Cash Burn
By far, the largest problem for drkoop.com is the fact that the company is a huge cash incinerator. In the first quarter, it reported sales of $4.7 million and a net loss of $24.8 million. Just think about those figures for a moment. Then think about the fact that drkoop.com saw its revenues decrease sequentially from the fourth quarter -- not exactly a sign of healthy growth.
Looking at the company's income statements in context with its balance sheet really makes drkoop.com's dire situation apparent. At the end of the first quarter, the company only had $23.9 million in cash to sustain the business. There is a reason the company's auditors recently expressed "substantial doubt" about its viability. Namely, there is only about four months' worth of cash fuel left in the tanks.
If that wasn't enough, drkoop.com has a series of high-dollar contracts that are sure to keep the cash drain from abating anytime soon. Last year, drkoop.com signed an $89 million marketing deal with America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and another $58 million deal with GO.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GO)") else Response.Write("(NYSE: GO)") end if %>. Never mind that drkoop.com never had the cash to pay for this exposure.
The company has renegotiated some of these deals, since it didn't have the cash to pay the bills when due, which is never a good sign. In lieu of the cash it was supposed to get, AOL took 3.5 million shares of drkoop.com stock as payment for its services, and the GO.com contract was also renegotiated. These are the actions of a company desperately fighting for survival. Further significant shareholder dilution down the road (if there is a "down the road" for drkoop.com) is a sure thing.
Broken Model
In the first quarter, drkoop.com took in $3.9 million in advertising revenue (its main source of revenue at 82% of total revenue), while it spent $19.4 million on sales and marketing. It doesn't take a genius to see that this model of paying a quarter to get a nickel doesn't work.
Low Morale
While I don't personally know anyone that works at drkoop.com, I'm certain that morale at the company is riding as low as the company's stock. (At this writing, the stock was at $2 1/4 per share, down from a high exceeding $45 per share less than a year ago.) As with most Internet companies, a significant portion of any given employee's compensation comes in the form of stock options. Many of drkoop.com's incentive options are essentially worthless now, since the strike prices are generally far above where the stock is trading today. (That is, unless you are one of the lucky drkoop.com founders holding options with pocket-change strike prices. More on that in a bit.)
Beyond seeing the value of their options go up in smoke, employees have also had to wave farewell to many of their coworkers. It has been widely reported that the company laid off approximately 35-40% of its employees since the beginning of April. If this isn't a sign of deep trouble, I don't know what is.
Either way, between the need to be frugal, the cratering stock, and the ongoing terminations, drkoop.com is going to be fighting a massive uphill battle to attract and retain the talented people needed to make an Internet-focused company a success. I'm also positive that those unfortunate enough to be inside the company today are looking for the nearest emergency exit.
Controversial Management
When I look at drkoop.com's upper management, I see two major problems that really make me wonder just how investor-friendly they really are. First, the company brought itself public way too early, with little more than a business plan and the drkoop.com name in hand. This indicates to me that the company's founders were more interested in cashing in on the hot IPO market of the time, rather than going through the rational steps of building a sustainable business.
Then there's also the issue of questionable insider sales. Back in February, a number of drkoop.com insiders (including Dr. Koop himself) made a series of stock sales... netting themselves, as a group, several million dollars. Significant insider sales, on their own, are always a yellow flag, but these are especially troubling since they were made just a few weeks before the auditors diagnosed the company with a potentially terminal illness.
All in all, it seems that drkoop.com's management team wants to get rich quick instead of building a company for the ages. Remember, when executives of busted companies get rich, it is from the money of investors who were left holding the bag. Know a dying company when you see it, and don't be the one holding the bag.
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