<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] 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
---------------------
NETGENESIS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3236862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MA 02140
(Address of principal executive offices, including zip code)
(617) 665-9200
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 10, 2000, there were 21,441,350 shares of the registrant's
Common Stock outstanding
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NETGENESIS CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED BALANCE SHEETS
AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 3
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 4
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 5
NOTES TO UNAUDITED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETGENESIS CORP.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,979 $ 9,643
Restricted cash..................................... 358 404
Short-term investments and marketable securities.... 45,624 1,184
Accounts receivable, net............................ 6,116 2,457
Prepaid expenses and other current assets........... 1,720 137
-------- --------
Total current assets.............................. 64,797 13,825
Marketable securities................................. 6,793 --
Fixed assets, net..................................... 9,776 3,697
Other assets.......................................... 1,862 270
-------- --------
Total assets................................ $ 83,228 $ 17,792
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations........ 396 163
Current portion of long-term debt................... 1,321 1,163
Accounts payable.................................... 759 800
Accrued expenses.................................... 3,576 2,963
Deferred revenue.................................... 2,077 1,383
-------- --------
Total current liabilities......................... 8,129 6,472
Long-term portion of capital lease obligations........ 479 323
Long-term debt........................................ 365 1,569
Other long-term liabilities........................... 13 --
-------- --------
Total liabilities................................. 8,986 8,364
-------- --------
Commitments and contingencies (Note 6)................
Redeemable convertible preferred stock................ -- 36,575
-------- --------
Stockholders' equity (deficit):
Convertible preferred stock, Series A-1, $.001 par
value; 200,000 shares authorized, issued and
outstanding at December 31, 1999.................. -- 49
Convertible preferred stock, Series A-2, $.001 par
value; 101,430 shares authorized, issued and
outstanding at December 31, 1999.................. -- 137
Convertible preferred stock, Series A-3, $.001 par
value; 624,000 shares authorized, issued and
outstanding at December 31, 1999.................. -- 1,531
Common stock, $.001 par value; 100,000,000 shares
authorized; 21,341,590 and 3,141,883 issued and
outstanding at September 30, 2000 and December 31,
1999, respectively................................ 21 3
Additional paid-in capital.......................... 128,613 6,606
Deferred compensation............................... (6,102) (5,723)
Note receivable from stockholder.................... (96) (96)
Accumulated deficit................................. (48,261) (30,838)
Accumulated other comprehensive income.............. 67 1,184
-------- --------
Total stockholders' equity (deficit).............. 74,242 (27,147)
-------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)....................................... $ 83,228 $ 17,792
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
NETGENESIS CORP.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue ........................ $ 3,921 $ 1,127 $ 9,248 $ 2,272
Service revenue ........................ 2,810 790 7,034 1,602
------- ------- ------- -------
Total revenue ....................... 6,731 1,917 16,282 3,874
------- ------- ------- -------
Cost of revenue:
Cost of product revenue ................ 222 25 541 99
Cost of service revenue (excluding
stock-based compensation of $83 and $2
for the three months ended September 30,
2000 and 1999, respectively, and $242
and $4 for the nine months ended
September 30, 2000 and 1999,
respectively) ........................ 2,727 896 7,016 1,841
------- ------- ------- -------
Total cost of revenue ................ 2,949 921 7,557 1,940
------- ------- ------- -------
Gross profit ............................. 3,782 996 8,725 1,934
------- ------- ------- -------
Operating expenses:
Sales and marketing (excluding
Stock-based compensation of $186 and
$42 for the three months ended
September 30, 2000 and 1999,
respectively, and $1,110 and $70 for
the nine months ended September 30,
2000 and 1999, respectively).......... 5,373 2,602 14,640 6,068
Research and development (excluding
stock-based compensation of $126 and
$176 for the three months ended September 30,
2000 and 1999, respectively, and
$373 and $193 for the nine months ended
September 30, 2000 and 1999,
respectively)......................... 2,723 1,257 7,730 3,026
General and administrative (excluding
stock-based compensation of $148 and
$3 for the three months ended September 30,
2000 and 1999, respectively, and $417 and
$5 for the nine months ended September 30,
2000 and 1999, respectively).......... 1,693 1,051 4,919 2,047
Stock-based compensation ............... 543 223 2,142 272
------- ------- ------- -------
Total operating expenses ............ 10,332 5,133 29,431 11,413
------- ------- ------- -------
Loss from operations ..................... (6,550) (4,137) (20,706) (9,479)
Other income (loss):
Interest and other income (loss), net .. 1,083 18 2,577 (106)
Gain on sale of short-term investments
and marketable securities ............ -- -- 1,148 --
------- ------- ------- -------
Net loss ................................. $(5,467) $(4,119) $(16,981) $(9,585)
------- ------- ------- -------
Dividends and accretion of redeemable
preferred stock ...................... -- (663) (442) (1,301)
------- ------- ------- -------
Net loss available to common stockholders. $(5,467) $(4,782) $(17,423) $(10,886)
======= ======= ======== ========
Basic and diluted net loss available to
common stockholders per share ........ $ (0.27) $ (3.20) $ (1.07) $ (9.48)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss available to common
stockholders per share................ 20,386 1,496 16,311 1,148
Pro forma basic and diluted net loss per
common share.......................... $ (0.27) $ (0.29) $ (0.89) $ (0.86)
======= ======= ======== ========
Shares used in computing pro forma basic
And diluted net loss per common share. 20,386 14,364 19,081 11,103
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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NETGENESIS CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(16,981) $ (9,585)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................... 1,986 422
Loss on disposal of fixed assets ................... -- 20
Gain on sale of short-term investments and
marketable securities .......................... (1,148) --
Non-cash interest expense .......................... 76 62
Stock-based compensation expense ................... 2,142 272
Increase (decrease) resulting from changes in
operating assets and liabilities:
Accounts receivable ............................. (3,659) (1,149)
Prepaid expenses and other current assets ....... (1,583) (23)
Other assets .................................... 88 --
Deferred revenue ................................ 694 914
Accounts payable ................................ (41) 167
Accrued expenses ................................ 613 506
Other long term liabilities ..................... 13 --
-------- --------
Net cash used in operating activities ......... (17,800) (8,394)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets .......................... (8,065) (1,988)
Purchases of short-term investments and
marketable securities ........................... (60,656) --
Proceeds from sales of short-term investments
and marketable securities ....................... 9,452 --
Decrease (increase) in restricted cash ............... 46 (349)
Increase in other assets ............................. (1,680) --
-------- --------
Net cash used in investing activities ......... (60,903) (2,337)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of fixed
assets .......................................... 547 425
Principal payments of capital lease obligations .... (158) --
Proceeds from issuance of debt ..................... -- 3,000
Repayment of long-term debt ........................ (1,122) (9)
Proceeds from issuance of common stock ............. 80,653 --
Proceeds from issuance of redeemable
convertible preferred stock ..................... -- 20,841
Proceeds from exercise of stock options ............ 129 149
Repurchase of restricted common stock .............. (10) --
-------- --------
Net cash provided by financing activities ..... 80,039 24,406
-------- --------
Net increase in cash and cash equivalents ............ 1,336 13,675
Cash and cash equivalents, beginning of period ....... 9,643 2,261
-------- --------
Cash and cash equivalents, end of period ............. $ 10,979 $ 15,936
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends and accretion of preferred stock ......... $ 442 $ 1,301
Interest paid ...................................... 238 287
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Additions to capital lease obligations for
sale and leaseback of fixed assets .............. 547 425
Convertible preferred stock warrants issued and
recorded as debt discount ....................... -- 255
Conversion of redeemable convertible preferred
stock to common stock ........................... 36,575 --
Conversion of convertible preferred stock
to common stock ................................. 1,717 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown.
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q and therefore do not include all information
and footnotes necessary for a complete presentation of operations, the financial
position, and cash flows of the Company, in conformity with generally accepted
accounting principles. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (File No. 333-93335) filed with the
Securities and Exchange Commission.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.
NOTE 2 - NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER COMMON SHARE AND PRO
FORMA NET LOSS PER COMMON SHARE
Basic and diluted net loss available to common stockholders per share is
computed using the weighted average number of common shares outstanding. Options
and warrants were not included in the computation of diluted net loss available
to common stockholders per share because the effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above except that it
gives effect to the conversion of preferred stock outstanding as if the
conversion took place at the beginning of the period presented:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss ................................ $ (5,467) $ (4,119) $(16,981) $ (9,585)
Dividends and accretion of redeemable
preferred stock ..................... -- (663) (442) (1,301)
-------- -------- -------- --------
Net loss available to common stockholders $ (5,467) $ (4,782) $(17,423) $(10,886)
Weighted average shares ................. 21,179 2,864 17,255 2,185
Weighted average unvested common shares
subject to repurchase ............... (793) (1,368) (944) (1,037)
-------- -------- -------- --------
Shares used in computing basic and
diluted net loss available to common
stockholders per share .............. 20,386 1,496 16,311 1,148
Net loss available to common stockholders
per share:
Basic and diluted .................. $ (0.27) $ (3.20) $ (1.07) $ (9.48)
======== ======== ======== ========
Conversion of convertible preferred stock -- 12,868 2,770 9,955
Pro forma shares used in computing basic
and diluted net loss per share ...... 20,386 14,364 19,081 11,103
Pro forma net loss per share:
Basic and diluted .................. $ (0.27) $ (0.29) $ (0.89) $ (0.86)
======== ======== ======== ========
</TABLE>
Options to purchase shares of NetGenesis' common stock totaling 3,113,649 and
1,350,621 at September 30, 2000 and 1999, respectively, and warrants to purchase
common stock totaling 0 and 296,000 at September 30, 2000 and 1999,
respectively, were outstanding but were not included in the computation of
diluted earnings per share as the inclusion of these shares would have been
anti-dilutive.
NOTE 3 - EQUITY TRANSACTIONS
For the three months ended September 30, 2000 and 1999, the Company recorded
deferred stock-based compensation of ($92,000) and $2.6 million, respectively,
for the difference at the grant date between the exercise price of options
granted and the deemed fair value of the common stock underlying the options
granted during those periods. For the nine months ended September 30, 2000 and
1999, the Company recorded deferred stock-based compensation of $1.8 million and
$3.6 million, respectively, for the difference at the grant date between the
exercise price of options granted and the deemed fair value of the common stock
underlying the options granted during those periods. Amortization of deferred
stock-based compensation for the three months ended September 30, 2000 and 1999
was $492,000 and $69,000, respectively. Amortization of
6
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deferred stock-based compensation for the nine months ended September 30, 2000
and 1999 was $1.4 million and $118,000, respectively. In addition, during the
three months ended September 30, 2000 and 1999, the Company recorded stock-based
compensation expense of $51,000 and $154,000 related to separation agreements
entered into with former employees. During the nine months ended September 30,
2000 and 1999, the Company recorded stock-based compensation expense of $733,000
and $154,000 related to separation agreements entered into with former
employees.
On February 29, 2000, the Company completed an initial public offering of common
stock. In the offering, 4,887,500 shares were sold at $18.00 per share. Net
proceeds to the Company were $80.3 million after $6.2 million in aggregate
underwriting discounts and commissions and $1.5 million in other offering
expenses.
NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Revenue by geographic region is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $5,200 $1,786 $13,563 $3,460
Europe $1,443 91 $ 2,367 338
Australia 88 25 151 51
Other -- 15 201 25
------ ------ ------- ------
Total $6,731 $1,917 $16,282 $3,874
====== ====== ======= ======
</TABLE>
One customer accounted for more than 10% of revenue for the quarter ended
September 30, 2000 and a different customer accounted for more than 10% of
revenue for the quarter ended September 30, 1999. No customer accounted for more
than 10% of revenue for the nine months ended September 30, 2000 or September
30, 1999.
NOTE 5 - COMPREHENSIVE LOSS
The components of comprehensive loss, net of income taxes, are as follows in
thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $(5,467) $(4,119) $(16,981) $(9,585)
Unrealized gain on short-term
investments and marketable
securities 54 542 (1,117) 542
------- ------- -------- -------
Comprehensive loss $(5,413) $(3,577) $(18,098) $(9,043)
------- ------- -------- -------
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In April 2000, the Company entered into an agreement to lease approximately
58,000 square feet of office space for its headquarters for approximately
$174,000 per month plus other occupancy costs. The Company expects to begin
occupancy of this space in December 2000.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer for three quarters the
effective date of implementation of SAB No. 101 with earlier application
encouraged. The Company is required to adopt SAB 101 in the fourth quarter of
fiscal 2000. The Company is still assessing the impact, if any, that SAB 101 may
have on its financial position or results of operation.
7
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NOTE 8 - SUBSEQUENT EVENT
On October 23, 2000 the company completed the acquisition of e-dynamics, a sales
and consulting firm based in Germany. The acquisition was accounted for under
purchase accounting rules with a purchase price of $1.2 million paid in cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed
historical financial information and the notes thereto included in this report
and Management's Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Company's
Registration Statement on Form S-1 (File No. 333-93335).
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THESE
FORWARD-LOOKING STATEMENTS INCLUDING THOSE SET FORTH BELOW UNDER THE CAPTION
"RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE
COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE
MATTERS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL
RISKS AND UNCERTAINTIES.
OVERVIEW
We offer e-customer intelligence software that enables companies to understand
and improve their online businesses. We license our NetAnalysis software product
to customers for a fee and also provide related maintenance and support
services. In addition, we provide professional consulting services. These
services include analytic consulting, product implementation, application
integration, customization of e-customer analysis reporting and training.
We license NetAnalysis and our other software products to our customers
primarily on a perpetual, non-exclusive and non-transferable basis. Our pricing
model is based on the number of the customer's managed servers, the platform
supported and the number of end users of our software, allowing for additional
revenue as a customer's requirements grow. Support and maintenance contracts,
which are purchased with initial product licenses and are renewable annually
thereafter, entitle customers to telephone, e-mail and web-based support and to
routine product upgrades, when and if available. The price for our support and
maintenance services is based on a percentage of the then-current list price of
the software. Consulting fees for implementation services and training are
charged either on a time-and-materials basis or on a fixed-fee basis in the case
of packaged services, such as our FastPath implementation package.
Service revenue consists of fees from professional services and from software
maintenance and support. Professional services include analytic consulting,
product implementation, application integration, report customization, training
and support. We recognize professional services fees as we perform the services.
Customers typically purchase maintenance and support agreements annually. We
recognize revenue from maintenance and support agreements ratably over the term
of the agreement, typically one year. We record cash receipts from clients and
billed amounts due from clients in excess of revenue recognized as deferred
revenue. The timing and amount of cash receipts from clients can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amount of deferred revenue in any given period.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and professional services departments, and to establish our
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since December 31, 1994 and, as of September 30, 2000, had an
accumulated deficit of $48.3 million. We anticipate that our operating expenses
will continue to increase in future quarters as we increase sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional consulting services and support, and
improve operational and financial systems. We expect that these operating
expenses, as well as anticipated capital expenditures, will constitute a
material use of our cash resources. We expect to incur additional losses and
continued negative cash flow from operations. We may not achieve or sustain
profitability or positive cash flow from operations.
We have recorded deferred stock-based compensation related to grants of stock
options. This amount represents the difference between the exercise price of
these stock option grants and the amount subsequently determined to be the fair
market value of the underlying common stock for financial reporting purposes at
the time of grant. Of this amount, we amortized approximately $492,000 and $1.4
million in the quarter and nine months ended September 30, 2000,
8
<PAGE> 9
respectively. In addition, we recorded stock-based compensation expense of
$51,000 and $733,000 related to severance agreements entered into with former
employees for the quarter and nine months ended September 30, 2000,
respectively. We will amortize $6.1 million of stock-based compensation ratably
over the remaining vesting periods of the options, generally four years or less,
which will affect our reported results of operations through 2003. All of these
amounts appear on our statements of operations as stock-based compensation.
RESULTS OF OPERATIONS
Total Revenue. Total revenue increased by $4.8 million, or 251%, to $6.7
million for the quarter ended September 30, 2000 from $1.9 million for the
quarter ended September 30, 1999. Total revenue increased by $12.4 million, or
321%, to $16.3 million for the nine months ended September 30, 2000 from $3.9
million for the nine months ended September 30, 1999. One customer accounted for
more than 10% of total revenue for the quarter ended September 30, 2000. A
different customer accounted for more than 10% of total revenue for the quarter
ended September 30, 1999. No customer accounted for 10% of total revenue in
either the nine months ended September 30, 2000 or the nine months ended
September 30, 1999. We expect that because of our small historical revenue base,
the recent percentage growth rates of our total revenue will not be sustainable
in the future.
International sales accounted for approximately 23% and 7% of our total revenues
for the quarters ended September 30, 2000 and 1999, respectively. International
sales accounted for approximately 17% and 11% of our total revenues for the nine
months ended September 30, 2000 and 1999, respectively. The majority of
international sales to date were made in Canada and Europe by our direct sales
force located in the United States and London.
Product Revenue. Product revenue increased by $2.8 million, or 248%, to
$3.9 million for the quarter ended September 30, 2000 from $1.1 million for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
product revenue was $9.2 million, an increase of $6.9 million, or 307% from $2.3
million for the nine months ended September 30, 1999. Substantially all of the
growth in product revenue was due to increases in the average dollar size of
licenses, attributable to larger implementations and price increases, as well as
the increase in the overall number of deals. Product revenue as a percentage of
total revenue decreased to 58% for the quarter ended September 30, 2000 from 59%
for the quarter ended September 30, 1999. Product revenue as a percentage of
total revenue decreased to 57% for the nine months ended September 30, 2000 from
59% for the nine months ended September 30, 1999. We anticipate that revenue
from licenses of NetAnalysis will continue to represent a majority of our
revenues in the future.
Service Revenue. Service revenue increased by $2.0 million, or 256%, to
$2.8 million for the quarter ended September 30, 2000 from $790,000 for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
service revenue was $7.0 million, an increase of $5.4 million, or 339% from $1.6
million for the nine months ended September 30, 1999. The increases in service
revenue were primarily attributable to increased implementation and consulting
services delivered in connection with increased product license sales. To a
lesser extent, the increases were attributable to increased average dollar size
of maintenance contracts associated with higher dollar value sales of
NetAnalysis licenses. We expect that because of our small historical revenue
base, the recent percentage growth rates of our service revenue will not be
sustainable in the future.
Cost of Product Revenue. Cost of product revenue consists primarily of
royalties associated with third-party software embedded in our software products
and software product costs, such as user manuals, packaging and media costs.
These costs were $222,000 and $541,000, or 6% of product revenue for the three
and nine months ended September 30, 2000, as compared to $25,000 and $99,000, or
2% and 4%, respectively, of product revenue for the corresponding periods in
fiscal 1999. The increases in costs of revenues in absolute dollar amounts
reflect the higher volumes of product shipped and related third-party royalties.
Cost of Service Revenue. Cost of service revenue consists primarily of
salaries, benefits and associated overhead costs of our professional services
organization. These costs, excluding stock-based compensation, were $2.7 million
and $7.0 million, respectively, for the three and nine months ended September
30, 2000, as compared to $896,000 and $1.8 million, respectively, for the
corresponding periods in fiscal 1999. Substantially all of these absolute dollar
increases were attributable to the increased number of personnel in our
professional services organization. Our growth has required that we invest in
hiring and training personnel and building a management and operational
infrastructure. Cost of service revenue as a percentage of service revenue was
97% and 100%, respectively, for the three and nine months ended September 30,
2000, as compared to 113% and 115% respectively, for the corresponding periods
in fiscal 1999.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of personnel costs, including related overhead costs and commissions,
as well as travel and entertainment expenses, trade show and other promotional
expenses, advertising, and other marketing costs. Sales and marketing expenses,
excluding stock based compensation, were $5.4 million and $2.6 million, or 80%
and 136% of total revenues, for the quarters ended September 30, 2000 and 1999,
respectively. Sales and marketing expenses, excluding stock based compensation,
were $14.6 million and $6.1 million, or 90% and 157% of total revenues, for the
nine months ended September 30, 2000 and
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1999, respectively. The increases in sales and marketing expenses in absolute
dollar amounts were primarily attributable to increased personnel-related costs
associated with increased headcount in our sales and marketing organizations and
related increases in incentive compensation paid to sales personnel. The
decreases in sales and marketing expenses as a percentage of total revenue were
due primarily to increased productivity from our personnel compared to the prior
year periods. We expect that sales and marketing expenses will continue to
increase in dollar amount to support marketing programs for new product
launches, promotion of awareness of our corporate and brand names, international
expansion and increased sales efforts.
Research and Development Expenses. Research and development expenses consist
primarily of salaries, benefits and related overhead costs attributable to our
research and development organization, as well as the cost of consultants.
Research and development expenditures are charged to operations as incurred.
Research and development expenses, excluding stock based compensation, were $2.7
million and $1.3 million, or 40% and 66% of total revenues, for the quarters
ended September 30, 2000 and 1999, respectively. Research and development
expenses, excluding stock based compensation, were $7.7 million and $3.0
million, or 47% and 78% of total revenues, for the nine months ended September
30, 2000 and 1999, respectively. The increases in research and development
expenses in absolute dollar amounts were primarily attributable to increased
staffing and associated support for software engineers required to expand and to
enhance our product offerings. The decreases in research and development
expenses as a percentage of total revenue were due primarily to the fact that
the rate of growth of our total revenue exceeded our planned rate of growth in
research and development expenditures. We believe that research and development
expenses will continue to increase in dollar amount as we add additional
research and development personnel.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, benefits and related overhead costs associated
with our executive, finance, human resources, legal, accounting and internal
information systems functions. General and administrative expenses, excluding
stock based compensation, were $1.7 million and $1.1 million, or 25% and 55% of
total revenues, for the quarters ended September 30, 2000 and 1999,
respectively. General and administrative expenses, excluding stock based
compensation, were $4.9 million and $2.0 million, or 30% and 53% of total
revenues, for the nine months ended September 30, 2000 and 1999, respectively.
The increases in general and administrative expenses in absolute dollar amounts
were primarily attributable to increased staffing and associated expense
necessary to manage and support our growth. The decreases in general and
administrative expenses as a percentage of total revenue were due primarily to
the fact that the rate of growth of our total revenue exceeded our planned rate
of growth in general and administrative expenditures. We expect that general and
administrative expenses will continue to increase in dollar amount as we expand
our operations and infrastructure to support our planned future growth and
transition to operating as a public company.
Stock-based Compensation. We incurred stock-based compensation expense of
$543,000 and $223,000 for the quarters ended September 30, 2000 and 1999,
respectively. For the quarter ended September 30, 2000, the expense includes
$51,000 related to the extension of options in connection with employee
severance. It also includes $492,000 for amortization of the deferred expense
attributable to the issuance of stock options with exercise prices less than the
amount subsequently determined to be the fair market value of the underlying
stock for financial reporting purposes on the date of grant. For the nine months
ended September 30, 2000 and 1999, we incurred stock-based compensation expense
of $2.1 million and $272,000, respectively. For the nine months ended September
30, 2000, the expense includes $733,000 related to the extension of options in
connection with employee severance. It also includes $1.4 million for
amortization of the deferred expense attributable to the issuance of stock
options with exercise prices less than the amount subsequently determined to be
the fair market value of the underlying stock for financial reporting purposes
on the date of grant. These options generally vest over four years or less. The
remaining deferred compensation expense of approximately $6.1 million will be
amortized ratably over the remaining vesting periods of the options, and will
affect periods ending after September 30, 2000.
Other Income (Loss). Other income (loss) consists of interest income,
interest expense, other income, other expenses, and realized gain on the sale of
marketable securities. Other income (loss) resulted in income of $1.1 million
for the quarter ended September 30, 2000 and a loss of ($18,000) for the quarter
ended September 30, 1999. The increase was due to higher interest income
incurred on larger average outstanding cash and investment balances attributable
to our initial public offering during the quarter ended March 31, 2000. Other
income (loss) was $3.7 million for the nine months ended September 30, 2000 and
($106,000) for the nine months ended September 30, 1999. Approximately $1.1
million of the increase was due to realized gains on marketable securities we
sold in the quarter ended March 31, 2000. The balance of the increase was due to
higher interest income incurred on larger average outstanding cash and
investment balances attributable to our initial public offering.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer for three quarters the
effective date of implementation of SAB No. 101 with earlier application
encouraged. The Company is required to adopt SAB 101 in the fourth quarter of
fiscal 2000. The Company is still assessing the impact, if any, that SAB 101 may
have on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private sales of preferred stock, with net proceeds of $35.0 million, and
through the net proceeds of $80.3 million from our initial public offering
completed in February of 2000. To a lesser extent, we have financed our
operations through debt and lease financing. As of September 30, 2000, we had
$63.7 million in cash and cash equivalents, restricted cash, and short and long
term investments, an increase of $52.5 million from $11.2 million as of December
31, 1999.
We used $17.8 million of cash in operations in the nine months ended
September 30, 2000 compared to $8.4 million in the nine months ended September
30, 1999. Net cash used in operations for the nine months ended September 30,
2000 was primarily attributable to our $17.0 million net loss generated during
the period, an increase in accounts receivable of $3.7 million and an increase
in prepaid expenses and other current assets of $1.6 million. This was offset in
part by non-cash charges for stock-based compensation expense of $2.1 million
and depreciation and amortization expense of $2.0 million, and increases in
deferred revenue and accrued expenses of $694,000 and $613,000, respectively.
Cash provided by financing activities was $80.0 million for the nine months
ended September 30, 2000 and $24.4 million for the nine months ended September
30, 1999. The principal source of financing for the nine months ended September
30, 2000 was the Company's initial public offering, completed in February 2000,
which yielded net proceeds of $80.3 million.
Our investing activities resulted in net cash used of $60.9 million for the
nine months ended September 30, 2000 and $2.3 million for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, approximately
$60.7 million of cash was used for the purchase of investments and marketable
securities and approximately $8.1 million was used for investment in capital
expenditures.
Our capital expenditures consist primarily of purchases of property and
equipment, Including computer equipment and software. We expect that our capital
expenditures will continue to increase in the future.
We have a subordinated debt agreement with Comdisco, Inc. under which we
have obtained a term loan of $3.0 million and an equipment line of credit of up
to $1.0 million. The term loans and the equipment line are payable in 36 monthly
payments and bear interest at rates of 13.5% and 9%, respectively. As of
September 30, 2000, we had $1.7 million outstanding under the term loan
agreement and $875,000 outstanding under the equipment line. No additional
amounts are available for borrowing under the term loan agreement. In order to
lease additional equipment under the equipment line of credit, we must not be in
default under the equipment line or under any other agreement, and there must
not have been a material change in our credit standing or in our ability to
perform our obligations under the equipment line. We believe we were in
compliance with these conditions as of September 30, 2000.
We expect to experience significant growth in our operating expenses in the
future in order to execute our business plan, particularly research and
development and sales and marketing expenses. As a result, we anticipate that
our operating expenses, as well as planned capital expenditures, will constitute
a material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in complementary businesses, technologies or
product lines. We believe that the net proceeds from the sale of common stock in
our initial public offering will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. Thereafter, we
may find it necessary to obtain additional equity or debt financing. Any needed
financing may not be available to us on commercially reasonable terms, if at
all.
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RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our capital stock or other securities is
cautioned to carefully consider these factors, along with the factors discussed
under the heading "Risk Factors" in the Company's Registration Statement on Form
S-1 (File No. 333-93335).
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR FUTURE
OPERATIONS
Although we were formed in 1994, our current business operations have a
limited history. We introduced the first version of our NetAnalysis software in
January 1996 and recorded our first revenue from this product and related
services in February 1996. To date, we have generated only limited amounts of
revenue from the sale of NetAnalysis and related products and services.
Accordingly, there is limited information about our company with which to
evaluate our business and prospects. Before buying our common stock,
consideration should be given to the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets,
particularly those companies whose businesses depend on the Internet.
WE HAVE A HISTORY OF LOSSES, EXPECT TO INCUR SUBSTANTIAL LOSSES AND
NEGATIVE OPERATING CASH FLOWS AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
IN THE FUTURE
We have not achieved profitability since 1994. We expect to continue to
incur substantial losses and may never become profitable. We incurred net losses
of $3.1 million in 1997, $5.8 million in 1998 and $16.0 million in 1999. As a
result of ongoing operating losses, we had an accumulated deficit of $48.3
million at September 30, 2000. As we grow our business, we expect operating
expenses and capital expenditures to increase, and we expect to continue to
incur losses and negative cash flow from operations. As a result, we will need
to generate significant revenue to achieve and maintain profitability. We do not
believe that we can sustain the percentage rates at which our revenue has grown
in recent quarters. We may not be able to sustain or increase profitability or
cash flows from operations on a quarterly or annual basis in the future. Our
failure to achieve or maintain profitability may materially and adversely affect
the market price of our common stock.
WE EXPECT OUR REVENUE AND RESULTS OF OPERATIONS TO FLUCTUATE. THE MARKET
PRICE OF OUR COMMON STOCK WOULD LIKELY FALL IF OUR QUARTERLY RESULTS ARE
LOWER THAN THE EXPECTATIONS OF SECURITY ANALYSTS OR STOCKHOLDERS
We have experienced substantial fluctuations in both our annual and
quarterly revenue and results of operations, and we expect those fluctuations to
continue for the foreseeable future. We believe the following factors are those
most likely to cause our revenue and results of operations to fluctuate:
- uncertain demand for our products and services
- unanticipated changes in the market for e-customer intelligence
software
- the timing of sales and delivery of our products and services
- the timing of customer implementations of our products
- the mix of revenue derived from our products and services
- timing of introductions of new products and services by us or our
competitors
- seasonal trends in our customers' business activity
- timing of hiring of personnel and changes in productivity of our
professional services personnel and direct sales personnel
If our revenue or results of operations fall below the expectations of
securities analysts or investors, the market price of our common stock would
likely fall. We budget our expenses in part according to the revenue we
forecast. A significant percentage of our expenses, particularly salaries and
rent, are relatively fixed. As a result, if our revenue falls below our
expectations, we may be unable to curtail our expenses quickly enough to avoid
losses greater than expected. As a result, our results of operations may be
volatile and difficult to predict. We do not believe that period-to-period
comparisons of our revenue and operating results are necessarily meaningful. You
should not rely on the results of one quarter as an indication of future
performance.
MOST OF OUR REVENUE EACH QUARTER IS DERIVED FROM A SMALL NUMBER OF LARGE
ORDERS. IF WE FAIL TO COMPLETE ONE OR MORE LARGE ORDERS IN ANY QUARTER, OUR
REVENUE COULD BE SIGNIFICANTLY LOWER THAN EXPECTED
We derive a significant portion of our revenue in each quarter from a small
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number of large orders. For example, during the three months ended September 30,
2000, one customer accounted for more than 10% of our total revenue. Our
quarterly operating results could be adversely affected if we were unable to
complete one or more large orders in any quarter.
OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, MAKING IT DIFFICULT TO
FORECAST OUR REVENUES AND BUDGET OUR EXPENSES
Our sales cycles are long and unpredictable, in part because we generally
need to educate potential customers about the benefits of e-customer
intelligence software. In addition, we believe that, for many of our potential
customers, the purchase of our software and services can represent a significant
portion of their web site budget and a substantial commitment of personnel
resources. As a result, we experience widely varying sales cycles that typically
range from two to six months. Our long and varying sales cycles make it
difficult to predict the quarter in which particular sales may occur and,
therefore, to forecast our revenue and budget our expenses. Moreover, we believe
that, as our business develops, a significant portion of our sales will
increasingly fall within the last month of a quarter, making it difficult to
predict revenue until late in the quarter and to adjust expenses accordingly.
WE FACE INTENSE COMPETITION, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY,
WE COULD EXPERIENCE REDUCED DEMAND FOR OUR PRODUCTS AND SERVICES, PRICE
REDUCTIONS AND REDUCED GROSS MARGINS FOR OUR PRODUCTS AND SERVICES, ANY OF
WHICH WOULD SERIOUSLY HARM OUR BUSINESS
Even though the market for e-customer intelligence software and other web
site analysis software is immature, it is already intensely competitive,
fragmented, evolving and subject to rapid technological change. We expect
competition to intensify in the future. Increased competition could result in
reduced demand for our products and services, price reductions and reduced gross
margins for our products and services, any of which could seriously harm our
business.
We may not be able to compete successfully against current and future
competitors. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. They have significantly greater name recognition and a larger installed
base of customers than we have. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our target markets. As a result, our competitors may be
able to respond more quickly to evolving industry standards and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. In the past, we have lost
potential customers to competitors for various reasons and may continue to do
so.
OUR ABILITY TO INCREASE REVENUE DEPENDS ON EXPANDING OUR DIRECT SALES
FORCE, WHICH MAY BE DIFFICULT BECAUSE OF THE SHORTAGE OF QUALIFIED SALES
PERSONNEL AND BECAUSE IT TAKES TIME FOR NEW HIRES TO BECOME PRODUCTIVE
If we are unable to significantly expand our direct sales force, we may not
increase our market share or revenue, which could seriously harm our business.
To date, we have derived the substantial majority of our revenue from the
efforts of our direct sales force. We believe we must increase the size of our
direct sales force in order to increase revenue. Competition for qualified sales
personnel is intense, and we may not be able to hire a sufficient number of
sales people with the skills we need. Moreover, the technical nature of our
products lengthens the time it takes for our new sales people to become
productive, typically three to six months. This lag in productivity may make it
more difficult to meet our sales growth targets. Further, we may not generate
sufficient sales to offset the increased expense resulting from growing our
sales force, and we may be unable to manage a larger sales force.
IF WE ARE UNABLE TO EXPAND OUR INDIRECT SALES THROUGH INTERNET-ORIENTED
SYSTEMS INTEGRATORS, RESELLERS, ORIGINAL EQUIPMENT MANUFACTURERS AND
APPLICATION SERVICE PROVIDERS, WE MAY NOT MAINTAIN OR INCREASE OUR MARKET
SHARE OR REVENUE, WHICH COULD SERIOUSLY HARM OUR BUSINESS
Our strategy includes developing relationships with a variety of
Internet-oriented systems integrators, resellers, original equipment
manufacturers and application service providers in the United States and abroad
to augment the efforts of our direct sales force. These third parties may not
succeed in marketing or selling our products and services. We have little or no
control over the activities of these third parties, and poor performance by any
of them could injure our reputation, create liabilities for us and seriously
harm our business. These third parties may also market and sell competing
products and services, which could adversely affect sales of our products and
services. We may be unable to effectively manage potential conflicts among these
third parties. Our reliance on these third parties may also increase our credit
risk because we effectively bear the risk of non-payment by both the third
parties and their customers. Any failure by these parties to pay for our
products and services in a timely manner could reduce our cash flows and harm
our financial condition.
BECAUSE THERE IS INTENSE COMPETITION FOR QUALIFIED PERSONNEL IN OUR
INDUSTRY, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN THE PERSONNEL WE NEED,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES
Our ability to achieve our business objectives could be adversely affected
if we cannot identify, attract, hire, train, retain and motivate a substantial
number of additional personnel. In particular, we are seeking to hire highly
skilled systems engineers and other technical and engineering personnel and
employees for our professional services organization. Because of the technical
nature of our products, it typically takes several months to train our
professional service personnel to provide services effectively. If we are unable
to expand and train our professional services staff, we could be unable to meet
customer demand for our services, which could cause customer dissatisfaction and
lost sales. Our headquarters are located in the metropolitan Boston,
Massachusetts area, and competition for qualified personnel in this area, as
well as the other areas where we need personnel, is intense. Competition is
particularly strong for qualified systems engineers and other software
development and technical personnel. Many other employers are able to offer
significantly more attractive compensation and benefits than we do. We may be
unable to recruit and retain the personnel we need. Our business would be
seriously harmed if we are unable to retain our existing employees or to hire
the other highly qualified personnel we need.
THE EXPANSION OF OUR BUSINESS HAS PLACED, AND CONTINUES TO PLACE, A
SIGNIFICANT STRAIN ON OUR MANAGEMENT, OPERATING SYSTEMS AND RESOURCES AND
COULD SERIOUSLY HARM US
Our failure to properly manage the expansion of our business could
seriously harm us. Our business has recently experienced a period of significant
and rapid expansion that has placed, and continues to place, a significant
strain on our management, operating systems and resources. During the nine
months ended September 30, 2000, the number of our employees grew from 150 to
239, and we plan to continue to expand our business by hiring additional
personnel. To the extent that our business continues to grow rapidly, we must
implement and improve our operating systems, including our administrative,
financial, customer service and operational systems, procedures and controls. We
are currently implementing a new software system for human resources management,
including payroll and benefits. Our financial accounting and enterprise resource
planning software system implementations were completed in January 2000. We
could be seriously harmed if our current and anticipated personnel, systems,
procedures and controls are inadequate to support our future operations, or if
we are unable to complete the necessary improvements to our systems, procedures
and controls on a timely basis.
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WE MAY NEED TO ACQUIRE COMPLEMENTARY PRODUCTS, SERVICES, BUSINESSES OR
TECHNOLOGIES TO REMAIN COMPETITIVE. ACQUISITIONS MAY BE UNAVAILABLE TO US
OR MAY EXPOSE US TO RISKS THAT COULD NEGATIVELY AFFECT OUR OPERATING
RESULTS
We believe our customers will increasingly demand additional product
capabilities, features and services. Our internal resources may be inadequate to
meet those demands on a timely basis. As a result, we may need to acquire
products, services, businesses, technologies or other capabilities in order to
remain competitive. Our failure to meet customer demands could seriously harm
our business. We may be unable to successfully identify or acquire on
commercially reasonable terms the products, services, businesses, technologies
or capabilities that we need. Many of our competitors have greater financial
resources and more well-established industry relationships than we do, and may
therefore compete more effectively for acquisition opportunities. If we make an
acquisition, we may be exposed to additional risks that could seriously harm our
business, including the following:
- acquired products, businesses, services, technologies and capabilities
may not meet customer needs or may not achieve or sustain widespread
market acceptance
- we may encounter difficulties in assimilating acquired products,
services, businesses, technologies and capabilities
- we may encounter difficulties in integrating acquired personnel and
operations
- acquired products, services, businesses, technologies and capabilities
may result in decreased revenue from our existing products and services
Acquisitions could disrupt our ongoing business, distract our employees,
increase our expenses and adversely affect our results of operations. We could
issue equity securities to pay for an acquisition, which could dilute the equity
interests of our existing stockholders. In addition, acquisitions may involve
investment-related or other charges and amortization of acquired technology,
goodwill and other intangible assets, which may adversely affect our results of
operations.
FUTURE EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE SIGNIFICANT
MANAGEMENT ATTENTION AND FINANCIAL RESOURCES AND OUR EFFORTS TO EXPAND
INTERNATIONALLY MAY NOT SUCCEED
We intend to expand our international operations and international sales
and marketing efforts, particularly in Europe and Asia. We currently have
offices in the United Kingdom and Australia, as well as sales personnel in
Scandinavia. We recently acquired a sales and consulting company in Germany. We
have limited experience in developing localized versions of our software
products and in marketing, selling and distributing our software and services
internationally. To successfully expand international sales, we must expand our
international operations, recruit additional international sales and support
personnel, and expand our international distribution channels. This
international expansion strategy will require significant management attention
and financial resources, and we may not be successful in implementing our
strategy. Our failure to manage these risks adequately could seriously harm our
business.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY SMALL DELAYS IN CUSTOMER
ORDERS OR PRODUCT INSTALLATIONS
Small delays in customer orders can cause significant variability in our
license revenue and operating results for any particular period. We derive a
substantial portion of our revenue from the sale of software products and
related services. Our revenue recognition policy generally requires us to
deliver the software prior to recognizing any revenue for the product and to
substantially complete the implementation of our product before we can recognize
service revenue. Any end of quarter delays in orders for delivery or product
installation schedules could harm operating results for that quarter.
OUR BUSINESS AND PROSPECTS WOULD SUFFER IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS
Our success depends in large part on our intellectual property,
particularly our software. If we fail to successfully enforce our intellectual
property rights, other companies might copy our technology or introduce products
or services that compete with ours. This could reduce our revenues and weaken
our competitive position. We rely solely on a combination of copyright,
trademark and trade secrets law, assignment of invention and confidentiality
agreements, confidentiality procedures and licensing arrangements to establish
and protect our intellectual property rights. We have no patents. We have filed
a provisional patent application relating to our NetActivator technology. We
have registered the trademark NetGenesis in the United States, Canada and
Australia, the trademarks NetAnalysis, Design for Analysis, and ReportSite in
the United States and the trademark CartSmarts in Australia. We also claim
trademark and service mark rights in the NetGenesis "Lens" logo, Miscellaneous
Design (Box Design), NetGenesis and Design (Box Design), The Start of Smart,
FastPath, StrategicPath, InfraMarketing, InfraMation, InfraMetrics, DFA, NDCA,
NDK, CartSmarts, CampaignSmarts, CustomerSmarts, LoyaltySmarts, TradeSmarts,
TargetSmarts, Vision Engine, AdSmarts, NetDashboard, NetInstrument, NetStream
and ReportSite. Our efforts to protect our intellectual property may be
inadequate. Existing trade secret, copyright and trademark laws offer only
limited protection, and we may be unsuccessful in obtaining that protection, or
our efforts to obtain that protection may be opposed by others. For example, we
have been advised that our application to register the mark NetGenesis in the
European Union has been opposed by a large Spanish insurance company that owns a
number of marks incorporating the word "Genesis." In addition, the laws of some
foreign countries where we market our products and services do not protect
intellectual property rights to the same extent as do the laws of the United
States. We may be required to spend significant resources to monitor
infringement of and enforce our intellectual property rights.
Third parties could copy or otherwise obtain and use our products or
technology without our authorization. They could also independently develop
similar technology that may infringe our intellectual property rights. We may
not be able to detect infringement and may lose our competitive position in the
market before we do so. Competitors may also design around our technology or
develop competing technologies. If this occurs, our business and prospects would
be materially and adversely affected.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD HARM OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reliance on intellectual property rights is pervasive in our industry, and
we expect that as competition intensifies, companies will continue to pursue
vigorous enforcement of their intellectual property rights through litigation
and other means. As a result, third parties may claim that our products or
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services infringe their intellectual property rights. Any such claim could
seriously harm our business, results of operations and financial condition. We
have not performed a comprehensive analysis of patents that may limit our
ability to do business. An increasing number of companies are seeking and
obtaining patents regarding methods of doing business on the Internet, and valid
patents that apply to our methods of doing business may have been issued or may
be issued in the future. Defending any claim of intellectual property
infringement, regardless of merit, is expensive and time-consuming and may
distract our management's attention away from our business. As a result of any
claim or anticipated claim, we may agree or be forced to:
- pay substantial damages
- cease selling or using products and services that incorporate the
infringed intellectual property
- obtain a license for the infringed intellectual property, which might
not be available on commercially reasonable terms or which could
adversely affect our results of operations and financial condition
- attempt to modify our products and services to avoid infringing others'
intellectual property rights, which we might be unable to do at all or
quickly enough to prevent serious harm to our competitive position in
the market
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Provisions of our certificate of incorporation and by-laws may discourage,
delay or prevent a merger, acquisition or change of control that a stockholder
may consider favorable. These provisions could also discourage proxy contests
and make it more difficult for stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
- authorizing the issuance of "blank check" preferred stock
- providing for a classified board of directors with staggered,
three-year terms
- providing that directors may only be removed for cause by a two-thirds
vote of stockholder
- limiting the persons who may call special meetings of stockholders
- prohibiting stockholder action by written consent
- establishing advance notice requirements for nominations for election
to the board of directors and for proposing matters to be submitted to
a stockholder vote
Delaware law may also discourage, delay or prevent someone from acquiring
or merging with our company or obtaining control of our company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuation, and changes in the market values of its investments.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relate primarily
to our investment portfolio. We have not used derivative financial instruments
in our investment portfolio. We invest our excess cash in debt instruments of
the U.S. Government and its agencies, and in high-quality corporate issuers. We
protect and preserve our invested funds by seeking to limit default, market and
reinvestment risk.
Investment in both fixed rate and floating rate interest-earning instruments
carries a degree of interest rate risk. The fair market value of fixed rate
securities may be adversely affected by a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
FOREIGN CURRENCY RISK
To date, international sales are made by our direct sales force or through
international alliances and are primarily transacted in U.S. dollars. As we
continue to increase our international business we could be subject to risks
typical of an international business, including but not limited to differing
economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely affected by
changes in these or other factors.
We do not use derivative financial instruments for speculative trading purposes,
nor do we hedge any foreign currency exposure in a manner that entirely offsets
the effects of changes in foreign exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that are material to our business
or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Not applicable
d. Use of Proceeds from Sale of Registered Securities.
On February 29, 2000 we completed an initial public offering of our Common
Stock, $0.001 par value. The managing underwriters in the offering were Chase
Securities, Inc., Deutsche Bank Securities, Inc., and U.S. Bancorp Piper
Jaffray, Inc. (the "Underwriters"). The shares of Common Stock sold in the
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offering were registered under the Securities Act on a Registration Statement on
Form S-1 (the "Registration Statement") (File No. 333-93335) that was declared
effective by the Securities and Exchange Commission on February 28, 2000. The
offering commenced on February 29, 2000, on which date the 4,887,500 shares of
Common Stock registered under the Registration Statement (including 637,500
shares issued upon exercise of the underwriters' over-allotment option) were
sold at a price of $18.00 per share. The aggregate underwriting discounts and
commissions to the Underwriters were $6.2 million and the aggregate net proceeds
to the Company were approximately $80.3 million after deducting offering
expenses of $1.5 million. Through September 30, 2000, we have applied the net
proceeds of the offering approximately as follows: $13.5 million for working
capital; $7.3 million for purchases of fixed assets; and, $995,000 for the
repayment of principal on our indebtedness and capital lease obligations. The
balance of the net proceeds, in the amount of $61.5 million has been invested in
temporary investments, consisting primarily of high-grade government agency and
corporate bonds, pending their future application.
We currently expect to use the balance of net proceeds primarily for working
capital and general corporate purposes, including funding product development
and expanding the sales and marketing organization. The amounts and timing of
these expenditures will vary depending on a number of factors, including the
amount of cash generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business. In addition, we
may use a portion of the net proceeds for further development of our product
lines through acquisitions of products, technologies and businesses.
None of our offering expenses or the net proceeds of the offering were paid
directly or indirectly to any director, officer, general partner of NetGenesis
or their associates, persons owning 10% or more of any class of equity
securities of NetGenesis, or any affiliate of NetGenesis.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
*3.3 Amended and Restated Certificate of Incorporation
*3.5 Amended and Restated By-Laws
27.1 Financial Data Schedule
* Incorporated by reference to the similarly numbered exhibit filed as
part of our Registration Statement on Form S-1, File No. 333-93335.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETGENESIS CORP.
By: /s/ Paul G. Fitzgerald
--------------------------------------
PAUL G. FITZGERALD
VP, FINANCE
(PRINCIPAL ACCOUNTING AND FINANCE OFFICER)
Date: November 10, 2000
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Exhibit number Description
-------------- -----------
<S> <C>
*3.3 Amended and Restated Certificate of Incorporation
*3.5 Amended and Restated By-Laws
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to the similarly numbered exhibit filed as part of
our Registration Statement on Form S-1, File No. 333-93335.
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