##### Table of Contents



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 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
 ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-50698 GREENFIELD ONLINE, INC.  Delaware
    
    06-1440369(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 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 o No x 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 August 25, 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 June 30, 2004 and December 31, 2003
    
    
    1Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003
    
    
    2Unaudited Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders Deficit for the six months ended June 30, 2004
    
    
    3Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    4Unaudited Notes to Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part II. Other InformationItem 2. Changes in Securities and Use of Proceeds
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    27Signature
    
    
    28SIXTH LOAN MODIFICATION AGREEMENTCERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906




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GREENFIELD ONLINE, INC. 
 CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
(Unaudited) Pro-forma,June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2004ASSETSCurrent assets:Cash, restricted cash and cash equivalents
    
    $
    2,067
    
    
    $
    3,721Accounts receivable trade (net of allowances of $99 and $219 at June 30, 2004
and December 31, 2003, respectively)
    
    
    7,738
    
    
    
    4,234Prepaid expenses and other current assets
    
    
    1,203
    
    
    
    498Total current assets
    
    
    11,008
    
    
    
    8,453Property and equipment, net
    
    
    3,020
    
    
    
    2,420Other intangible assets, net
    
    
    309
    
    
    
    311Deferred initial public offering costs
    
    
    1,361
    
    
    
    Security deposits
    
    
    797
    
    
    
    745Total assets
    
    $
    16,495
    
    
    $
    11,929LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    2,108
    
    
    $
    1,563
    
    
    $
    2,108Accrued expenses and other current liabilities
    
    
    4,803
    
    
    
    4,579
    
    
    
    4,803Current portion of capital lease obligations
    
    
    1,080
    
    
    
    874
    
    
    
    1,080Deferred revenues
    
    
    463
    
    
    
    394
    
    
    
    463Series B convertible preferred stock distribution accrual
    
    
    
    
    
    
    
    
    
    
    9,447Total current liabilities
    
    
    8,454
    
    
    
    7,410
    
    
    
    17,901Long-term debt
    
    
    1,000
    
    
    
    
    
    
    
    1,000Capital lease obligations
    
    
    369
    
    
    
    705
    
    
    
    369Other long-term liabilities
    
    
    25
    
    
    
    84
    
    
    
    25Series C-2 redeemable preferred stock (aggregate liquidation preference $2,053)
    
    
    999
    
    
    
    943
    
    
    
    999Total liabilities
    
    
    10,847
    
    
    
    9,142
    
    
    
    20,294Series B convertible preferred stock; par value $0.0001 per share; 30,211,595
shares authorized, issued and outstanding; none authorized, issued and
outstanding pro forma
    
    
    9,450
    
    
    
    9,114
    
    
    
    Commitments and contingenciesStockholders deficit:Series A convertible preferred stock; par value $0.0001 per share; 40,874,511
shares authorized; 40,817,166 and 40,874,511 shares issued and outstanding
(aggregate liquidation preference of $5,953 as of June 30, 2004 and December
31, 2003); none authorized, issued and outstanding pro forma
    
    
    4
    
    
    
    4
    
    
    
    Series C-1 convertible preferred stock; par value $0.0001 per share;
74,627,182 shares authorized, issued and outstanding (aggregate liquidation
preference of $9,127 as of June 30, 2004 and December 31, 2003); none
authorized, issued and outstanding pro forma
    
    
    7
    
    
    
    7
    
    
    
    Common stock; par value $0.0001 per share; 13,605,479 shares authorized;
2,048,938 and 2,054,485 shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively, and 12,471,435 shares issued and outstanding
pro forma
    
    
    
    
    
    
    
    
    
    
    1Additional paid-in capital
    
    
    81,951
    
    
    
    82,440
    
    
    
    81,964Accumulated deficit
    
    
    (82,337
    )
    
    
    (84,389
    )
    
    
    (82,337
    )Unearned stock-based compensation
    
    
    (3,296
    )
    
    
    (4,258
    )
    
    
    (3,296
    )Treasury stock, at costSeries A preferred stock  57,345 and zero shares at June 30, 2004 and
December 31, 2003, respectively
    
    
    (56
    )
    
    
    
    
    
    
    Common stock  5,547 and zero shares at June 30, 2004 and December 31,
2003, respectively and 9,643 shares proforma
    
    
    (75
    )
    
    
    
    
    
    
    (131
    )Note receivable from stockholder
    
    
    
    
    
    
    (131
    )
    
    
    Total stockholders deficit
    
    
    (3,802
    )
    
    
    (6,327
    )
    
    
    (3,799
    )Total liabilities, temporary equity and stockholders deficit
    
    $
    16,495
    
    
    $
    11,929
    
    
    $
    16,495
 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
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    10,229
    
    
    $
    5,948
    
    
    $
    18,852
    
    
    $
    10,539Cost of revenues (including stock-based compensation of $53 and
$5, respectively for the three months ended June 30, 2004 and
2003, and $106 and $9, respectively for the six months ended June
30, 2004 and 2003 and excluding depreciation shown below)
    
    
    2,180
    
    
    
    1,956
    
    
    
    4,993
    
    
    
    3,487Gross profit
    
    
    8,049
    
    
    
    3,992
    
    
    
    13,859
    
    
    
    7,052Operating expenses:Selling, general and administrative (including stock-based
compensation of $215 and $272, respectively for the three months
ended June 30, 2004 and 2003, and $742 and $544, respectively for
the six months ended June 30, 2004 and 2003)
    
    
    5,109
    
    
    
    2,478
    
    
    
    9,363
    
    
    
    4,889Panel acquisition expenses
    
    
    484
    
    
    
    399
    
    
    
    1,172
    
    
    
    747Depreciation and amortization
    
    
    245
    
    
    
    268
    
    
    
    463
    
    
    
    533Research and development
    
    
    265
    
    
    
    146
    
    
    
    481
    
    
    
    284Total operating expenses
    
    
    6,103
    
    
    
    3,291
    
    
    
    11,479
    
    
    
    6,453Operating income
    
    
    1,946
    
    
    
    701
    
    
    
    2,380
    
    
    
    599Other income (expense):Interest expense, net
    
    
    (74
    )
    
    
    (113
    )
    
    
    (130
    )
    
    
    (239
    )Related party interest income (expense), net
    
    
    (13
    )
    
    
    1
    
    
    
    (40
    )
    
    
    2Other income (expense), net
    
    
    (11
    )
    
    
    
    
    
    
    (16
    )
    
    
    600Total other income (expense)
    
    
    (98
    )
    
    
    (112
    )
    
    
    (186
    )
    
    
    363Income before income taxes
    
    
    1,848
    
    
    
    589
    
    
    
    2,194
    
    
    
    962Provision for income taxes
    
    
    121
    
    
    
    40
    
    
    
    142
    
    
    
    63Net income
    
    
    1,727
    
    
    
    549
    
    
    
    2,052
    
    
    
    899Less: Accretion of Series C-2 redeemable preferred stock dividends
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (63
    )Cumulative dividends on Series B convertible preferred stock
    
    
    (168
    )
    
    
    (168
    )
    
    
    (336
    )
    
    
    (336
    )Income allocable to participating preferred securities
    
    
    (1,302
    )
    
    
    (292
    )
    
    
    (1,433
    )
    
    
    (417
    )Net income available to common stockholders
    
    $
    257
    
    
    $
    58
    
    
    $
    283
    
    
    $
    83Net income per share available to common stockholders:Basic
    
    $
    0.13
    
    
    $
    0.03
    
    
    $
    0.14
    
    
    $
    0.04Diluted
    
    $
    0.10
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.04Weighted average shares outstanding:Basic
    
    
    2,052
    
    
    
    2,054
    
    
    
    2,053
    
    
    
    2,054Diluted
    
    
    2,693
    
    
    
    2,339
    
    
    
    2,707
    
    
    
    2,281
 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 DEFICIT
(in thousands)
(Unaudited) Series AConvertible
    
    Series C-1Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    Note
    
    Treasury StockPreferred Stock
    
    Preferred Stock
    
    Common Stock
    
    Additional
    
    Receivable
    
    Series A Preferred
    
    Common Stock
    
    Unearned
    
    
    
    
    
    TotalPaid-In
    
    From
    
    
    
    
    
    Stock Based
    
    Accumulated
    
    Stockholders'Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Officer
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Compensation
    
    Deficit
    
    DeficitBalance at December
31, 2003
    
    
    40,875
    
    
    $
    4
    
    
    
    74,627
    
    
    $
    7
    
    
    
    2,054
    
    
    $
    
    
    
    $
    82,440
    
    
    $
    (131
    )
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    (4,258
    )
    
    $
    (84,389
    )
    
    $
    (6,327
    )Six Months ended
June 30, 2004:Net income for the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,052
    
    
    
    2,052Repossession of
shares in payment
of note receivable
from officer
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (38
    )
    
    
    131
    
    
    
    58
    
    
    
    (56
    )
    
    
    5
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )Cumulative
dividends on
Series B
convertible
Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )Stock option
forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    Amortization of
unearned stock
based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847
    
    
    
    
    
    
    
    847Balance at June 30,
2004
    
    
    40,817
    
    
    $
    4
    
    
    
    74,627
    
    
    $
    7
    
    
    
    2,049
    
    
    $
    
    
    
    $
    81,951
    
    
    $
    
    
    
    
    58
    
    
    $
    (56
    )
    
    
    5
    
    
    $
    (75
    )
    
    $
    (3,296
    )
    
    $
    (82,337
    )
    
    $
    (3,802
    )
 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) Six MonthsJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,052
    
    
    $
    899Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    638
    
    
    
    668Amortization of contract asset
    
    
    17
    
    
    
    100Amortization of stock based compensation
    
    
    847
    
    
    
    553Non-cash interest expense (income)
    
    
    40
    
    
    
    (2
    )Loss on sale of property and equipment
    
    
    1
    
    
    
    Gain on sale of Custom Research Business
    
    
    
    
    
    
    (600
    )Provision for doubtful accounts and other sales allowances
    
    
    9
    
    
    
    (6
    )Changes in assets and liabilities, net:Accounts receivable
    
    
    (3,512
    )
    
    
    (754
    )Deferred project costs
    
    
    (94
    )
    
    
    (16
    )Other current assets
    
    
    (537
    )
    
    
    (27
    )Security deposits
    
    
    (165
    )
    
    
    102Accounts payable
    
    
    547
    
    
    
    (337
    )Accrued expenses and other current liabilities
    
    
    227
    
    
    
    464Deferred project revenues
    
    
    69
    
    
    
    (31
    )Net cash provided by operating activities
    
    
    139
    
    
    
    1,013Cash 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
    
    
    (860
    )
    
    
    (83
    )Net cash (used in) provided by investing activities
    
    
    (858
    )
    
    
    517Cash flows from financing activities:Proceeds from borrowings under credit facility
    
    
    1,000
    
    
    
    Repayments under credit facility
    
    
    
    
    
    
    (294
    )Other long-term liabilities
    
    
    (60
    )
    
    
    (155
    )Proceeds of options exercised
    
    
    
    
    
    
    1Proceeds from subscriptions receivable from management
    
    
    
    
    
    
    2Deferred IPO costs
    
    
    (1,361
    )
    
    
    Principal payments under capital lease obligations
    
    
    (510
    )
    
    
    (426
    )Net cash used in financing activities
    
    
    (931
    )
    
    
    (872
    )Effect of exchange rate changes
    
    
    (4
    )
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (1,654
    )
    
    
    658Cash restricted cash and cash equivalents at beginning of the period
    
    
    3,721
    
    
    
    1,864Cash restricted cash and cash equivalents at end of the period
    
    $
    2,067
    
    
    $
    2,522Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    129
    
    
    $
    239Income taxes
    
    
    151
    
    
    
    63Supplemental Schedule of Non-cash Investing and Financing Activities:Purchase of equipment and internal use software financed through capital lease obligations
    
    $
    380
    
    
    $
    75Repossession of shares in payment of note receivable from officer
    
    
    169
    
    
    
    Cumulative dividends on Series B convertible preferred stock
    
    
    336
    
    
    
    336Accretion 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 six-month periods ended June 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 In April 2004, our board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission that
permitted us to sell shares of our common stock in connection with a proposed
initial public offering of our common stock (the IPO). 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. On July 16, 2004, we completed the IPO at a public offering price of $13
per share, including the sale of 4 million shares by us and 1.75 million shares
by our 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 IPO totaled approximately $34.6 million, after payment of underwriters
commissions, the mandatory conversion and dividend payment of approximately
$9.5 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 IPO amounting to approximately $2.2 million. The remaining
proceeds will be utilized for working capital and other general corporate
purposes, including potential acquisitions. 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. 5




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Unaudited Pro Forma Balance Sheet The unaudited pro forma balance sheet gives effect to the conversion of
the convertible preferred stock as if it occurred on June 30, 2004. The
conversion of the outstanding preferred stock into common stock automatically
occurred upon consummation of the IPO and all of the outstanding shares of
Series A Convertible Participating Preferred Stock, par value $0.0001 (Series
A), Series B, and Series C-1 Convertible Participating Preferred Stock, par
value $0.0001 (Series C-1), automatically converted into an aggregate of
10,408,092 shares of common stock. Additionally, a distribution accrual in the
amount of $9,447,000 became due and payable to the holders of the Series B. 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, except as noted below. 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 they occur. For the periods presented, unclaimed incentives represented less
than 10% of total incentives accrued. In April 2004, we shifted this incentive
program to include a greater emphasis on a prize-based program, whereby
panelists become eligible to receive prizes rather than receiving cash
payments. 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. One customer accounted for more
than 10% of our net sales. Custom Research, Inc. (CRI) accounted for
approximately 17% of our net sales for each of the three and six months ended
June 30, 2004. Stock-Based Compensation.We have awarded certain stock option and
warrant grants in which the fair value of its 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 $847,000 and $553,000 of
stock based compensation expense in the statement of operations for the six
months ended June 30, 2004 and 2003, respectively, related to these option
grants. Stock-based compensation cost for the six months ended June 30, 2004
totaled $847,000, including compensation cost of zero related to the notes
receivable from stockholder. Stock-based compensation expense for the six
months ended June 30, 2003 totaled $553,000, including compensation cost of
$48,000 related to the notes receivable from stockholders. In connection with
options forfeited during the six months ended June 30, 2004, we wrote-off
$115,000 of unearned stock-based compensation as a reduction of additional
paid-in capital. 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 FASB Statement No. 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 six months ended June 30, 2004 and 2003
would have been as follows: 6




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##### Table of Contents



Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income as reported
    
    $
    1,727
    
    
    $
    549
    
    
    $
    2,052
    
    
    $
    899Add: Stock-based employee compensation expense included in net
income as recorded
    
    
    268
    
    
    
    277
    
    
    
    847
    
    
    
    553Deduct: Total stock-based employee compensation expense determined
under the fair value method for all awards, net of related tax
effects
    
    
    (443
    )
    
    
    (863
    )
    
    
    (1,211
    )
    
    
    (1,966
    )Pro forma net income (loss)
    
    
    1,552
    
    
    
    (37
    )
    
    
    1,688
    
    
    
    (514
    )Less: Accretion of Series C-2 redeemable preferred stock dividends
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (63
    )Cumulative dividends on Series B convertible preferred stock
    
    
    (168
    )
    
    
    (168
    )
    
    
    (336
    )
    
    
    (336
    )Income allocable to participating preferred securities
    
    
    (1,156
    )
    
    
    
    
    
    
    (1,129
    )
    
    
    Pro forma net income (loss) available to common stockholders
    
    $
    228
    
    
    $
    (236
    )
    
    $
    223
    
    
    $
    (913
    )Net income per share as reported:Basic
    
    $
    0.13
    
    
    $
    0.03
    
    
    $
    0.14
    
    
    $
    0.04Diluted
    
    $
    0.10
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.04Pro forma income (loss) per share:Basic
    
    $
    0.11
    
    
    $
    (0.11
    )
    
    $
    0.11
    
    
    $
    (0.44
    )Diluted
    
    $
    0.08
    
    
    $
    (0.11
    )
    
    $
    0.08
    
    
    $
    (0.44
    )
 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 $5,400,000 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 $6,000,000. In December 2003, the minimum
purchases, as required under the Alliance Agreement, were satisfied by TNSI. 7




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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 $5,600,000. The $400,000 difference
between the contractual amount of $6,000,000 and the fair value of the services
of $5,600,000 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, $183,000
and $200,000 was amortized during the year ended December 31, 2002 and 2003,
respectively, with the balance of $17,000 being amortized during the quarter
ended March 31, 2004. We recorded a pre-tax gain on the sale of the Custom
Research Business in the amount of $1,497,000 and $600,000 in year ended
December 31, 2002 and 2003, respectively, as a result of this transaction. The
$600,000 gain was recorded in 2003, when the associated contingencies lapsed
and the cash was received, which is included in other income (expense) in the
accompanying statement of operations. On November 26, 2003, we and TNSI amended the Alliance Agreement to
provide that: the term would expire on December 31, 2006, with no automatic
renewal rights; that we would be allowed to sell Internet data collection
services to end-users; and that during the term of the Alliance Agreement, TNSI
and NFO Worldgroup, Inc (NFO), which Taylor Nelson Sofres plc, the parent
company of TNSO, had acquired in 2003, would provide us with an opportunity to
bid on substantially all of TNSI and NFOs third-party U.S.-based Internet
consumer sample business. Note 4  Prepaid expenses and other current assets: Prepaid expenses and other current assets consisted of the following at
June 30, 2004 and December 31, 2003 ($ in thousands): June 30,
    
    December 31,2004
    
    2003Prepaid expenses
    
    $
    932
    
    
    $
    355Other non-trade receivables
    
    
    7
    
    
    
    28Deferred project costs
    
    
    162
    
    
    
    68Contract asset (Note 3)
    
    
    
    
    
    
    17Other
    
    
    102
    
    
    
    30$
    1,203
    
    
    $
    498
 Note 5  Property and Equipment, net: Property and equipment, net consisted of the following at June 30, 2004
and December 31, 2003 ($ in thousands): EstimatedUseful
    
    June 30,
    
    December 31,Life-Years
    
    2004
    
    2003Computer and data processing equipment
    
    3-5
    
    $
    6,358
    
    
    $
    5,581Leasehold improvements
    
    2-7*
    
    
    1,415
    
    
    
    1,366Furniture and fixtures
    
    7
    
    
    1,322
    
    
    
    1,097Telephone system
    
    5
    
    
    135
    
    
    
    123Automobile
    
    4
    
    
    88
    
    
    
    889,318
    
    
    
    8,255Less: Accumulated depreciation
    
    
    
    
    (6,298
    )
    
    
    (5,835
    )Property and equipment, net
    
    
    
    $
    3,020
    
    
    $
    2,420
   *
    
    Lesser of the estimated life of the asset or the life of the underlying
lease. 8




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##### Table of Contents



Depreciation expense amounted to $463,000 and $489,000 for the six months
ended June 30, 2004 and 2003, respectively including amounts recorded under
capital leases. Included in property and equipment above are assets acquired under capital
leases, which are summarized below at June 30, 2004 and December 31, 2003 ($ in
thousands): June 30,
    
    December 31,2004
    
    2003Computer and data processing equipment
    
    $
    3,651
    
    
    $
    3,271Furniture and fixtures
    
    
    947
    
    
    
    947Automobile
    
    
    58
    
    
    
    584,656
    
    
    
    4,276Accumulated depreciation
    
    
    (3,346
    )
    
    
    (3,024
    )Assets under capital leases, net
    
    $
    1,310
    
    
    $
    1,252
 Note 6  Other intangible assets, net: Other intangible assets consists of the following at June 30, 2004 and
December 31, 2003 ($ in thousands): EstimatedUseful
    
    June 30,
    
    December 31,Life-Years
    
    2004
    
    2003Internal use software
    
    2
    
    $
    2,220
    
    
    $
    2,047Panel members (fully amortized at December 31,
2003)*
    
    4
    
    
    712
    
    
    
    7122,932
    
    
    
    2,759Less: Accumulated amortization
    
    
    
    
    (2,623
    )
    
    
    (2,448
    )Other intangible assets, net
    
    
    
    $
    309
    
    
    $
    311
   *
    
    Asset recorded in connection with the Management Buyout in 1999 Amortization of internal use software amounted to $175,000 and $135,000
for the six months ended June 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 $44,000 for the six months ended June 30, 2004 and 2003,
respectively. Note 7  Accrued expenses and other current liabilities: Accrued expenses and other current liabilities consisted of the following
at June 30, 2004 and December 31, 2003 ($ in thousands): June 30,
    
    December 31,2004
    
    2003Accrued payroll and commissions
    
    $
    1,542
    
    
    $
    1,499Panelist incentives
    
    
    982
    
    
    
    1,118Accrued panels costs
    
    
    813
    
    
    
    214Other
    
    
    1,466
    
    
    
    1,748$
    4,803
    
    
    $
    4,579
 9




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##### Table of Contents



For the six months ended June 30, 2004 and 2003, the Company reversed
panelist incentives accrual of $124,000 and $139,000, 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 $89,000 and $733,000 for the six months ended June 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 $438,000 and zero,
respectively for the six months ended June 30, 2004 and 2003. Note 8  Related Parties: Notes receivable from Stockholder In May 1999, Hugh O. Davis, one of our executive officers, borrowed
$75,013 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 $75,013, 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 $56,285 from us in order to purchase
securities from Greenfield Holdings (which securities were later exchanged for
shares of our Series A 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 $56,285 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. 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 June 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 month that the
SVB Credit Facility is outstanding. We had an outstanding balance of $1,000,000
and zero, respectively at June 30, 2004 and December 31, 2003. In addition, we
incurred interest expense in the amount of $51,000 and $71,000, respectively,
for each of the six months ended June 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.
Prior to this amendment, we were required to maintain our primary depository
account with SVB. Upon the completion of the IPO, we deposited the net proceeds
in a cash management account maintained by one of our underwriters. 10




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##### Table of Contents



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, 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 191,000 and 24,000, respectively
for the three months ended June 30, 2004 and 2003 and 103,000 and 24,000,
respectively for the six months ended June 30, 2004 and 2003 were excluded from
the computation of diluted earnings per share as they would be anti-dilutive. 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
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Weighted average number of common and potential common shares
outstanding:Basic number of common shares outstanding
    
    
    2,052
    
    
    
    2,054
    
    
    
    2,053
    
    
    
    2,054Dilutive effect of stock option grants
    
    
    620
    
    
    
    248
    
    
    
    631
    
    
    
    190Dilutive effect of warrants
    
    
    21
    
    
    
    37
    
    
    
    23
    
    
    
    37Diluted number of common and potential common shares outstanding
    
    
    2,693
    
    
    
    2,339
    
    
    
    2,707
    
    
    
    2,281
 Note 11  Commitments and Contingencies: Legal Contingencies: From time to time, in the ordinary course of business, we are subject to
legal proceedings. While it is impossible 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. 11




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##### Table of Contents



NOTE 12  Subsequent Events: Initial Public Offering.On July 16, 2004, we completed the IPO, including
the sale of 4 million shares by us and 1.75 million shares by our selling
stockholders. Net proceeds to us from the offering totaled approximately $34.6
million, after payment of underwriters commissions, the mandatory conversion
and dividend payment of approximately $9.5 million to the holders of our Series
B, the mandatory redemption of all outstanding shares of our Series C-2 for
approximately $2.1 million and costs associated with the IPO amounting to
approximately $2.2 million. The remaining proceeds will be utilized for working
capital and other general corporate purposes, including potential acquisitions.
All deferred costs from the IPO were recorded against equity upon the completion of the
IPO. Pending Acquisition.On August 18, 2004, we signed a definitive agreement
to acquire specific assets from The Dohring Company, including all of the
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 and goodwill associated with the
OpinionSurveys.com panel. The agreement does not by its terms transfer
liabilities from The Dohring Company to us and is subject to certain closing
conditions. We filed a current report on Form 8-K related to the announcement
on August 19, 2004. 12




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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 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. There have been no material changes during the six months ended
June 30, 2004, except as noted below. 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 they occur. For the periods presented, unclaimed incentives represented less
than 10% of total incentives accrued. In April 2004, we shifted this incentive
program to include a greater emphasis toward a prize-based program, whereby
panelists become eligible to receive prizes rather than receiving cash
payments. Results of Operations Quarter Ended June 30, 2004 Versus Quarter Ended June 30, 2003 Six months Ended June 30, 2004 Versus Six Months Ended June 30, 2003 Net Revenues.Net revenues for the three months ended June 30, 2004 were
$10.2 million, compared to $5.9 million for the three months ended June 30,
2003, an increase of $4.3 million, or 72.0%. Net revenues for the six months
ended June 30, 2004 were $18.8 million, compared to $10.5 million for the six
months ended June 30, 2003, an increase of $8.3 million, or 78.9%. Net revenues
increased due to an increase in the number of survey projects. This increase
was seen primarily in the full service and sample only solutions and to a
lesser extent, in tracker projects. 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 Internet survey solutions will continue
to be strong in the remainder of 2004, but sequential quarterly year over year
growth rates may decline. 13




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##### Table of Contents



Gross Profit.Gross profit for the three months ended June 30, 2004 was
$8.0 million, compared to $4.0 million for the three months ended June 30,
2003, an increase of $4.0 million, or 101.6%. Gross profit for the three months
ended June 30, 2004 was 78.7% of net revenues, compared to 67.1% for the three
months ended June 30, 2003. Gross profit for the six months ended June 30, 2004
was $13.9 million, compared to $7.1 million for the six months ended June 30,
2003, an increase of $6.8 million, or 96.5%. Gross profit for the six months
ended June 30, 2004 was 73.5% of net revenues, compared to 66.9% for the six
months ended June 30, 2003. The increase in gross margin was 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
added approximately 4.9% and 5.7% to our gross margin for the three and six
months ended June 30, 2004, respectively. Additionally, gross margin was
positively impacted by approximately 6.6% due to the more productive use of
panelist incentives during the three months ended June 30, 2004 due to a shift
from cash incentive payments to a prized-based program. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the three months ended June 30, 2004 were $5.1
million, compared to $2.5 million for the three months ended June 30, 2003, an
increase of $2.6 million or 106.2%. Selling, general and administrative
expenses for the six months ended June 30, 2004 were $9.4 million, compared to
$4.9 million for the six months ended June 30, 2003, an increase of $4.5
million or 91.5%. Selling expenses, primarily personnel costs and related
commissions, increased approximately $850,000 and $1.4 million, respectively
for the three and six months ended June 30, 2004 as a result of hiring new
sales and sales-support personnel in order to better promote our products and
services. General and administrative expenses increased approximately $833,000
and $1.1 million, respectively for the three and six months ended June 30, 2004
as a result of increased personnel, including recruiting costs, to support our
revenue growth and international expansion. We also incurred additional
facility and overhead costs associated with our expansion into India, Europe
and Canada as well as in the United States. Selling, general and administrative
expenses increased 8.2% to 49.9% from 41.7% of net revenues for the three
months ended June 30, 2004, and increased 3.3% to 49.7% from 46.4% of net
revenues for the six months ended June 30, 2004. This increase was primarily
due to additional indirect costs associated with becoming a public company and
the requirements thereof. 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 $484,000 for
the three months ended June 30, 2004, compared to $399,000 for the three months
ended June 30, 2003, an increase of $85,000, or 21.3%. Panel acquisition
expenses were $1.2 million for the six months ended June 30, 2004, compared to
$747,000 for the six months ended June 30, 2003, an increase of $425,000, or
56.9%. 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 $150,000 and $445,000 of additional panel
acquisition costs for the three and six months ended June 30, 2004,
respectively. Our panel recruiting through MSN has declined significantly in
the three and six months ended June 30, 2004 compared to the three and six
months ended June 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 June 30, 2004 were $245,000, compared to
$268,000 for the three months ended June 30, 2003, a decrease of $23,000, or
8.9%. Depreciation and amortization expenses for the six months ended June 30,
2004 were $463,000, compared to $533,000 for the six months ended June 30,
2003, a decrease of $70,000, or 13.1%. This decline in depreciation and
amortization expense occurred as a portion of these assets became fully
depreciated during the first half of 2003. Interest Expense, Net.Net interest expense for the three months ended
June 30, 2004 was $74,000, compared to $113,000 for the three months ended June
30, 2003, a decrease of $39,000, or 34.5%. Net interest expense for the six
months ended June 30, 2004 was $130,000, compared to $239,000 for the six
months ended June 30, 2003, a decrease of $109,000, or 45.6%. The decrease was
due primarily to lower debt levels outstanding during the 2004 period,
resulting primarily from the repayment of the outstanding debt balance under
our revolving credit facility in October 2003 with cash generated from
operations. 14




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Related Party Interest Income (Expense), Net.Related party interest
expense for the three months ended June 30, 2004 was $13,000, compared to
related party interest income of $1,000 for the three months ended June 30,
2003. Related party interest expense for the six months ended June 30, 2004 was
$40,000, compared to related party interest income of $2,000 for the six months
ended June 30, 2003. The increase in the related party interest expense was due
to the accretion of debt discount associated with our Series C-2 which was
reclassified to a liability following the adoption of Statement of Financial
Accounting Standards No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liability and Equity (SFAS 150) in the third quarter
of 2003. Prior to the adoption of SFAS 150, our Series C-2 was classified
between liabilities and equity, and the accretion of the debt discount was
recorded against equity. Other Income (Expense), Net.Other expense for the three months ended
June 30, 2004 was $11,000, compared to zero for the three months ended June 30,
2003. Other expense for the six months ended June 30, 2004 was $16,000,
compared to other income of $600,000 for the six months ended June 30, 2003.
Other expense for the three and six months ended June 30, 2004 related
primarily to the effects of currency translation associated with our operations
in India, Europe and Canada. Other income for the six months ended June 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. Provision for Income Taxes.We recorded an income tax provision for the
three and six months ended June 30, 2004 of $121,000 and $142,000,
respectively, compared to $40,000 and $63,000, respectively for the three and
six months ended June 30, 2003. Our effective tax rate was 6.5% for both the
three and six months ended June 30, 2004 compared to 6.8% and 6.5%,
respectively for the three and six months ended June 30, 2003. The tax
provision was primarily related to federal and state taxes that could not be
offset by net operating loss carry-forwards. Net Income.Our net income for the three and six months ended June 30,
2004 was $1.7 million and $2.1 million, respectively, compared to $549,000 and
$899,000, respectively for the three and six months ended June 30, 2003. The
increase in net income is primarily the result of increased revenues partially
offset by increased selling, general and administrative expenses and panel
acquisition expenses, 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 income
per common share for the three and six months ended June 30, 2004 was $0.13 and
$0.14, respectively for basic and $0.10 and $0.10, respectively for diluted, as
compared to net income per share of $0.03 and $0.04, respectively for basic and
$0.02 and $0.04, respectively for diluted for the three and six months ended
June 30, 2003. 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. At June 30, 2004, we had approximately $2.1 million in cash on
hand. In July 2004, we completed our initial public offering (IPO) at a
public offering price of $13 per share, and raised approximately $34.6 million
in net proceeds after payment of underwriters commissions, the mandatory
conversion and dividend payment of approximately $9.5 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 our IPO amounting to
approximately $2.2 million. Cash provided by operations for the six months ended June 30, 2004 was
$139,000, compared to $1.0 million for the six months ended June 30, 2003. The
decrease in cash flow from operations in the 2004 period was primarily
attributed to our accounts receivable collections not keeping pace with our
additional revenue growth. Additional resources have been assigned to assist
and maintain collections, which has resulted in increased collections during
July 2004. 15




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Cash used by investing activities was $858,000 for the six months ended
June 30, 2004, compared to cash provided by investing activities of $517,000
for the six months ended June 30, 2003. This decrease of $1.4 million is due to
the capital expenditure program initiated in 2004,which accounted for
approximately $860,000 as well as the one-time $600,000 contingent gain on sale
of the Custom Research Business in 2003. Cash used by financing activities was $931,000 for the six months ended
June 30, 2004, compared to $872,000 for the six months ended June 30, 2003. The
difference was primarily the result of higher repayments of our short-term debt
in the 2003 period, while we borrowed $1.0 million in the 2004 period to
provide the necessary liquidity to further expand our facilities and
infrastructure, primarily in India. This was offset by deferred costs from the
IPO, which utilized cash of approximately $1.4 million during the six-month
period ended June 30, 2004 Our working capital at June 30, 2004 was $2.5 million, compared to $1.0
million at December 31, 2003, an increase of $1.5 million. The increase in
working capital was primarily due to our improved revenues resulting in
increases in accounts receivable, partially offset by an increase in our
current liabilities. We believe that the working capital, cash flows from
operations, borrowings available under the credit facility, and asset financing
under the lease agreement with Somerset Capital, are sufficient to fund our
business for at least the next twelve months. Additionally, in July 2004, we
completed the IPO and raised net proceeds of $34.6 million
(after fees, expenses and mandatory conversion and redemption
payments), this additional
capital provides additional financial strength to execute our growth plan. 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 month
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 June 30, 2004, the Borrowing Base was sufficient to allow us to borrow
the entire amount available under the credit facility, of which we have
outstanding $1.0 million. 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 to allow us to maintain our primary deposit account outside
of SVB through October 15, 2004. Upon the completion of the IPO, we deposited
the net proceeds in a cash management account maintained by one of our
underwriters. 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 June 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. 16




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On
July 16, 2004, we completed the IPO , including the sale of 4,000,000
shares by us and 1,750,000 shares by our selling stockholders. Net proceeds to
us from the offering totaled approximately $34.6 million, after paying the
mandatory conversion and dividend payment of approximately $9.5 million to the
holders of our Series B, approximately $2.1 million of the
net proceeds of the
IPO to fund the mandatory redemption of all outstanding shares of our Series
C-2 and costs associated with the IPO amounting to approximately $2.2 million.
The remaining proceeds will be utilized for working capital and other general
corporate purposes, as well as potential acquisitions. 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. Throughout 2004 we anticipate 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. 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. During 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. We incurred $584,000 and $660,000 related to India and North America,
respectively, for the six months ended June 30, 2004. In the United States, we
anticipate capital expenditures to be applied to upgrade computer servers and
networking equipment to manage increased Internet-based survey production and
data collection, upgrade personal computers for employees and 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 capital expenditures will
consist primarily of leasehold improvements, office furniture, computer
equipment, Internet telephony equipment and other costs associated with
building our Indian facility. These expenditures will be funded from our cash
flow from operations and other available financing sources, including our
credit facility. In addition, costs we 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, will also be funded from our cash flow from
operations and other available financing sources, including our credit
facility. The following table summarizes our contractual obligations at June 30,
2004 and the effect such obligations are expected to have on our liquidity and
cash flow in future periods: Total at
    
    Years Ended December 31,June 30,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 and2004
    
    2004(2)
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter($ in thousands)Contractual obligations:Loans payable
    
    $
    25
    
    
    $
    3
    
    
    $
    5
    
    
    $
    6
    
    
    $
    6
    
    
    $
    5
    
    
    $
    Capital lease obligations
    
    
    1,449
    
    
    
    584
    
    
    
    625
    
    
    
    204
    
    
    
    36
    
    
    
    
    
    
    
    Long-term debt
    
    
    1,000
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Series C-2 preferred redemption payment(1)
    
    
    2,053
    
    
    
    2,053
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Series B preferred conversion payment(1)
    
    
    9,450
    
    
    
    9,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-cancelable operating lease obligations
    
    
    6,623
    
    
    
    748
    
    
    
    1,330
    
    
    
    1,264
    
    
    
    1,166
    
    
    
    1,133
    
    
    
    982Total contractual cash obligations
    
    $
    20,600
    
    
    $
    12,838
    
    
    $
    2,960
    
    
    $
    1,474
    
    
    $
    1,208
    
    
    $
    1,138
    
    
    $
    982
   (1)
    
    Represents mandatory payments to be made upon
completion of the
IPO. The amounts have been presented in this table at their liquidation
value at June 30, 2004.(2)
    
    Includes only the remaining six months of the year ending June 30,
2004. 17




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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 the IPO, 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. 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. 18




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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 rely on a few of our clients for a large portion of our net revenue and if
we were to lose, or if there were a material reduction in business from, any of
these clients our net revenue may decline substantially. We receive a significant portion of our net revenue from our three largest
clients. Any of these clients may terminate or reduce its use of our products
and services at any time. Our ten largest clients accounted for $8.0 million,
or approximately 42%, of our total net revenues for the first six months of
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. 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. 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-Custom
Research, Inc., 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 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. 19




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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 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. We have grown our employee base substantially since February 2002. 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; 20




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##### Table of Contents




    
    potentially adverse tax consequences;
    
    political instability; and
    
    Internet access restrictions. 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. 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. The risks we may face should
we acquire or invest in complementary businesses include:  
    
    difficulties with the integration and assimilation of the acquired business;
    
    diversion of our management teams attention from other business concerns;
    
    availability of favorable acquisition or investment financing; 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 those 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. 21




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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: 22




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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. 23




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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. 24




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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. The legislation authorizing the creation and enforcement of the federal Do Not
Call registry may be declared unconstitutional by the U.S. Supreme Court and,
as a result, the migration of data collection from traditional methods to the
Internet may take longer than we currently anticipate. On February 17, 2004, the 10th Circuit Court of Appeals reversed a
decision by the U.S. District Court for the District of Colorado, which had
held that the federal Do Not Call registry maintained and enforced by the FTC
and the FCC constituted unconstitutional abridgements of free speech rights
guaranteed under the First Amendment of the U.S. Constitution. At least one
telemarketing group has publicly indicated that it will appeal this decision.
Should the U.S. Supreme Court hold that the Do Not Call registry violates First
Amendment rights to free speech, telephone survey cooperation rates may
increase and the migration from traditional methods of data collection such as
the telephone to the Internet may slow or stabilize. This may slow or stabilize
the demand for 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. 25




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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. 
 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. In addition, we have reviewed our internal controls over financial
reporting and have made no changes during the quarter ended June 30, 2004 that
our certifying officers concluded materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting. 26




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PART II -  OTHER INFORMATION 
 Item 2. Changes in Securities and Use of Proceeds (c) During
the quarter ended June 30, 2004, we granted options for the
purchase of 178,574 shares of our common stock at an exercise price
of $17.64 per share. The options vest 25% on the anniversary of
the date of the grant and 12.5% on each six-month anniversary
thereafter. These grants were deemed exempt from registration under
the Securities Act in reliance Rule 701 promulgated under the
Securities Act as offers and sales of securities pursuant to certain
compensatory benefit plans and contracts relating to compensation in
compliance with Rule 701. (d) 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 5,000,000 shares of common stock to be sold by
us (4,000,000 shares) and certain of our shareholders (1,000,000 shares). An
additional 750,000 shares belonging to our shareholders were subject to the
underwriters over-allotment option. The stock was offered at $13.00 per share
or an aggregate of $52,000,000 for us, and $13,000,000 for the selling
stockholders. Our common stock commenced trading on July 16, 2004. The offering
closed on July 21, 2004 after the sale of all securities registered, including
the underwriters over-allotment, and as a result, we received net proceeds of
approximately $34.6 million (after underwriters discounts or $3.6 million, the
mandatory $9.5 million conversion and dividend payment of 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 $2.2
million). The selling shareholders received net proceeds of approximately $21
million (after underwriters discounts of approximately $1.6 million),
including the sale of the over-allotment shares. The underwriters of the
offering were Lehman Brothers Inc., Friedman, Billings, Ramsey & Co., Inc. and
Piper Jaffray & Co. No offering expenses were paid directly or indirectly to
our directors, officers (or their associates), or to persons owning 10% or more
of any of our equity securities. We intend to use the net proceeds 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 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNo.
    
    Description of Exhibits10.37
    
    Sixth Loan Modification Agreement dated July 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).
  (b)
    
    Reports on Form 8-K. None 27




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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 Dated: August 27, 2004 28