<PAGE> 1
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 JUNE 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 AUGUST 8, 2000, there were 21,147,015 shares of the registrant's
Common Stock outstanding.
<PAGE> 2
NETGENESIS CORP.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED BALANCE SHEETS
AT JUNE 30, 2000 AND DECEMBER 31, 1999 3
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 4
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETGENESIS CORP.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,518 $ 9,643
Restricted cash..................................... 358 404
Short-term investments and marketable securities.... 50,668 1,184
Accounts receivable, net............................ 4,778 2,457
Prepaid expenses and other current assets........... 1,409 137
-------- --------
Total current assets.............................. 67,731 13,825
Marketable securities................................. 11,201 --
Fixed assets, net..................................... 7,337 3,697
Other assets.......................................... 1,934 270
-------- --------
Total assets...................................... $ 88,203 $ 17,792
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations........ 342 163
Current portion of long-term debt................... 1,247 1,163
Accounts payable.................................... 1,299 800
Accrued expenses.................................... 3,031 2,963
Deferred revenue.................................... 1,676 1,383
-------- --------
Total current liabilities......................... 7,595 6,472
Long-term portion of capital lease obligations........ 624 323
Long-term debt........................................ 929 1,569
Other long-term liabilities........................... 13 --
-------- --------
Total liabilities................................. 9,161 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; 21,105,640 and 3,141,883 issued and
outstanding at June 30, 2000 and December 31,
1999, respectively................................. 21 3
Additional paid-in capital.......................... 128,614 6,606
Deferred compensation............................... (6,716) (5,723)
Note receivable from stockholder.................... (96) (96)
Accumulated deficit................................. (42,794) (30,838)
Accumulated other comprehensive income.............. 13 1,184
-------- --------
Total stockholders' equity (deficit).............. 79,042 (27,147)
-------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)...................................... $ 88,203 $ 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 SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue ................................ $ 3,245 $ 676 $ 5,327 $ 1,144
Service revenue ................................ 2,542 458 4,224 812
------- ------- -------- --------
Total revenue ............................... 5,787 1,134 9,551 1,956
------- ------- -------- --------
Cost of revenue:
Cost of product revenue ........................ 191 43 319 74
Cost of service revenue (excluding stock-based
compensation of $83, $2, $178, and $3 for the
three and six months ended June 30, 2000 and
the three and six months ended June 30, 1999,
respectively) ................................ 2,487 527 4,289 944
------- ------- -------- --------
Total cost of revenue ........................ 2,678 570 4,608 1,018
------- ------- -------- --------
Gross profit ..................................... 3,109 564 4,943 938
------- ------- -------- --------
Operating expenses:
Sales and marketing (excluding stock-based
compensation of $452, $18, $941 and $26 for
the three and six months ended June 30, 2000
and the three and six months ended June 30,
1999, respectively) .......................... 5,187 1,865 9,267 3,465
Research and development (excluding stock-based
compensation of $127, $14, $210 and $18 for
the three and six months ended June 30, 2000
and the three and six months ended June 30,
1999, respectively) .......................... 2,530 981 5,007 1,770
General and administrative (excluding
stock-based compensation of $168, $2, $270,
and $2 for the three and six months ended
June 30, 2000 and the three and six months
ended June 30, 1999, respectively) ........... 1,544 499 3,226 996
Stock-based compensation ......................... 830 36 1,599 49
------- ------- -------- --------
Total operating expenses .................... 10,091 3,381 19,099 6,280
------- ------- -------- --------
Loss from operations ............................. (6,982) (2,817) (14,156) (5,342)
Other income (loss):
Interest and other income (loss), net .......... 1,131 (71) 1,494 (124)
Gain on sale of short-term investments and
marketable securities .......................... -- -- 1,148 --
------- ------- -------- --------
Net loss ......................................... $(5,851) $(2,888) $(11,514) $(5,466)
------- ------- -------- --------
Dividends and accretion of redeemable preferred
stock .......................................... -- (367) (442) (587)
------- ------- -------- --------
Net loss available to common stockholders ........ $(5,851) $(3,255) $(11,956) $(6,053)
======= ======= ======== ========
Basic and diluted net loss available to common
stockholders per share ......................... $ (0.29) $ (2.95) $ (0.84) $ (6.23)
======= ======= ======== =======
Shares used in computing basic and diluted net
loss available to common stockholders per share 20,133 1,105 14,249 971
Pro forma basic and diluted net loss per common
share........................................... $ (0.29) $ (0.28) $ (0.63) $ (0.58)
======= ======= ======== =======
Shares used in computing pro forma basic and
diluted net loss per common share............... 20,133 10,149 18,421 9,446
</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>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $(11,514) $(5,466)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................. 1,107 232
Gain on sale of short-term investments and
marketable securities ..................... (1,220) --
Non-cash interest expense ..................... 41 42
Stock-based compensation expense .............. 1,599 49
Increase (decrease) resulting from changes in
operating assets and liabilities:
Accounts receivable ........................ (2,321) (792)
Prepaid expenses and other assets .......... (1,272) (187)
Other assets ............................... 17 --
Deferred revenue ........................... 293 178
Accounts payable ........................... 499 (16)
Accrued expenses ........................... 68 60
Other long term liabilities ................ 13 --
-------- -------
Net cash used in operating activities .... (12,690) (5,900)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets ..................... (4,748) (920)
Purchases of short-term investments and
marketable securities ...................... (63,644) --
Proceeds from sales of short-term investments
and marketable securities .................. 3,009 --
Decrease in restricted cash ................... 46 (280)
Increase in other assets....................... (1,681) --
-------- -------
Net cash used in investing activities .... (67,018) (1,200)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of fixed
assets ..................................... 547 --
Principal payments of capital lease obligations (67) --
Proceeds from issuance of debt................. -- 3,425
Repayment of debt ............................. (597) (9)
Proceeds from the issuance of common stock .... 80,653 --
Proceeds from issuance of redeemable
convertible preferred stock ................ -- 20,873
Proceeds from exercise of stock options ....... 58 81
Repurchase of restricted common stock ......... (11) --
-------- -------
Net cash provided by financing activities. 80,583 24,370
-------- -------
Net increase in cash and cash equivalents ....... 875 17,270
Cash and cash equivalents, beginning of period .. 9,643 2,261
-------- -------
Cash and cash equivalents, end of period ........ $ 10,518 $19,531
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends and accretion of preferred stock .... $ 442 $ 587
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Additions to capital lease obligations for
sale and leaseback of fixed assets ......... 547 --
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>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ................................... $(5,851) $(2,888) $(11,514) $(5,466)
Dividends and accretion of redeemable
preferred stock ............................ -- (367) (442) (587)
------- ------- ------- -------
Net loss available to common stockholders ... $(5,581) $(3,255) $(11,956) $(6,053)
Weighted average shares ..................... 21,068 2,142 15,270 1,840
Weighted average unvested common shares
subject to repurchase ....................... (935) (1,037) (1,021) (869)
------- ------- ------- -------
Shares used in computing basic and diluted
net loss available to common stockholders
per share ................................... 20,133 1,105 14,249 971
Net loss available to common stockholders
per share:
Basic and diluted ...................... $ (0.29) $ (2.95) $ (0.84) $ (6.23)
======= ======= ======= =======
Conversion of convertible preferred stock..... -- 9,044 4,172 8,475
Pro forma shares used in computing basic and
diluted net loss per share.................... 20,133 10,149 18,421 9,446
Pro forma net loss per share:
Basic and diluted....................... $ (0.29) $ (0.28) $ (0.63) $ (0.58)
======= ======= ======= =======
</TABLE>
Options to purchase shares of NetGenesis' common stock totaling 2,549,000 and
1,541,000 at June 30, 2000 and 1999, respectively, and warrants to purchase
common stock totaling 210,000 and 296,000 at June 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
antidilutive.
NOTE 3 - EQUITY TRANSACTIONS
For the six months ended June 30, 2000 and 1999, the Company recorded
6
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deferred stock-based compensation of $1.9 million and $942,000, 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 June 30, 2000 and 1999 was $500,000 and $36,000,
respectively. Amortization of deferred stock-based compensation for the six
months ended June 30, 2000 and 1999 was $918,000 and $49,000, respectively. In
addition, during the three months ended June 30, 2000 and 1999, the Company
recorded stock-based compensation expense of $330,000 and $0 related to
separation agreements entered into with former employees. During the six months
ended June 30, 2000 and 1999, the Company recorded stock-based compensation
expense of $681,000 and $0 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 $6,158,000 in aggregate
underwriting discounts and commissions and $1,544,000 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 SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States $5,117 $1,028 $8,363 $1,683
Europe 552 86 924 247
Australia 10 20 63 26
Other 108 -- 201 10
------ ------ ------ ------
Total $5,787 $1,134 $9,551 $1,956
====== ====== ====== ======
</TABLE>
Each of two customers accounted for more than 10% of revenue for the quarter
ended June 30, 2000. Each of two customers accounted for more than 10% of
revenue for the quarter ended June 30, 1999. No customer accounted for more than
10% of revenue for the six months ended June 30, 2000 or June 30, 1999,
respectively.
NOTE 5 - COMPREHENSIVE LOSS
THE COMPONENTS OF COMPREHENSIVE LOSS, NET OF INCOME TAXES, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
(IN THOUSANDS) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET LOSS ($5,851) ($2,888) ($11,514) ($5,466)
UNREALIZED GAIN ON SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES (72) -- (105) --
------- ------- -------- -------
COMPREHENSIVE LOSS ($5,923) ($2,888) ($11,619) ($5,466)
------- ------- -------- -------
</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 October 2000.
7
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NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Option No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including:
the definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to
specific events occurring after either December 15, 1998 or January 12, 2000.
The Company does not expect the application of FIN 44 to have a material impact
on the Company's financial position or results of operations.
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 SEC has recently indicated it intends to issue
further guidance with respect of adoption of specific issues addressed by SAB
No. 101. Until such time as this additional guidance is issued, the Company is
unable to assess the impact, if any, it may have on its financial position or
results of operation.
NOTE 8 - SUBSEQUENT EVENT
During the three months ending September 30, 2000, the Company will record a
charge of approximately $140,000 related to a separation agreement entered into
in July 2000 with the Company's former Vice President, Western Region Sales. Of
this amount, $31,000 will be included in sales and marketing expenses and
$109,000 will be included in stock-based compensation.
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
8
<PAGE> 9
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since December 31, 1994 and, as of June 30, 2000, had an
accumulated deficit of $42.8 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
$500,000 and $918,000 in the quarter and six months ended June 30, 2000. In
addition, we recorded stock-based compensation expense of $330,000 and $681,000
related to severance agreements entered into with former employees for the
quarter and six months ended June 30, 2000. We will amortize $6.7 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 $4.7 million, or 410%, to $5.8
million for the quarter ended June 30, 2000 from $1.1 million for the quarter
ended June 30, 1999. Total revenue increased by $7.6 million, or 388%, to $9.6
million for the six months ended June 30, 2000 from $2.0 million for the six
months ended June 30, 1999. Each of two customers accounted for more than 10% of
total revenue for the quarter ended June 30, 2000. Each of two customers
accounted for more than 10% of total revenue for the quarter ended June 30,
1999. No customer accounted for 10% of total revenue for the six months ended
June 30, 2000 and no customer accounted for 10% of revenue for the six months
ended June 30, 1999. International sales accounted for approximately 12% and 9%
of our total revenues for the quarters ended June 30, 2000 and 1999,
respectively. International sales accounted for approximately 12% and 15% of our
total revenues for the six months ended June 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. 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.
Product Revenue. Product revenue increased by $2.6 million, or 380%, to
$3.2 million for the quarter ended June 30, 2000 from $676,000 for the quarter
ended June 30, 1999. For the six months ended June 30, 2000, product revenue was
$5.3 million, an increase of $4.2 million, or 366% from $1.1 million for the six
months ended June 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. Product revenue as a percentage of
total revenue decreased to 56% for the quarter ended June 30, 2000 from 60% for
the quarter ended June 30, 1999. Product revenue as a percentage of total
revenue decreased to 56% for the six months ended June 30, 2000 from 58% for the
six months ended June 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 $2.1 million, or 455%, to
$2.5 million for the quarter ended June 30, 2000 from $458,000 for the quarter
ended June 30, 1999. For the six months ended June 30, 2000, service revenue was
$4.2 million, an increase of $3.4 million, or 420% from $812,000 for the six
months ended June 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.
9
<PAGE> 10
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 $191,000 and $319,000, or 6% of product revenue for the three
and six months ended June 30, 2000, as compared to $43,000 and $74,000, or 6% 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 were $2.5 million and $4.3 million, respectively, for
the three and six months ended June 30, 2000, as compared to $527,000 and
$944,000, 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. This investment has resulted in the
cost of service revenue exceeding our service revenue in six of the last seven
quarters. Cost of service revenue as a percentage of service revenue was 98% and
102%, respectively, for the three and six months ended June 30, 2000, as
compared to 115% and 116% 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
were $5.2 million and $1.9 million, or 90% and 164% of total revenues, for the
quarters ended June 30, 2000 and 1999, respectively. Sales and marketing
expenses were $9.3 million and $3.5 million, or 97% and 177% of total revenues,
for the six months ended June 30, 2000 and 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 were $2.5 million and $981,000, or
44% and 87% of total revenues, for the quarters ended June 30, 2000 and 1999,
respectively. Research and development expenses were $5.0 million and $1.8
million, or 52% and 90% of total revenues, for the six months ended June 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 increased productivity from
our personnel compared to the prior year periods. 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 were $1.5
million and $499,000, or 27% and 44% of total revenues, for the quarters ended
June 30, 2000 and 1999, respectively. General and administrative expenses were
$3.2 million and $996,000, or 34% and 51% of total revenues, for the six months
ended June 30, 2000 and 1999, respectively.
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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
increased productivity from our personnel compared to the prior year periods. 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
$830,000 and $36,000 for the quarters ended June 30, 2000 and 1999,
respectively. For the quarter ended June 30, 2000, the expense includes $330,000
related to the extension of options in connection with employee severance. It
also includes $500,000 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 six months ended June
30, 2000 and 1999, we incurred stock-based compensation expense of $1.6 million
and $49,000, respectively. For the six months ended June 30, 2000, the expense
includes $681,000 related to the extension of options in connection with
employee severance. It also includes $918,000 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. These
options generally vest over four years or less. The remaining deferred
compensation expense of approximately $6.7 million will be amortized ratably
over the remaining vesting periods of the options, and will affect periods
ending after June 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) was $1.1 million for the quarter
ended June 30, 2000 and ($71,000) for the quarter ended June 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 $2.6
million for the six months ended June 30, 2000 and ($124,000) for the six months
ended June 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of previously fixed
stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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 SEC has recently indicated it intends to
issue further guidance with respect to adoption of specific issues addressed by
SAB No. 101. Until such time as this additional guidance is issued, the Company
is unable to assess the impact, if any, it 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 with
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 June 30, 2000, we had $61.5 million in cash and
cash equivalents,
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restricted cash, and short term investments, a decrease of $12.0 million from
$73.5 million as of March 30, 2000.
We used $12.7 million of cash in operations in the six months ended June
30, 2000 compared to $5.9 million in operations in the six months ended June 30,
1999. Net cash used in operations for the six months ended June 30, 2000 was
primarily attributable to our $11.5 million net loss generated during the
period, an increase in accounts receivable of $2.3 million and an increase in
prepaid expenses and other current assets of $1.3 million. This was offset in
part by non-cash charges for stock-based compensation expense of $1.6 million
and depreciation and amortization expense of $1.1 million, and increases in
deferred revenue and accrued expenses of $293,000 and $499,000, respectively.
Cash provided by financing activities was $80.6 million for the six months ended
June 30, 2000 and $24.4 million for the six months ended June 30, 1999. The
principal source of financing for the six months ended June 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
$67.0 million for the six months ended June 30, 2000 and $1.2 million for the
six months ended June 30, 1999. For the six months ended June 30, 2000,
approximately $60.6 million of cash was used for the purchase of investments and
marketable securities and approximately $4.7 million was used for investment in
capital expenditures.
Capital expenditures were $4.7 million for the six months ended June 30,
2000, and $920,000 for the six months ended June 30, 1999. 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 June
30, 2000, we had $2.2 million outstanding under the term loan agreement and
$966,000 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 June 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, you have limited information about our company with which to
evaluate our business and prospects. Before buying our common stock, you should
consider 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 for the foreseeable future 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 $42.8 million at June 30, 2000. As we grow our business,
we expect operating expenses and capital expenditures to increase significantly,
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.
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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, and you could lose some or all of your investment. 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
number of large orders. For example, during the three months ended June 30,
2000, each of two customers 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
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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.
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.
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. For example, Brian
Zanghi, our Executive Vice President and Chief Operating Officer, joined us in
January 2000, and several other members of our management team joined us in
1999. During the six months ended June 30, 2000, the number of our employees
grew from 150 to 210, and we plan to continue to expand our business by hiring
additional
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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 implementions 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.
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.
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 trademarks NetGenesis and NetAnalysis in the United States
and claim trademark rights in CartSmarts, Design for Analysis, DFA,
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
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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
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
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
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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 its business
or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Recent Sales of Unregistered Securities
The sales of the securities listed below were exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") in reliance on Section
4(2) of the Securities Act or Rule 701 promulgated under section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
(i) During the quarter ended June 30, 2000, the Company granted options
to purchase an aggregate of 198,750 shares of Common Stock to an
aggregate of 31 employees pursuant to the Company's 1999 Stock Option
Plan.
(ii) During the quarter ended June 30, 2000, options to purchase an
aggregate of 58,631 shares of Common Stock were exercised by an
aggregate of 28 employees pursuant to the Company's 1995 Stock Option
Plan, and options to purchase an aggregate of 397 shares of Common
Stock were exercised by an aggregate of 3 employees pursuant to the
Company's 1999 Stock Option Plan.
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
offering were registered under the Securities Act on a Registration Statement on
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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 $6,158,000 and the aggregate net proceeds
to the Company were approximately $80.3 million after deducting offering
expenses of $1,544,000. Through June 30, 2000, we have applied the net proceeds
of the offering approximately as follows: $7,988,000 for working capital;
$4,002,000 for purchases of fixed assets; and, $414,000 for the repayment of
principal on our indebtedness and capital lease obligations. The balance of the
net proceeds, in the amount of $61,472,000 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:
27.1 Financial Data Schedule
b. Reports on Form 8-K
None.
19
<PAGE> 20
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/ JOHN P. DELEA
--------------------------------------
JOHN P. DELEA
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCE OFFICER)
Date: AUGUST 11, 2000
INDEX TO EXHIBIT
Exhibit number Description
-------------- -----------
27.1 Financial Data Schedule
20
