield Online panel, our
technology infrastructure and products and services, we may consider acquiring
or making investments in complementary businesses, services, products or
technologies as appropriate opportunities arise, such as our acquisition of
OpinionSurveys.com. The risks we may face should we acquire or invest in
complementary businesses include:  
    
    difficulties with the integration and assimilation of the acquired
business, including maintaining the frequency of survey participation of
panelist who join our panel through acquisitions;  
    
    diversion of our management teams attention from other business concerns;  
    
    availability of favorable acquisition or investment financing;  
    
    potential undisclosed liabilities associated with acquisitions; and  
    
    loss of key employees of any acquired business. Acquisitions or investments may require us to expend significant amounts
of cash. This would result in our inability to use these funds for other
business purposes. Additionally, if we fund acquisitions through further
issuances of our common stock, our stockholders will be diluted, which may
cause the market price of our common stock to decline. The potential impairment
or complete write-off of goodwill and other intangible assets related to any
such acquisition may reduce our overall earnings, which in turn could
negatively affect the price of our common stock. 23




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Our success depends on our ability to retain the current members of our senior
management team and other key personnel. Our success depends to a significant extent on the continued services of
our core senior management team of Dean A. Wiltse, our CEO; Robert E. Bies, our
Executive Vice President and CFO; and Jonathan A. Flatow, our Vice President
and General Counsel. If one or more of these individuals were unable or
unwilling to continue in his present position, our business would be disrupted
and we might not be able to find replacements on a timely basis or with the
same level of skill and experience. Finding and hiring any such replacements
could be costly and might require us to grant significant equity awards or
other incentive compensation, which could adversely impact our financial
results. We do not maintain key-person life insurance for any of our management
personnel or other key employees. If we fail to continue to attract and retain project management professionals
and other highly-skilled personnel, we may be unable to successfully execute
our business strategy. Our business model is based and our success depends upon our ability to
attract, retain and motivate highly-skilled project management professionals
and other technical, managerial, marketing, sales and client support personnel
throughout the world. Because competition to attract trained technical and
project management personnel is intense in the marketing research data
collection industry, we may experience difficulty attracting, integrating or
retaining the number of qualified personnel needed to successfully implement
our business strategy. If we are delayed in recruiting key employees, we may be
forced to incur significant additional recruitment, compensation and relocation
expenses. If we are unable to hire and retain such personnel in the future, we
may not be able to operate our business as we do today or meet the needs of our
clients. We may be at a competitive disadvantage if we are unable to protect our
proprietary rights or if we infringe on the proprietary rights of others, and
related litigation could be time consuming and costly. Because we operate our business through websites and rely heavily on
computer hardware and software, proprietary rights, particularly trade secrets
and copyrights, are critical to our success and competitive position. The
actions we take to protect our proprietary rights may be inadequate. In
addition, effective copyright, trademark and trade secret protection may be
unenforceable or limited in certain countries and, due to the global nature of
the Internet, we may be unable to control the dissemination of our content and
products and the use of our products and services. In addition, third-parties
may claim that we have violated their intellectual property rights. For
example, companies have recently brought claims against other Internet
companies regarding alleged infringement of patent rights relating to methods
of doing business over the Internet. To the extent that we violate a patent or
other intellectual property right of another party, we may be prevented from
operating our business as planned or may be required to pay damages, obtain a
license, if available, for the use of the patent or other right to use a
non-infringing method to accomplish our objectives. Our ability to execute our business strategy will suffer if a successful
claim of infringement is brought against us and we are unable to introduce new
trademarks, develop non-infringing technology or license the infringed or
similar technology on a timely basis. Moreover, our general liability insurance
may not be adequate to cover all or any of the costs incurred defending patent
or trademark infringement claims, or to indemnify us for liability that may be
imposed. Fluctuations in our quarterly operating results may cause our stock price to
decline and limit our stockholders ability to sell our common stock in the
public market. In the past, our operating results have fluctuated significantly from
quarter to quarter and we expect them to continue to do so in the future due to
a variety of factors, many of which are outside of our control. Our operating
results may in some future quarter fall below the expectations of securities
analysts and investors. In this event, the trading price of our common stock
could decline significantly. In addition to the risks disclosed elsewhere in
this report, factors outside of our control that have caused our quarterly
operating results to fluctuate in the past and that may affect us in the
future, include: 24




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
    
    fluctuations in general economic conditions;
    
    demand for marketing research products and services generally;  
    
    fluctuations in the marketing research budgets of the end-users
serviced by our marketing research clients;  
    
    the failure of our large clients to win Internet-based marketing research projects; and  
    
    the development of products and services by our competitors. In addition, factors within our control, such as our capacity to deliver
projects to our clients in a timely fashion, have caused our operating results
to fluctuate in the past and may affect us similarly in the future. The factors listed above may affect both our quarter-to-quarter operating
results as well as our long-term success. Given the fluctuations in our
operating results, you should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of our future performance or to
determine any trend in our performance. Fluctuations in our quarterly operating
results could cause the market price of and demand for our common stock to
fluctuate substantially, which may limit your ability to sell our common stock
on the public market. We might have difficulty obtaining additional capital, which could prevent us
from achieving our business objectives. If we are successful in raising
additional capital, it may have a dilutive effect on our stockholders. We may need to raise additional capital in the future to fund the
expansion of the Greenfield Online panel and the marketing of our products and
services, or to acquire or invest in complementary businesses, technologies or
services. If additional financing is not available, or available only on terms
that are not acceptable to us, we may be unable to fund the development and
expansion of our business, attract qualified personnel, promote our brand name,
take advantage of business opportunities or respond to competitive pressures.
Any of these events may harm our business. Also, if we raise funds by issuing
additional shares of our common stock or debt securities convertible into
common stock, our stockholders will experience dilution, which may be
significant, to their ownership interest in us. If we raise funds by issuing
shares of a different class of stock other than our common stock or by issuing
debt, the holders of such different classes of stock or debt securities may
have rights senior to the rights of the holders of our common stock. Government regulations could limit our Internet activities or result in
additional costs of doing business and conducting marketing research on the
Internet. The federal Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003 (the CAN-SPAM Act), which took effect on January 1,
2004, imposes a series of new requirements on the use of commercial email
messages and directs the FTC to issue new regulations that define relevant
criteria and to enforce the Act. Among other things, one proposal being
examined by the FTC is a federal Do Not Email registry. The CAN-SPAM Act and
the regulations enforcing the Act may significantly impact the manner in which
we recruit and communicate with our panelists. It may also expose us to
potential liability or require us to change or abandon our webmaster affiliate
program and other recruitment techniques. We may also need to develop
technology or systems to comply with the Acts requirements for honoring
opt-out requests. Additionally, there are at least 36 state statutes that
purport to regulate the distribution of commercial email. If we cannot comply
with the requirements of the CAN-SPAM Act or these state statutes, we may need
to cease operating portions of our business, which could reduce our revenues. 25




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The Internet Tax Freedom Act (the ITFA) that was originally passed in
1995 prohibited states or political subdivisions from (i) imposing taxes on
Internet access and (ii) imposing multiple and discriminatory taxes on
e-commerce. The ITFA expired on November 1, 2003 and has not been renewed. As a
result of the expiration of the ITFA, states are no longer prohibited under
federal law from imposing taxes that were covered by the ITFA. In the absence
of a renewal of the ITFA, states may begin to impose taxes on Internet access,
related charges and other e-commerce products and services. If one or more
states impose such taxes in a manner that results in the taxation of Internet
access providers, ourselves, our customers or other parties upon whom these
parties or our panelists rely for access to the Internet or other products or
services, our expenses may increase and it may become difficult to recruit and
maintain our panelists or sell our products and services. Proposed legislation
has been introduced in Congress to reinstate and broaden the ITFA. It is
unclear whether or not this legislation will be enacted and, if so, the
substance of its provisions. A number of states within the United States are participants in the
Streamlined Sales Tax Project (the SSTP), which seeks to establish a uniform,
nationwide state-based taxation system that requires remote sellers to
administer and collect their respective sales taxes even though they do not
maintain a presence within that state. If the SSTP is successful in
implementing such a system, and if our products or services are subject to this
system, our resulting tax, administrative and compliance burden will increase. Separately, countries belonging to the European Union (the EU) impose a
value added tax (VAT) on the sale of goods and services, including digital
goods and services. An EU Directive that took effect on July 1, 2003 requires
businesses that sell digital goods and services from outside the EU to certain
customers within the EU to collect, administer and remit the VAT. To the extent
that our products or services are subject to the EU Directive, our resulting
administrative and compliance burden will increase. In February 1999, the FCC issued a declaratory ruling interpreting the
Telecommunications Act of 1996 to allow local exchange carriers to receive
reciprocal compensation for traffic delivered to information service providers,
particularly Internet service providers, on the basis that traffic bound for
Internet service providers is largely interstate. As a result of this ruling,
the costs of transmitting data over the Internet may increase. If this occurs,
our tax liability and operating expenses may increase. In addition to those described above, we expect more stringent laws and
regulations to be enacted both domestically and globally in the near future due
to the increasing popularity and use of the Internet. Any new legislation or
regulations or the application of existing laws and regulations to the Internet
could limit our effectiveness in conducting Internet-based marketing research
and increase our operating expenses. In addition, the application of existing
laws to the Internet could expose us to substantial liability for which we
might not be indemnified by content providers or other third-parties. Existing
laws and regulations currently address, and new laws and regulations and
industry self-regulatory initiatives are likely to address, a variety of issues
that could have a direct impact on our business, including:  
    
    user privacy and expression;  
    
    the rights and safety of children;  
    
    intellectual property;  
    
    information security;  
    
    anti-competitive practices;  
    
    the convergence of offline channels with Internet commerce; and  
    
    taxation and pricing. 26




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Current laws that explicitly apply to the Internet have not yet been
interpreted by the U.S. courts and their applicability and scope are not yet
defined. Any new laws or regulations relating to the Internet could have an
impact on the growth of the Internet and, as a result, might limit our ability
to administer our surveys and provide our products and services. Cautionary Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. All statements other than statements of
historical facts contained herein, including statements of our expectations
regarding Internet survey solutions revenues, selling, general and
administrative expenses, profitability, financial position, business strategy
and plans and objectives of management for future operations, are
forward-looking statements. The words believe, may, will, estimate,
continue, anticipate, intend, expect and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions described in Risk Factors beginning on page 18
and in our prospectus filed on July 16, 2004 pursuant to Rule 424(b)(4) of the
Securities Act, including, among other things:  
    
    the acceptance of our Internet-based marketing research data
collection products and services by existing and potential clients;  
    
    our ability to maintain and expand the Greenfield Online panel both domestically and internationally;  
    
    our ability to market our Internet survey solutions;  
    
    our ability to continue to develop and improve our technology infrastructure;  
    
    significant increases in competitive pressures in the marketing research data collection industry;  
    
    our ability to attract and retain experienced project management professionals;  
    
    the effect that the Do Not Call registry and other regulations may
have on the adoption of Internet-based marketing research data
collection;  
    
    the growth of Internet penetration outside the United States;  
    
    our ability to expand internationally; and  
    
    our ability to identify, consummate and integrate potential acquisition targets. These risks are not exhaustive. Other sections of this report on 10-Q
include additional factors, which could adversely impact our business and
financial performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for us to predict all risk factors, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements. We assume no obligation to update any
forward-looking statements after the date of this report as a result of new
information, future events or developments, except as required by federal
securities laws. You should not rely upon forward-looking statements as predictions of
future events. We cannot assure you that the events and circumstances reflected
in the forward-looking statements will be achieved or occur and actual results
could differ materially from those projected in the forward-looking statements. 27




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Item 3: Quantitative and Qualitative Disclosures About Market Risk We operate primarily in the United States. However, we have recently
expanded internationally and are exposed to certain market risks arising from
transactions that in the normal course of business include fluctuations in
interest rates and currency exchange rates. These risks are not expected to be
material. However, no assurance can be given that such risks will not become
material. While we have not used derivative financial instruments in the past,
we may, on occasion, use them in the future in order to manage or reduce these
risks. We do not expect to enter into derivative or other financial instruments
for trading or speculative purposes. 
 Item 4: Controls and Procedures As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer (together,
our certifying officers), of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on their evaluation, our
certifying officers concluded that our disclosure controls and procedures are
effective in providing reasonable assurance that information required to be
disclosed by us in our periodic reports filed with the Securities and Exchange
Commission (the SEC) is recorded, processed, summarized and reported within
the time periods specified by the SECs rules and forms. We believe that a controls system, no matter how well designed and
operated, is based in part upon certain assumptions about the likelihood of
future events, and therefore can only provide reasonable, not absolute,
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected. 28




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PART II   OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 2. Changes in Securities; Use of Proceeds and Issuer Purchases of Equity
Securities (b) On July 15, 2004, our registration statement on Form S-1 (Registration
No. 333-114391) was declared effective for our initial public offering,
pursuant to which we registered 4 million shares of common stock to be sold by
us and 1 million shares sold by certain of our stockholders. The stock was
offered at $13.00 per share or an aggregate of $52 million for us, and $13
million for the selling stockholders. As a result of our initial public
offering, we received net proceeds of approximately $34.8 million (after
underwriters commissions of $3.6 million, the $9.4 million conversion and
dividend payment to holders of our Series B Convertible Participating Preferred
Stock, the $2.1 million mandatory redemption of Series C-2 Redeemable
Non-Voting Preferred Stock and expenses of approximately $2.1 million). We
intend to use the remaining net proceeds from the initial public offering for
working capital and general corporate purposes, including potential
acquisitions. Pending use of the net proceeds of this offering, we have
invested the funds in short-term, interest bearing, investment-grade
securities. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 
 Item 6. Exhibits Exhibits ExhibitNo.
    
    Description of Exhibits10.38
    
    Amendment No. 7 dated October 15, 2004 to Accounts Receivable
Financing Agreement, dated August 9, 2001, by and between
Silicon Valley Bank and Greenfield Online, Inc. (filed
herewith).31.1
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 (filed herewith).32.2
    
    Certifications of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 (filed herewith).
 29




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized. GREENFIELD ONLINE, INC.By:
    /s/ Robert E. BiesRobert E. BiesExecutive Vice President and
Chief Financial Officer (and duly
authorized officer) Dated: November 4, 2004 30