<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: 333-87267
POET HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 94-3221778
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
------------------------------
999 BAKER WAY, SUITE 200
SAN MATEO, CALIFORNIA 94404
(650) 286-4640
(Address, including zip code, of Registrant's principal executive offices and
telephone number, including area code)
------------------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$0.001 par value
------------------------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's Common Stock on
June 30, 2000 was 10,728,280 shares.
1
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POET HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss - Three and
Six Months ended June 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated 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 12
PART II: OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes to Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
SIGNATURES
In addition to historical information, this Form 10-Q contains forward-looking
statements that relate to future events or future financial performance. In some
cases, forward-looking statements can be identified by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential" or "continue," or the negative
of such terms or other comparable terminology. These statements are only
predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors" in POET Holding's
Annual Report on Form 10-K dated March 30, 2000 as filed with the SEC. All
forward-looking statements included in this document are based on information
available to us on the date hereof. We assume no obligation to update any such
forward-looking statements.
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,*
2000 1999
-------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................... $ 1,728 $ 35,039
Short-term investments .................................................. 35,123 9,311
Accounts Receivable trade (net of allowances of $125 and $134 at
June 30, 2000 and December 31, 1999, respectively) ................... 2,712 2,125
Inventories ............................................................. 46 32
Other current assets .................................................... 2,733 288
-------- --------
Total current assets .............................................. 42,342 46,795
Property, furniture and equipment, net ..................................... 1,058 581
Other assets, net .......................................................... 259 224
-------- --------
Total assets ............................................................... $ 43,659 $ 47,600
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 1,287 $ 933
Accrued liabilities ..................................................... 1,871 2,149
Deferred revenue ........................................................ 1,072 845
Current portions of debt (including capital lease obligations) .......... 259 283
-------- --------
Total current liabilities ......................................... 4,489 4,210
Long-term obligations ...................................................... 218 326
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 3,000,000 shares authorized; no shares
outstanding
Common Stock, $0.001 par value; 30,000,000 shares authorized;
shares outstanding: 2000 -- 10,728,280; 1999 - 10,547,106 ............ 11 11
Additional paid-in capital ................................................. 65,781 65,582
Deferred stock compensation ................................................ (547) (927)
Accumulated deficit ........................................................ (26,593) (22,058)
Accumulated other comprehensive income ..................................... 300 456
-------- --------
Total stockholders' equity ........................................ 38,952 43,064
-------- --------
Total liabilities and stockholders' equity ................................. $ 43,659 $ 47,600
======== ========
</TABLE>
* Balance sheet as of December 31, 1999 derived from audited financial
statements in Poet Holdings Annual Report on Form 10-K.
See Notes to Unaudited Condensed Consolidated Financial Statements
3
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POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product ($0, $429, $0 and $857 in the three
and six month periods ended June 30, 2000
and 1999, respectively, from a stockholder) ... $ 1,981 $ 1,790 $ 3,998 $ 3,475
Consulting and training .......................... 267 444 635 836
Support and maintenance ($0, $20, $0 and $40
in the three and six month periods ended
June 30, 2000 and 1999, respectively, from
a stockholder) ................................ 414 304 800 605
-------- -------- -------- --------
Total revenues ............................ 2,662 2,538 5,433 4,916
-------- -------- -------- --------
Cost and operating expenses:
Cost of product .................................. 99 68 177 107
Cost of consulting and training .................. 266 283 538 530
Cost of support and maintenance .................. 338 232 570 514
Selling and marketing ............................ 3,071 1,827 5,901 3,473
Research and development ......................... 1,232 869 2,189 1,626
General and administrative ....................... 903 446 1,527 798
Amortization of deferred stock compensation(*) ... 128 125 273 229
-------- -------- -------- --------
Total operating expenses .................. 6,037 3,850 11,175 7,277
-------- -------- -------- --------
Operating loss ...................................... (3,375) (1,312) (5,742) (2,361)
-------- -------- -------- --------
Other income (expense):
Interest expense ................................. (10) (99) (21) (191)
Interest income and other, net ................... 639 84 1,269 171
-------- -------- -------- --------
Total other expense, net .................. 629 (15) 1,248 (20)
-------- -------- -------- --------
Loss before income taxes
(2,746) (1,327) (4,494) (2,381)
Income taxes ........................................ (41) (1) (41) 7
-------- -------- -------- --------
Net loss ............................................ $ (2,787) $ (1,328) $ (4,535) $ (2,374)
======== ======== ======== ========
Other comprehensive income (loss) -- foreign
currency translation adjustment .................. (133) 182 (156) 283
-------- -------- -------- --------
Comprehensive loss .................................. $ (2,920) $ (1,146) $ (4,691) $ (2,091)
======== ======== ======== ========
Basic and diluted net loss per share ................ $ (0.26) $ (0.84) $ (0.43) $ (1.52)
======== ======== ======== ========
Shares used in computing basic and diluted net
loss per share ...................................... 10,618 1,576 10,595 1,566
======== ======== ======== ========
(*) Amortization of deferred stock compensation
Cost of consulting and training .................. $ 14 $ 15 $ 31 $ 27
Cost of support and maintenance .................. 6 4 13 8
Selling and marketing ............................ 56 57 122 102
Research and development ......................... 38 29 79 52
General and administrative ....................... 14 20 28 40
-------- -------- -------- --------
$ 128 $ 125 $ 273 $ 229
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $ (4,535) $ (2,374)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization ............................. 236 296
Amortization of deferred stock compensation ............... 273 229
Amortization of investment discounts ...................... (1,067) --
Changes in assets and liabilities:
Trade accounts receivable ............................. (649) (423)
Inventories ........................................... (15) (16)
Other current assets .................................. (2,453) 55
Other assets .......................................... (45) (3)
Accounts payable and accrued liabilities .............. 207 97
Deferred revenues ..................................... 237 (739)
-------- --------
Net cash used for operating activities ........... (7,811) (2,878)
Cash flows from investing activities:
Purchases of property, furniture and equipment................ (729) (185)
Proceeds from sales and maturities of short-term investments.. 21,403 --
Purchases of short-term investments .......................... (46,225) --
-------- --------
Net cash used in investing activities ............ (25,551) (185)
Cash flows from financing activities:
Borrowings ................................................... -- 3,912
Repayments of debt ........................................... (184) (142)
Preferred stock issued, net .................................. -- 475
Common stock issued, net ..................................... 306 16
-------- --------
Net cash provided by financing activities ........ 122 4,261
Effect of exchange rate changes on cash and equivalents .......... (71) 2
-------- --------
Increase (decrease) in cash and equivalents ...................... (33,311) 1,200
Cash and equivalents -- beginning of period ....................... 35,039 4,776
-------- --------
Cash and equivalents -- end of period ............................. $ 1,728 $ 5,976
======== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 29 $ 30
======== ========
Taxes paid ................................................... $ 19 $ 21
======== ========
Non-cash financing and investment activities:
Deferred stock compensation .................................. $ (107) $ 669
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
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POET HOLDINGS, INC. AND SUBSIDIARIES
1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these unaudited condensed consolidated financial
statements include all adjustments necessary (consisting of normal, recurring
adjustments) for a fair presentation of POET's financial position as of June 30,
2000, the results of operations and comprehensive loss for the three and six
month periods ending June 30, 2000 and 1999 and cash flows for the six month
periods ending June 30, 2000 and 1999.
The results of operations for the three and six month periods ending June 30,
2000 are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 2000. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
accompanying notes included in the Company's 1999 Annual Report on Form 10-K
dated March 30, 2000 as filed with the SEC.
2. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (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>
Net loss (numerator), basic and diluted ........... $ (2,787) $ (1,328) $ (4,535) $ (2,374)
Shares (denominator):
Weighted average common shares outstanding .. 10,667 1,586 10,646 1,579
Weighted average common shares outstanding
subject to repurchase ...................... (49) (10) (51) (13)
-------- -------- -------- --------
Shares used in computing basic and diluted
net loss per share ......................... 10,618 1,576 10,595 1,566
======== ======== ======== ========
Net loss per share basic and diluted .............. $ (0.26) $ (0.84) $ (0.43) $ (1.52)
======== ======== ======== ========
</TABLE>
For the above mentioned periods, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:
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POET HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Redeemable Convertible Preferred Stock ........ -- 4,981,958
Shares of common stock subject to repurchase .. 47,663 12,395
Outstanding options ........................... 717,337 611,749
Warrants ...................................... 55,739 107,079
--------- ---------
Total ......................................... 820,739 5,713,181
========= =========
Weighted average exercise price of options .... $ 29.13 $ 0.57
========= =========
Weighted average exercise price of warrants ... $ 6.88 $ 6.63
========= =========
</TABLE>
3. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates in one reportable segment, the development and marketing of
software products that allow businesses to share and manage complex information
enabled by the Company's database management system. The Company principally
operates in the U.S. and Germany. The following is a summary of operations
within geographic areas (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues (1):
United States ......... $1,317 $1,522 $2,612 $2,920
Germany ............... 1,345 1,016 2,821 1,996
------ ------ ------ ------
$2,662 $2,538 $5,433 $4,916
====== ====== ====== ======
</TABLE>
(1) Revenues are broken out geographically by the ship-to location of
the customer
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------ ------------
<S> <C> <C>
Long lived assets:
United States .............. $ 521 $ 221
Germany .................... 537 360
------ ------
$1,058 $ 581
</TABLE>
During 1996 the Company entered into product licensing and service agreements
with Novell, Inc., a stockholder of the Company. Revenues from this stockholder
are detailed on the consolidated statements of operations. The Company does not
specifically identify and account for the related costs of revenues by customer.
The Company believes that costs and the related gross margin of its revenues to
this stockholder are similar to costs and gross margin to unaffiliated
customers.
4. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. This standard requires companies to capitalize qualifying computer
software costs incurred during the application development stage and amortize
them over the software's estimated useful life. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The
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POET HOLDINGS, INC. AND SUBSIDIARIES
adoption of SOP 98-1 did not have a significant impact on the financial results
for the three months ended June 30, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. As amended
in June 1999 by SFAS No. 137, this statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company has not
yet determined the impact that the adoption of SFAS 133 will have on its
earnings or statement of financial position. The Company is required to adopt
SFAS 133 on January 1, 2001.
In December 1999, the Commission released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. The Company is required to be in
conformity with the provisions of SAB 101, as amended by SAB 101A, no later than
April 1, 2000 and does not expect a material effect on its financial position,
results of operations or cash flows as a result of SAB 101.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting for
Certain Transactions Involving Stock compensation -- an Interpretation of APB
Opinion 25. This Interpretation clarifies (a) the definition of employee for
purposes of applying APB Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet determined the impact, if any, of adopting this
interpretation.
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with POET's unaudited
condensed consolidated financial statements and notes thereto. The results
described below are not necessarily indicative of the results to be expected in
any future period.
OVERVIEW
We are a provider of innovative software infrastructure and solutions that allow
organizations to efficiently share, manage and manipulate complex data and
facilitate effective business-to-business processes and information exchange
over the Internet. Our object database management system utilizes and supports
complex,
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POET HOLDINGS, INC. AND SUBSIDIARIES
multidimensional data models, or frameworks within a database for the
organization of information elements and their interrelationships, and standard
Internet programming languages. Our database system allows software vendors and
original equipment manufacturers, or manufacturers who develop and produce
products incorporating another company's product, to build efficient, high
performance applications that are fully integrated, easy to use and cost
efficient. Our Internet solutions provide our customers with the ability to
efficiently author, manipulate and electronically distribute and exchange
complex business documents. Our solutions leverage the Internet as a new means
to increase customer relationships, accelerate business processes and reduce
costs. Our open systems approach, which works with a variety of tools, hardware,
software and networks, allows our customers to rapidly develop applications
using our database products and customize our Internet solutions for work with a
variety of standard application environments and third-party tools without
having to make any significant adjustments to their existing internal
information technology systems. It is our objective to make complex applications
simple and affordable for a large group of organizations by providing
sophisticated, easy to use and powerful software products that leverage the
Internet.
From commencement of our operations in March 1995 through June 2000, our
operating activities related primarily to increasing our research and
development capabilities, designing and developing the software products which
we are currently selling and staffing our administrative, sales and marketing
organizations. Since our inception, we have incurred significant losses, and as
of June 30, 2000, we had an accumulated deficit of $26.6 million, and for the
three months ended June 30, 2000, our net loss was $2.8 million. We have not
achieved profitability on a quarterly or annual basis and anticipate that we
will incur net losses for the foreseeable future. We expect to continue to incur
significant selling and marketing, product development, professional services
and administrative expenses, and as a result, we will need to generate
significantly higher revenues to achieve and maintain profitability.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE QUARTER ENDED JUNE 30, 2000 TO THE QUARTER ENDED
JUNE 30, 1999
Total revenues increased 5% from $2.5 million for the quarter ended June 30,
1999 to $2.7 million for the quarter ended June 30, 2000. Product revenues
increased 11% from $1.8 million for the quarter ended June 30, 1999 to $2.0
million for the quarter ended June 30, 2000. The increase in product revenue was
primarily attributable to revenues generated from our electronic Catalog Suite
Product Line ("eCS") which was not available for sale in the quarter ended June
30, 1999. Consulting and training revenues decreased 40% from $444,000 for the
quarter ended June 30, 1999 to $267,000 for the quarter ended June 30, 2000. The
decrease in consulting and training revenues was primarily due to one
significant customer in the quarter ended June 30, 1999 not repeating in the
quarter ended June 30, 2000. Support and maintenance revenues increased 36% from
$304,000 for the quarter ended June 30, 1999 to $414,000 for the quarter ended
June 30, 2000. The increase in support and maintenance revenues was primarily
due to in overall increase in support and maintenance customers.
As indicated in POET Holding's Press Release as filed with the SEC on Form 8-K
dated July 26, these revenues are below the company's expectations primarily due
to lower than anticipated revenues in the POET Content Management Suite (CMS)
product line, and to a lesser extent, in the POET Object Server Suite (OSS)
product line and consulting services. Our strategic Business-to-Business product
line, eCS, slightly exceeded the company's expectations and reached
approximately $430,000 in product license revenues, representing approximately
116% growth compared to the quarter ended March 31, 2000. The results for the
quarter ended June 30, 2000 for POET CMS and POET eCS represents further
evidence that the market for the CMS product line remained difficult, while the
market acceptance for the eCS product line continued to expand rapidly. As a
result of the continued slow revenue growth for the CMS product line, the
company is reallocating resources from the CMS product line to the eCS product
line. The company will continue to maintain and support its current CMS customer
base. However, the company will not pursue new CMS sales opportunities.
Cost of product revenues increased 46% from $68,000 in the quarter ended June
30, 1999 to $99,000 in the quarter ended June 30, 2000. This increase was
primarily attributable to increased license fees. Cost of consulting and
training revenues decreased 6% from $283,000 in the quarter ended June 30, 1999
to $266,000 in the quarter ended June 30, 2000. This decrease was primarily
attributable to a decrease in personnel and related compensation. The gross
margin for consulting and training decreased to 0% in the quarter ended June 30,
2000 from 36% in the quarter ended June 30, 1999 primarily as a result of
decrease in consulting revenues without a significant decrease in our consulting
and training personnel. Cost of support and maintenance
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POET HOLDINGS, INC. AND SUBSIDIARIES
revenues increased 46% from $232,000 in the quarter ended June 30, 1999 to
$338,000 in the quarter ended June 30, 2000. The increase was primarily
attributable to an increase in personnel and related compensation. The gross
margin for support and maintenance decreased to 18% in the quarter ended June
30, 2000 from 24% in the quarter ended June 30, 1999 primarily as a result of
the increase in the cost of support and maintenance revenues.
Selling and marketing expenses increased 68% from $1.8 million in the quarter
ended June 30, 1999 to $3.1 million in the quarter ended June 30, 2000. Selling
expenses increased primarily as a result of an increase in sales personnel and
related compensation. Marketing expenses increased primarily as a result of
increased spending on trade shows and public relations, as well as an increase
in personnel and related compensation.
Research and development expenses increased 42% from $869,000 in the quarter
ended June 30, 1999 to $1.2 million in the quarter ended June 30, 2000. This
increase was primarily attributable to an increase in personnel and related
compensation, as well as outsourcing of some research and development efforts.
General and administrative expenses increased 102% from $446,000 in the quarter
ended June 30, 1999 to $903,000 in the quarter ended June 30, 2000. This
increase was primarily attributable to costs associated with being a publicly
traded company, including the costs of the shareholders' meeting and investor
relations activities, which did not occur in the comparable prior quarter. In
addition, there was an increase in personnel and related compensation.
Other, net increased to income of $629,000 in the quarter ended June 30, 2000,
from expense of $15,000 in the quarter ended June 30, 1999. The increase is
primarily attributable to interest income earned on higher cash and cash
equivalent and short-term investment balances in the quarter ended June 30, 2000
as a result of the proceeds from the Company's initial public offering in
November 1999.
Income tax expense increased to $41,000 in the quarter ended June 30, 2000, from
expense of $1,000 in the quarter ended June 30, 1999. The income tax amount in
the quarter ended June 30, 2000 represents taxes accrued on sales made during
the quarter.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS
ENDED JUNE 30, 1999
Total revenues increased 11% from $4.9 million for the six months ended June 30,
1999 to $5.4 million for the six months ended June 30, 2000. Product revenues
increased 15% from $3.5 million for the six months ended June 30, 1999 to $4.0
million for the six months ended June 30, 2000. The increase in product revenue
was primarily attributable to revenues generated from our electronic Catalog
Suite Product Line ("eCS") which was not available for sale in the six months
ended June 30, 1999. Consulting and training revenues decreased 24% from
$836,000 for the six months ended June 30, 1999 to $635,000 for the six months
ended June 30, 2000. The decrease in consulting and training revenues was
primarily due to one significant customer in the six months ended June 30, 1999
not repeating in the six months ended June 30, 2000. Support and maintenance
revenues increased 32% from $605,000 for the six months ended June 30, 1999 to
$800,000 for the six months ended June 30, 2000. The increase in support and
maintenance revenues was primarily due to in overall increase in support and
maintenance customers.
Cost of product revenues increased 65% from $107,000 in the six months ended
June 30, 1999 to $177,000 in the six months ended June 30, 2000. This increase
was primarily attributable to increased license fees. Cost of consulting and
training revenues increased 2% from $530,000 in the six months ended June 30,
1999 to $538,000 in the six months ended June 30, 2000. This increase was
primarily attributable to an increase in personnel and related compensation. The
gross margin for consulting and training decreased to 15% in the six months
ended June 30, 2000 from 37% in the six months ended June 30, 1999 primarily as
a result of the decrease in consulting revenues. Cost of support and maintenance
revenues increased 11% from $514,000 in the six months ended June 30, 1999 to
$570,000 in the six months ended June 30, 2000. The increase was primarily
attributable to an increase in personnel and related compensation. The gross
margin for support and maintenance increased to 29% in the six months ended June
30, 2000 from 15% in the six months ended June 30, 1999 primarily as a result of
the increase in support and maintenance revenues.
Selling and marketing expenses increased 70% from $3.5 million in the six months
ended June 30, 1999 to $5.9 million in the six months ended June 30, 2000.
Selling expenses increased primarily as a result of an increase in
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POET HOLDINGS, INC. AND SUBSIDIARIES
sales personnel and related compensation. Marketing expenses increased primarily
as a result of increased spending on trade shows and public relations, as well
as an increase in personnel and related compensation.
Research and development expenses increased 35% from $1.6 million in the six
months ended June 30, 1999 to $2.2 million in the six months ended June 30,
2000. This increase was primarily attributable to an increase in personnel and
related compensation, as well as outsourcing of some research and development
efforts.
General and administrative expenses increased 91% from $798,000 in the six
months ended June 30, 1999 to $1.5 million in the six months ended June 30,
2000. This increase was primarily attributable to costs associated with being a
publicly traded company, including the costs of the shareholders' meeting and
investor relations activities, which did not occur in the comparable prior six
months. In addition, there was an increase in personnel and related
compensation.
Other, net increased to income of $1.2 million in the six months ended June 30,
2000, from expense of $20,000 in the six months ended June 30, 1999. The
increase is primarily attributable to interest income earned on higher cash and
cash equivalent and short-term investment balances in the six months ended June
30, 2000 as a result of the proceeds from the Company's initial public offering
in November 1999.
Income tax expense increased to $41,000 in the six months ended June 30, 2000,
from income of $7,000 in the six months ended June 30, 1999. The income tax
amount in the six months ended June 30, 2000 represents taxes accrued on sales
made during the six months.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operations through private sales
of redeemable convertible preferred stock and from our initial public offering,
resulting in net proceeds of $16.4 million and $41.6 million, respectively. To a
lesser extent, we have also financed our operations through a convertible note
financing and lending arrangements in the aggregate amount of $6.3 million.
As of June 30, 2000, we had $1.7 million in cash and cash equivalents, $35.1
million in short-term investments and $37.9 million in working capital. As of
December 31, 1999, we had $35.0 million in cash and cash equivalents, $9.3
million in short-term investments and $42.6 million in working capital. The
decrease in working capital was primarily due to normal operational
expenditures.
Net cash used in operating activities was $7.8 million for the six months ended
June 30, 2000 and $2.9 million for the six months ended June 30, 1999. Net cash
used in operating activities for the six months ended June 30, 2000 reflects the
net losses, the amortization of investment discounts and changes in other
current assets for the period. In June 2000, we entered into an unsecured note
agreement loaning 2.5 million euros (approximately $2,387,000 based on the U.S.
Dollar/euro exchange rate at June 30, 2000) to a services provider. The loan
bears interest at 11% per year and is due on December 31, 2000. Net cash used in
operating activities for the six months ended June 30, 1999 primarily reflects
the net losses for the period.
Net cash used in investing activities was $25.6 million for the six months ended
June 30, 2000 and $185,000, for the six months ended June 30, 1999. Investing
activities reflect purchases of property, furniture and equipment in each
period, proceeds from the sale and maturities of short-term investments, as well
as purchases of short-term investments. Short-term investments are securities
with an original maturity of greater than three months and less than a year.
Since inception, we have generally funded capital expenditures either through
the use of working capital or, to a lesser extent, through equipment leases.
Net cash provided by financing activities was $122,000 for the six months ended
June 30, 2000 and $4.3 million for the six months ended June 30, 1999. Our
financing activities for the six months ended June 30, 2000 provided cash
primarily through the issuance of common stock and used cash primarily to repay
debt in the form of loans and capital leases. Our financing activities for the
six months ended June 30, 1999 provided cash primarily through proceeds from a
convertible note.
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POET HOLDINGS, INC. AND SUBSIDIARIES
In January 1999, we entered into a $3.9 million convertible note agreement with
TBG. Under this agreement, TBG purchased a convertible note in the aggregate
principal amount of $3.9 million maturing on December 31, 2003, and bearing
interest at 6% per year. In September 1999, we entered into an amendment to the
convertible note agreement with TBG, which converted the entire outstanding
principal balance of the note, excluding accrued interest, into 275,106 shares
of our common stock effective as of September 30, 1999. As a result of this
amendment, we recognized a non-recurring charge in the quarter ended September
30, 1999 of approximately $809,000.
In 1997, our subsidiary POET Software GmbH entered into a loan agreement with
IKB Deutsche Industriebank in the amount of DM 1.5 million (approximately
$773,000 based on the U.S. Dollar/Deutsche Mark exchange rate at December 31,
1999) bearing interest at 7% per year with principal payments due quarterly of
DM 125,000 commencing on June 15, 1999 and ending on March 15, 2002. The
principal balance of the IKB Deutsche Industriebank AG loan at June 30, 2000 was
DM 875,000 (approximately $427,000 based on the U.S. Dollar/Deutsche Mark
exchange rate at June 30, 2000). We have guaranteed the payment of principal and
interest under this loan.
We expect to experience significant growth in our operating expenses,
particularly as we increase our selling and marketing activities, increase
research and development and professional services spending, and enhance our
operational and financial systems for the foreseeable future in order to execute
our business plan. As a result, we anticipate that such 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 of,
or investments in, complementary businesses, technologies or product lines and
payoffs of credit lines.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates and in
foreign currency exchange rates:
Interest Rate Exposure. Our exposure to market risk due to fluctuations in
interest rates relates primarily to cash and cash equivalents and short term
investments, which consists primarily of investments in commercial paper and
money market accounts, and reported at an aggregate fair market value of $36.9
million as of June 30, 2000. These securities are subject to interest rate risk
inasmuch as their fair value will fall if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from the
levels prevailing at June 30, 2000, for example, the fair value of the portfolio
would not decline by a material amount. We do not use derivative financial
instruments to mitigate the risks inherent in these securities. However, we do
attempt to reduce such risks by generally limiting the maturity date of such
securities to no more than three months, placing investments with high credit
quality issuers and limiting the amount of credit exposure with any one issuer.
In addition, we believe that we currently have the ability to hold these
investments until maturity and, therefore, believe that reductions in the value
of such securities attributable to short-term fluctuations in interest rates
would not materially affect our financial position, results of operations or
cash flows.
Foreign Currency Exchange Rate Exposure. Our exposure to market risk due to
fluctuations in foreign currency exchange rates relates primarily to the
intercompany balance with our German subsidiary. Although we transact business
in various foreign countries, settlement amounts are usually based on U.S.
dollars, Deutsche Mark or the euro. Transaction gains or losses have not been
significant in the past and there is no hedging activity on Deutsche Mark, the
euro or other currencies. Based on the intercompany balance of $1.5 million at
June 30, 2000, a hypothetical 10% adverse change in Deutsche Mark against U.S.
dollars would not result in a material foreign exchange loss. Consequently, we
do not expect that reductions in the value of such intercompany balances or of
other accounts denominated in foreign currencies resulting from even a sudden or
significant fluctuation in foreign exchange rates would have a direct material
impact on our financial position, results of operations or cash flows.
Notwithstanding the foregoing, analysis of the direct effects of interest rate
and foreign currency exchange rate fluctuations on the value of our investments
and accounts and the indirect effects of such fluctuations could have a material
adverse effect on our business, financial condition and results of operations.
For example, international demand for our products is affected by foreign
currency exchange rates. In addition, interest rate fluctuations may affect the
buying patterns of our customers. Furthermore, interest rate and currency
exchange rate fluctuations have broad influence on the general condition of the
U.S., foreign and global economies that could have a material adverse effect on
us.
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POET HOLDINGS, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 17, 2000, the Company held its Annual Meeting of Stockholders. At the
meeting, the stockholders elected as directors Dirk Bartels (with 5,340,127
affirmative votes, and 140,250 votes withheld), Gert Kohler (with 5,480,127
affirmative votes, and 0 votes withheld), and Jerome Leceour (with 5,480,127
affirmative votes, and 0 votes withheld).
The stockholders also approved an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of the Company's Common
Stock from 30,000,000 to 100,000,000 (with 5,467,127 affirmative votes, 13,250
negative votes, 0 votes withheld and 0 broker non-votes).
The stockholders also approved an amendment to the Company's 1995 Stock Option
Plan increasing the number of shares of the Company's Common Stock reserved for
issuance thereunder by 300,000 shares (with 5,480,127 affirmative votes, 250
negative votes, 0 votes withheld and 0 broker non-votes).
The stockholders also ratified the appointment of Deloitte and Touche LLP, as
the Company's independent public accountants for the current fiscal year (with
5,480,127 affirmative votes, 250 negative votes and 0 votes withheld).
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K
None
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POET HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 on August 11, 2000.
POET Holdings, Inc.
(Registrant)
By: /s/ DIRK BARTELS
------------------------------------
Dirk Bartels
President,
Chief Executive Officer and Director
S-1
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
