<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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: 0-26789
BROADBASE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0417081
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
172 Constitution Drive
Menlo Park, CA 94025
(Address of principal executive offices including zip code)
(650) 614-8300
(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 [ ] NO [X]
Number of shares of registrant's common stock outstanding as of October 31,
1999: 18,007,316
<PAGE> 2
BROADBASE SOFTWARE, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998...................................................................... 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and September 30, 1998............................ 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998............................................ 5
Notes to 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................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 21
Item 2. Changes in Securities and Use of Proceeds.................................................. 21
Item 3. Defaults upon Senior Securities............................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 5. Other Information.......................................................................... 24
Item 6. Exhibits and Reports on Form 8-K........................................................... 24
Signatures................................................................................. 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998(1)
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 76,784 $ 13,990
Accounts receivable, net 1,835 1,072
Prepaid expenses and other current assets 1,069 326
--------- ---------
Total current assets 79,688 15,388
Property and equipment, net 1,975 1,610
Other assets 593 175
--------- ---------
TOTAL ASSETS $ 82,256 $ 17,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 772 $ 395
Accrued compensation 2,240 922
Accrued expenses 3,584 1,142
Current portion of bank line of credit and notes payable 746 798
Deferred revenue 4,434 3,330
--------- ---------
Total current liabilities 11,776 6,587
Bank line of credit and notes payable, less current portion 587 1,110
Convertible debentures -- 8,250
--------- ---------
Total liabilities 12,363 15,947
Stockholders equity:
Convertible preferred stock -- 6
Common stock, at par value 17 2
Additional paid-in capital 117,292 22,171
Deferred stock compensation (11,031) (2,338)
Notes receivable from stockholders (695) (476)
Accumulated other comprehensive loss (72) (37)
Accumulated deficit (35,618) (18,102)
--------- ---------
Total stockholders' equity 69,893 1,226
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,256 $ 17,173
========= =========
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
(1) The balance sheet at December 31, 1998 has been derived from the audited
statements as of that date.
3
<PAGE> 4
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenue
License $ 2,114 $ 888 $ 4,808 $ 2,237
Maintenance and professional services 650 104 1,496 202
-------- -------- -------- --------
Total net revenue 2,764 992 6,304 2,439
-------- -------- -------- --------
Cost of revenue:
License 482 180 910 546
Maintenance and professional services 750 84 1,683 167
-------- -------- -------- --------
Total cost of revenue 1,232 264 2,593 713
-------- -------- -------- --------
Gross margin 1,532 728 3,711 1,726
-------- -------- -------- --------
Operating expenses:
Sales and marketing 4,062 1,975 10,557 5,616
Research and development 1,587 1,030 4,387 2,695
General and administrative 498 315 1,429 837
Amortization of deferred stock compensation 1,976 374 4,448 702
-------- -------- -------- --------
Total operating expenses 8,123 3,694 20,821 9,850
-------- -------- -------- --------
Loss from operations (6,591) (2,966) (17,110) (8,124)
-------- -------- -------- --------
Interest income 237 94 431 252
Interest expense (275) (47) (837) (147)
-------- -------- -------- --------
Net loss ($ 6,629) ($ 2,919) ($17,516) ($ 8,019)
======== ======== ======== ========
Basic and diluted net loss per share ($ 1.70) ($ 2.14) ($ 6.80) ($ 6.69)
======== ======== ======== ========
Weighted-average shares used in computing basic and
diluted net loss per share 3,904 1,367 2,577 1,199
======== ======== ======== ========
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
4
<PAGE> 5
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($17,516) ($ 8,019)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred stock compensation 4,448 702
Depreciation and amortization 710 327
Common stock issued to consultants 227 0
Write-off of note receivable from shareholder 7 0
Changes in operating assets and liabilities
Accounts receivable (763) (831)
Prepaid expenses and other current assets (521) (348)
Accounts payable 377 (311)
Accrued expenses 3,760 1,404
Deferred revenue 1,104 2,384
Payment on license agreement (250) 0
-------- --------
Net cash used in operating activities (8,417) (4,692)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,065) (765)
-------- --------
Net cash used in investing activities (1,065) (765)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock, net 19,979 11,906
Proceeds from issuance of common stock upon exercise of options 448 38
Proceeds from issuance of common stock in initial public offering, net 50,561 0
Proceeds from issuance of common stock in private placement 631 0
Payments to repurchase unvested common stock (8) 0
Issuance of notes receivable to shareholder 0 (400)
Payments on notes payable (306) (283)
Principal payments on capital lease obligations (19) (25)
Principal payments on equipment line of credit (250) 0
Borrowings on equipment line of credit 0 446
Proceeds from issuance of convertible debt 1,275 0
-------- --------
Net cash provided by financing activities 72,311 11,682
Effect of foreign exchange rate changes on cash and cash equivalents (35) (14)
-------- --------
Net increase in cash and cash equivalents 62,794 6,211
Cash and cash equivalents:
Beginning of period 13,990 1,153
-------- --------
End of period 76,784 7,364
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest 816 131
Supplemental schedule of noncash investing and financing activities:
Conversion of convertible debentures into common stock 9,525 0
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
5
<PAGE> 6
BROADBASE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS
Broadbase Software, Inc. (the "Company") was incorporated on November 28,
1995 and develops and markets software that integrates and analyzes customer
information from Internet and traditional business channels, enabling businesses
to improve their customer acquisition, retention, and profitability.
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements included herein reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's financial
position, results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1998, which are contained in the Company's Registration Statement on Form
S-1, as amended (File No 333-82251), which was declared effective on September
21, 1999. Operating results for the nine month period ended September 30, 1999
are not necessarily indicative of results to be expected for the full fiscal
year of 1999 or any future period.
2. INITIAL PUBLIC OFFERING
On September 21, 1999, the Company made its initial public offering of
common stock, in which the Company sold 4,000,000 shares of its common stock at
a price of $14.00 per share, raising $56.0 million in gross proceeds. Offering
proceeds to Broadbase, net of approximately $3.9 million in aggregate
underwriters discounts and commissions and $1.5 million in estimated related
expenses, were approximately $50.6 million. Upon closing of the initial public
offering, all convertible debentures were converted into shares of Series D
convertible preferred stock and each outstanding share of the Company's Series
A, Series B, Series C, Series D, and Series E convertible preferred stock was
converted into one share of common stock, resulting in the issuance of 9,976,882
shares of common stock. Subsequent to September 30, 1999, an additional 600,000
shares of common stock were sold by the Company at a price of $14.00 per share
from the exercise of the underwriters' overallotment option, generating
additional net proceeds to the Company of approximately $7.8 million.
3. NET LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128) which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive shares outstanding during the period. Diluted net loss per share, as
presented, excludes potentially dilutive shares outstanding for all periods as
the effect of the assumed exercise of stock options, warrants and contingently
issued shares is antidilutive due to the Company's net loss.
Pursuant to SEC Staff Accounting Bulletin No. 98, pro forma net loss
per share is computed using the weighted average number of shares of common
stock outstanding, including common equivalent shares from the convertible
preferred stock (using the if-converted method), which automatically converted
into common stock upon the completion of the Company's initial public offering
as if converted at the original date of issuance, for both basic and diluted net
loss per share, even though inclusion is antidilutive.
6
<PAGE> 7
The following table sets forth the computation of loss per share (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine months ended September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic and diluted net loss per share
Net loss ($ 6,629) ($ 2,919) ($17,516) ($ 8,019)
Weighted-average shares of common stock
outstanding 4,521 2,651 3,466 2,597
Less weighted-average shares subject to
repurchase (617) (1,284) (889) (1,398)
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share 3,904 1,367 2,577 1,199
Basic and diluted net loss per share ($ 1.70) ($ 2.14) ($ 6.80) ($ 6.69)
======== ======== ======== ========
Pro forma net loss per share
Net loss ($ 6,629) ($ 2,919) ($17,516) ($ 8,019)
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share 3,904 1,367 2,577 1,199
Adjusted to reflect the assumed conversion of
convertible debentures from the date of
issuance 9,110 6,474 8,140 6,089
Weighted-average shares used in computing pro
forma basic and diluted net loss per share
13,014 7,841 10,717 7,288
Pro forma basic and diluted net loss per share ($ 0.51) ($ 0.37) ($ 1.63) ($ 1.10)
======== ======== ======== ========
</TABLE>
4. STOCKHOLDERS' EQUITY
1999 Equity Incentive Plan
On July 2, 1999, the Board of Directors approved the adoption of the
Company's 1999 Equity Incentive Plan (the "1999 Incentive Plan"), subject to
stockholder approval which it received in August 1999. A total of 3,500,000
shares of common stock have been reserved for issuance under the 1999 Incentive
Plan, plus, commencing on January 1, 2000, annual increases equal to 5% of the
outstanding shares of the Company's common stock on the preceding December 31.
The number of shares authorized for issuance under the 1999 Incentive Plan will
be increased to include any shares reserved under the 1996 Equity Incentive Plan
not issued or subject to outstanding grants on the date of the final prospectus
for the Company's initial public offering and any shares issued under the 1996
Equity Incentive Plan that are forfeited or repurchased by the Company at the
original purchase price or that expire or become unexercisable for any reason
without having been exercised in full. The types of awards that may be made
under the 1999 Incentive Plan are options to purchase shares of common stock,
restricted stock and stock bonuses. The exercise price for incentive stock
options may not be less than 100% of the fair market value of the Company's
common stock on the date of grant (85% for nonstatutory options). In the event
of a change in control of the Company, an option or award under the 1999
Incentive Plan may be assumed or substituted by the successor corporation. The
Company's compensation committee may also accelerate the vesting of awards upon
a change of control transaction.
1999 Employee Stock Purchase Plan
On July 2, 1999, the Board of Directors approved the adoption of the
Company's 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject
to stockholder approval which it received in August 1999. A total of 500,000
7
<PAGE> 8
shares of common stock have been reserved for issuance under the 1999 Purchase
Plan, plus, commencing on January 1, 2000, annual increases equal to 1% of the
Company's outstanding common shares on the preceding December 31. The 1999
Purchase Plan permits eligible employees to acquire shares of the Company's
common stock through periodic payroll deductions of up to 10% of their cash
compensation, subject to certain maximum purchase limitations. Each offering
period will have a maximum duration of 24 months and will consist of four
six-month purchase periods. The price at which the common stock may be purchased
is 85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable offering period or the last day of each
respective purchase period. The initial offering period began on the first
business day on which price quotations for the Company's common stock were
available on the Nasdaq National Market after the effectiveness of the initial
public offering (September 22, 1999) and the first purchase period will end on
December 31, 1999.
Stockholder Purchase Rights
In connection with our private financing in June 1999, we granted rights to
purchase up to 238,306 shares in our initial public offering to many of the
Series E investors, subject to compliance with applicable laws, including
federal securities laws. Because the offering of the rights started privately in
June 1999, the sale of the shares in connection with these rights was required
to continue privately and the issuance of these shares could not be registered
in connection with the initial public offering or on any other registration
statement. Although we offered to sell the shares to these investors in a
separate private placement at the initial public offering price, only some of
these investors accepted this offer as to 45,063 shares. We believe that we have
fulfilled our obligations under the agreement, but it is possible that the
investors who did not accept this offer could claim that we breached the
agreement by failing to sell them the shares in the initial public offering. If
they were successful in their claims, we could be obligated to pay damages,
which could equal the amount of any increase in the value of our common stock in
the trading market following this offering.
5. LEGAL PROCEEDINGS
On July 21, 1999, Timeline, Inc. filed a complaint against the Company in
the United States District Court for the Western Division of Washington,
alleging infringement by the Company of U.S. Patent No. 5,802,511 held by
Timeline. The complaint alleged that the Company directly and indirectly
infringed Timeline's patent claims by making, using, selling and offering to
sell software products, both alone and in combination with third party software
products, and further alleged that the Company induced infringement of the
Timeline patent claims. Timeline requested permanent injunctions prohibiting the
Company from directly or indirectly infringing the Timeline patent, and sought
damages, exemplary damages, costs and attorneys' fees. Timeline further
disclosed to the Company patent claims of a related pending patent application
that Timeline expected to be issued and to be added to its claims. Based on the
Company's preliminary investigation of this matter, it did not believe its
products infringed any valid claims of the Timeline patent or of the pending
patent application, and that it had other meritorious defenses to all claims
made by Timeline. However, rather than pursue a course of protracted litigation,
the Company, on August 30, 1999, settled this matter by paying Timeline $250,000
and agreeing to issue Timeline 40,000 shares of its common stock for a license
to all of Timeline's patents and pending patent applications and a release of
any claims of past infringement by its products of any of Timeline's patents and
pending patent applications. The cost of the license is being amortized by the
Company over its estimated useful life of five years. All of Timeline's claims
against the Company have been dismissed.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report on Form 10-Q contains forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. Forward-looking statements are identified by words
such as "believes," "anticipates," "expects," "intends," "will," "may" and other
similar expressions. In addition, any statements which refer to expectations,
beliefs, hopes, intentions, projections or other characterizations of future
events, circumstances or strategies are forward-looking statements, including
statements regarding our intention to expand our direct sales force, indirect
sales channels, professional services group, sales and marketing organization
and research and development organization, to expand our international
operations, and to incur substantial operating losses. In addition, the section
labeled "Risk Factors That May Affect Future Results" consists primarily of
forward-looking statements and associated risks. These forward-looking
statements involve risks and uncertainties. Actual results may differ materially
form those indicated in such forward-looking statements. We are under no duty to
update
8
<PAGE> 9
any of the forward-looking statements after the date of this filing on Form 10-Q
to conform these statements to actual results. See "Risk Factors That May Affect
Future Results," and the factors and risks discussed in our Registration
Statement on Form S-1 (File No. 333-82251) declared effective by the Securities
and Exchange Commission on September 21, 1999. These risks and uncertainties
include the market acceptance of our Broadbase EPM applications, particularly
those products designed for the emerging e-business market; our ability to
increase our revenues through increased sales of our products; our ability to
attract and retain qualified personnel in a competitive employment market,
including sales personnel; and our ability to respond to competitive pressures
and to develop and enhance products in order to attract and retain customers in
light of competitive alternatives.
OVERVIEW
We incorporated in November 1995 and from that date through December 1997
were in the development stage, conducting research and developing our initial
products. In the fourth quarter of 1997, we introduced EPM/Foundation. This
software product was originally designed to enable organizations to build and
manage datamarts for their customer information. In the third quarter of 1998,
we began offering Broadbase/EPM applications, built on EPM/ Foundation, which
provide analysis for customer relationship management. In May 1999 we expanded
our Broadbase/EPM suite by introducing new applications designed for Internet
sales channels, Internet marketing and other customer-focused e-business
applications, as well as new versions of our existing applications. As a result
most of our license revenue through the first nine months of 1999 has been
derived from licenses of EPM/Foundation. Throughout these periods, we expanded
our organization by hiring personnel in key areas, particularly sales, marketing
and research and development. We have grown from a total of 41 full-time
employees at December 31, 1997 to 75 full-time employees at December 31, 1998
and 120 full-time employees at September 30, 1999, and we intend to continue to
increase our number of employees throughout 1999 and 2000.
Our revenue comes principally from licenses of our software products, with
the balance coming from maintenance and professional services. We adopted the
provisions of Statement of Position ("SOP") No. 97-2 Software Revenue
Recognition, as amended by SOP No. 98-4, Deferral of the Effective Date of
Certain Provisions of SOP No. 97-2. Under SOP No. 97-2 we recognize license
revenue when persuasive evidence of an agreement exists, delivery of the product
has occurred, no significant company obligations with regard to installation or
implementation of the software remain, the fee is fixed or determinable and
collectibility is probable. In a typical application license transaction, our
professional services group connects our product to the customer's systems and
data sources. Upon completion of that connection, no significant obligations
remain with respect to implementation, and we recognize the revenue related to
that license. The actual connection process can often be completed in two to
four weeks. However, the timing of the commencement and completion of this
process is subject to factors that may be beyond our control, as this process
requires access to the customer's facilities and coordination with the
customer's personnel following delivery of the software. As a result, we
typically do not recognize the license revenue from an application license until
one to three months after our product is shipped to the customer. License
revenue generated by distributors and other resellers is recognized upon receipt
of a reseller report of sale and our shipment of the licensed software.
Maintenance and support revenue associated with new product licenses and
maintenance revenue resulting from renewed maintenance contracts are deferred
and recognized ratably over the contract period. Professional services revenue
is recognized when services are performed.
Currently, businesses that license our products generally license one or
more Broadbase EPM applications, together with EPM/Foundation and adapters to
interface with the customers' existing data sources. Customers generally receive
nonexclusive, perpetual licenses to use our products for a specified number of
servers and named concurrent users. After the initial license, they may purchase
licenses for additional servers and users as needed. In addition, customers
often purchase professional services from us, including training services,
although they may use other consulting organizations. Customers that license our
products also usually purchase maintenance contracts, which provide software
upgrades and technical support over a stated term, typically 12 months.
We sell our products through our direct sales force and through indirect
sales channels. Direct sales are made by our direct sales force in North
America, Germany, the United Kingdom and the Netherlands. Our indirect sales
channels include software application vendors, resellers and distributors
located in the United States, Japan and the Netherlands. Sales through indirect
sales channels accounted for approximately 20.5% of our total net revenue for
the nine months ended September 30, 1998 and 36.4% for the nine months ended
September 30, 1999. Although a significant portion of our revenue to date has
been
9
<PAGE> 10
generated by our indirect sales channels, we intend to continue increasing the
size of our direct sales force, both in the United States and internationally.
Revenue from customers outside North America represented 0% of our total net
revenue for the nine months ended September 30, 1998 and 24.1% for the nine
months ended September 30, 1999. Substantially all of our international revenue
has been derived from sales of EPM/Foundation by our distributors in Japan. We
intend to continue to expand our international operations and commit significant
management time and financial resources to developing our direct and indirect
international sales channels. International revenue may not, however, increase
as a percentage of total net revenue.
We have experienced substantial net losses since our inception due to the
significant costs incurred to develop our technology and products and to recruit
and train personnel for our engineering, sales, marketing, professional services
and administration departments. As of September 30, 1999, we had an accumulated
deficit of $35.6 million. We expect to continue to incur substantial operating
losses for the foreseeable future.
RESULTS OF OPERATIONS
NET REVENUE
License. Net license revenues increased from $888,000 in the third quarter
of 1998 to $2.1 million in the third quarter of 1999 and from $2.2 million in
the nine months ended September 30, 1998 to $4.8 million in the nine months
ended September 30, 1999. The significant growth in net license revenue in the
three months and nine months ended September 30, 1999 compared to the same
periods of 1998 was due to increases in the number of licenses sold, reflecting
the results of the expansion of our direct sales force and our indirect sales
channels as well as an increase in the average size of our revenue per license
transaction as a result of licensing Broadbase EPM applications as well as
EPM/Foundation. We intend to continue to expand both our direct sales force and
indirect sales channels.
Maintenance and professional services. Maintenance revenue is recognized on
a straight-line basis over the period support is provided, usually one year. We
first began recognizing maintenance revenue in the second quarter of 1998 for
maintenance contracts sold at the end of the first quarter of 1998. Professional
services revenue is recognized as the services are performed. Professional
services revenue was first recognized in the second quarter of 1998. Maintenance
and professional services revenue increased from $104,000 in the third quarter
of 1998 to $650,000 in the third quarter of 1999 and from $202,000 in the first
nine months of 1998 to $1.5 million in the first nine months of 1999. The growth
in maintenance and professional services revenue in the three months and nine
months ended September 30, 1999 compared to the same periods of 1998 reflects
the expansion of our installed base of customers and the Company's increasing
emphasis on providing its customers with post-implementation consulting and
support.
COST OF REVENUE
Cost of licenses. The cost of licenses consists primarily of royalties paid
to third parties and the cost of product manuals, media, packaging and shipping.
The cost of licenses increased from $180,000 in the third quarter of 1998 to
$482,000 in the third quarter of 1999 and from $546,000 in the first nine months
of 1998 to $910,000 in the first nine months of 1999, primarily as a result of
increased license revenue. Our cost of licenses has varied significantly from
quarter to quarter. These variations are due primarily to changes in the mix of
products sold, since our products require payment of royalties to third parties
at differing rates.
Cost of maintenance and professional services. The cost of maintenance and
professional services consists primarily of personnel costs associated with
providing maintenance and support services, consulting services and training
services. We began incurring costs associated with maintenance and support in
the second quarter of 1998 when support periods for our customers began. The
cost of maintenance and professional services increased from $84,000 in the
third quarter of 1998 to $750,000 in the third quarter of 1999 and from $167,000
in the first nine months of 1998 to $1.7 million in the first nine months of
1999, primarily as a result of the hiring of a vice president of professional
services and twelve additional professional services and support personnel. We
plan to continue expanding our professional services group and, accordingly,
expect the dollar amount of our cost of maintenance and professional services to
increase.
10
<PAGE> 11
OPERATING EXPENSES AND OTHER ITEMS
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, bonuses, commissions, travel and promotional expenses and
the facilities cost for the various domestic and international field sales
offices. Sales and marketing expenses increased from $2.0 million in the third
quarter of 1998 to $4.1 million in the third quarter of 1999 and from $5.6
million in the first nine months of 1998 to $10.6 million in the first nine
months of 1999. These increases in sales and marketing expenses resulted
primarily from higher salary, recruiting, benefits, travel and facilities costs
associated with the hiring of additional sales and marketing personnel and the
expansion of our international sales organization. Full time sales and marketing
personnel grew from 24 at September 30, 1998 to 47 at September 30, 1999. We
plan to continue expanding our sales and marketing organization, and expect our
sales and marketing expense to increase.
Research and development. Research and development expenses consist
primarily of salaries for development personnel and related costs associated
with the development of new products, the enhancement of existing products,
localization, quality assurance and testing. Research and development expenses
increased from $1.0 million in the third quarter of 1998 to $1.6 million in the
third quarter of 1999 and from $2.7 million in the first nine months of 1998 to
$4.4 million in the first nine months of 1999. These increases in research and
development expenses were due to the hiring of additional personnel and to other
expenses associated with the development and localization of new products. Full
time research and development personnel grew from 27 at September 30, 1998 to 42
at September 30, 1999. We plan to continue expanding our research and
development organization, and expect our research and development expenses to
increase.
General and administrative. General and administrative expenses consist
primarily of salaries of executive, financial, human resource and information
services personnel as well as outside professional fees. General and
administrative expenses increased from $315,000 in the third quarter of 1998 to
$498,000 in the third quarter of 1999 and from $837,000 in the first nine months
of 1998 to $1.4 million in the first nine months of 1999. These increases in
general and administrative expenses were primarily due to increased staffing
required to support our expanded operations in the United States and abroad and,
to a lesser extent, increased costs of outside professional services and costs
to implement additional management information systems. Our full time general
and administrative personnel grew from 9 at September 30, 1998 to 14 at
September 30, 1999.
Amortization of deferred compensation. We recorded deferred compensation of
approximately $3.5 million in 1998, representing the difference between the
exercise prices of options granted to acquire approximately 632,000 shares of
common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We amortized deferred
compensation expense of approximately $702,000 for the nine months ended
September 30,1998. This compensation expense relates to options awarded to
individuals in all operating expense categories. In addition, we granted options
to purchase common stock in the first nine months of 1999 for which we recorded
additional deferred compensation of approximately $13.1 million which will be
amortized using a graded vesting method over the vesting periods of the options.
Interest income. Interest income consists of interest earned on our cash and
cash equivalents. Interest income increased from $94,000 in the third quarter of
1998 to $237,000 in the third quarter of 1999 and from $252,000 in the first
nine months of 1998 to $431,000 in the first nine months of 1999 due to higher
invested cash balances in 1999 as a result of the investment of proceeds
received from the sale of $8.3 million and $1.2 million of Series D convertible
debentures in December 1998 and April 1999, respectively, and the sale of $20.0
million of Series E preferred stock in June 1999.
Interest expense. Interest expense consists primarily of interest on our
notes payable, bank line of credit and convertible debentures. Interest expense
increased from $47,000 in the third quarter of 1998 to $275,000 in the third
quarter of 1999 and from $147,000 in the first nine months of 1998 to $837,000
in the first nine months of 1999 due primarily to interest payments on $8.3
million of convertible debentures issued in December 1998 and $1.2 million of
convertible debentures issued in April 1999.
11
<PAGE> 12
Income taxes. There was no federal income tax provision in any period
presented due to our net operating losses. We had deferred tax assets of
approximately $6.5 million as of December 31, 1998. Realization of deferred tax
assets is dependent on future earnings, if any, the timing and amount of which
are uncertain. Accordingly, a valuation allowance, in an amount equal to the net
deferred tax assets as of December 31, 1998, has been established to reflect
these uncertainties. Our deferred tax assets primarily relate to net operating
loss and tax credit carryforwards. As of December 31, 1998, we had federal net
operating loss carryforwards of approximately $15.4 million and state net
operating loss carryforwards of approximately $10.7 million. We also had federal
and state research and development tax credit carryforwards of approximately
$300,000 and $200,000, respectively. The net operating loss and tax credit
carryforwards will expire at various dates beginning in 2004, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating loss and tax
credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $8.4 million and $4.7 million
in the first nine months of 1999 and 1998, respectively. In each period, net
cash used in operating activities resulted primarily from our net loss offset in
part by the amortization of deferred stock compensation as well as increases in
current liabilities, including deferred revenue and accrued expenses. The
increase in deferred revenue consisted primarily of prepayments of licenses from
Japanese distributors and prepayment of maintenance fees.
Our investing activities used cash of $1.1 million and $765,000 in the first
nine months of 1999 and 1998, respectively. Net cash used in investing
activities in these periods was the result of capital expenditures for computer
and communications equipment, purchased software, office equipment, furniture,
fixtures and leasehold improvements.
Our financing activities provided net cash of $72.3 million and $11.7
million in the first nine months of 1999 and 1998, respectively. Net cash from
financing activities in the first nine months of 1999 resulted primarily from
the sale of preferred stock of $20.0 million and the net proceeds of $50.6
million from the Company's initial public offering completed in September 1999.
Net cash from financing activities in the first nine months of 1998 resulted
primarily form the sale of preferred stock of $12.0 million.
As of September 30, 1999, we had $76.8 million of cash and cash equivalents,
together with the $2.0 million available for borrowing under our bank line of
credit, which expires December 31, 1999. We believe that cash and cash
equivalents on hand together with available borrowings under our bank line of
credit will be sufficient to fund our operations, including working capital and
capital equipment purchase requirements for the next 12 months. However, we may
need to raise additional funds in future periods through public or private
financing, or other arrangements to fund our operations and potential
acquisitions, if any, over a long-term basis until we achieve profitability, if
ever. We cannot be certain that we would be able to obtain additional financing
on favorable terms, if at all. Failure to raise capital when needed could
seriously harm our business and results of operations. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
YEAR 2000 READINESS
Many currently installed computer systems and software products
electronically store dates using only the last two digits of the calendar year.
As a result, these systems may not be able to distinguish whether "00" means
1900 or 2000, which may cause system failures or erroneous results. This problem
is generally referred to as the "year 2000 issue."
State of readiness. We have completed our assessment of the potential
overall impact of the impending century change on our business. Based on our
current assessment, we believe current and prior versions of our software
products are year 2000 compliant. By year 2000 compliant, we mean that the use
or occurrence of dates on or after January 1, 2000 will not materially affect
the performance of our software products or the ability of our products to
correctly create, store, process and output data involving dates, provided that
all other products, such as hardware and
12
<PAGE> 13
software used with our products, are also year 2000 compliant. However, our
products are generally integrated into, and process data extracted from, other
enterprise systems involving sophisticated hardware and complex software
products that we cannot adequately evaluate for year 2000 compliance. We may
face claims based on year 2000 problems in other companies' products, or issues
arising from the integration of multiple products within an overall system even
if our products are otherwise year 2000 compliant.
Utilizing a combination of an external consulting firm and our information
systems department personnel, we have completed an assessment of our internal
management information systems and other computer systems' readiness for year
2000 issues. As part of this effort, we have communicated with the external
vendors that supply us with our software and information systems and with our
significant suppliers to determine their products' and organization's year 2000
compliance. We received a written response from a small percentage of the
external vendors and significant suppliers that were contacted indicating that
their systems are year 2000 compliant. Those who have not responded have
statements on their web sites indicating that their systems are year 2000
compliant.
The results of these readiness assessment initiatives indicated that, with
the exception of our accounting system and software on a few of the computers
used by our sales representatives to demonstrate our products, virtually all of
our internal information technology systems and other internal operating systems
were currently year 2000 compliant. For those non-compliant internal information
systems, we have implemented the necessary upgrades to these systems as of
September 30, 1999.
Costs. To date, costs directly associated with our year 2000 compliance
efforts have not been material, amounting to less than $20,000. These costs
consist of fees paid to an external consulting firm assisting us with our year
2000 readiness assessment initiatives as well as costs incurred for consultants
to assist in our remediation efforts. In addition, we have incurred expenses in
amounts that are not material associated with our salaried employees who have
devoted some of their time to our year 2000 assessment and remediation efforts.
We do not expect the total cost of year 2000 problems to be material to our
business. However, during the months prior to the century change, we will
continue to evaluate new versions of our software products, new software and
information systems provided to us by third parties and any new infrastructure
systems that we acquire, to determine whether they are year 2000 compliant.
Despite our current assessment, we may not identify and correct all significant
year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could seriously harm our
business. We currently have developed contingency plans to address the risks
associated with unremediated year 2000 problems.
Risks. We are not currently aware of any year 2000 compliance problems
relating to our products that would seriously harm our business. We may discover
year 2000 compliance problems in our products that will require substantial
revision and could subject us to liability claims. Our products operate in
complex network environments and directly or indirectly interact with a number
of other hardware and software systems that we cannot adequately evaluate for
year 2000 compliance. In addition, technology developed by others and
incorporated in our products could have year 2000 problems. We may face claims
based on year 2000 problems in other companies' products, or issues arising from
the integration of multiple products within an overall system even if our
products are otherwise year 2000 compliant. Our failure to fix or replace our
internally developed proprietary software or third-party software, hardware or
services on a timely basis could result in lost revenue, increased operating
costs, the loss of customers and other business interruptions, any of which
could seriously harm our business. Moreover, our failure to adequately address
year 2000 compliance issues in our internally developed proprietary software
could result in claims of mismanagement, misrepresentation or breach of contract
and related litigation, which could be costly and time-consuming to defend.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
not be year 2000 compliant. The failure of these entities to be year 2000
compliant could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our customers, decrease the use of
the Internet or prevent users from accessing websites.
13
<PAGE> 14
Although we have not been a party to any litigation or arbitration
proceeding involving our products related to year 2000 compliance issues, we may
in the future be required to defend our products or services in these
proceedings, or to negotiate resolutions of claims based on year 2000 issues.
Defending and resolving year 2000-related disputes, regardless of the merits of
these disputes, and any liability we have for year 2000-related damages,
including consequential damages, could be expensive and could seriously harm our
business.
We may experience reduced sales of products as customers and potential
customers put a priority on correcting year 2000 problems and therefore defer
purchases of our products. Accordingly, demand for our products may be
particularly volatile and unpredictable for the remainder of 1999 and early
2000. To the extent year 2000 issues cause a significant delay in, or
cancellation of, decisions to purchase our products or services, our business
would be seriously harmed.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the risks discussed above, our business, operating results
and financial condition could be materially adversely affected by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment in the Company.
You should also refer to the other information set forth in this report,
including our financial statements and the related notes. The following
discussion consists primarily of forward-looking statements and associated
risks.
Risks Related to Our Business
Our business is difficult to evaluate because our operating history is limited
We are still in the early stages of our development. Our revenue and income
potential is unproven and depends on emerging, rapidly changing markets and on
acceptance of products that we have only recently introduced. Because our
operating history is limited and our product offerings are evolving, it is
difficult to evaluate our business and our future prospects. We have only
recently begun licensing our products and deriving revenue. Because we have only
recently introduced our products, it is difficult to predict whether our
products will be accepted by the market and the level of revenues we can expect
to derive from sales of our products.
Our growth depends on market acceptance of our recently introduced Broadbase EPM
applications designed for Internet-based systems
We first introduced Broadbase EPM applications designed for Internet-based
systems in May 1999. We expect that our future growth will depend significantly
on revenue from licenses of these Broadbase EPM applications and related
services, which is subject to significant risks. These new applications are our
first products specifically designed for the emerging e-business market. To
date, only 7 customers have licensed these e-business applications. To date,
revenue from licenses of our Broadbase EPM applications have constituted only a
minority of our revenues, and most of our license revenue has been derived from
licenses of EPM/Foundation. There are significant risks inherent in the
introduction of new products like our new e-business applications. Market
acceptance of these new applications will depend on the growth of the market for
e-business solutions. This growth may not occur. We also cannot be certain that
our new e-business applications will meet customer performance expectations. If
they do not meet customer expectations or the market for these products fails to
develop or develops more slowly than we expect, our business would be harmed.
We have incurred losses since inception and we expect to incur losses for the
foreseeable future
We incurred net losses and losses from operations for each period from our
inception through the third quarter of 1999. As of September 30, 1999, we had
accumulated net losses of approximately $35.6 million. We have not achieved
profitability and we expect to continue to incur substantial operating losses
for the foreseeable future. We expect to incur increasing sales and marketing,
research and development and general and administrative expenses. As a result,
we will need to significantly increase our revenue to achieve profitability.
While our revenue has grown significantly in 1999, our growth may not continue
at the current rate or at all.
14
<PAGE> 15
We expect our quarterly revenue and operating results to fluctuate
Our revenue and operating results are likely to vary significantly from
quarter to quarter. The factors that affect our quarterly operating results
include:
o the demand for our products, particularly our recently-introduced
Broadbase EPM applications;
o the size and timing of customer orders for our EPM/Foundation product,
our Broadbase EPM applications and our professional services;
o increased expenses for sales and marketing, product development and
administration;
o changes in the mix of sales between EPM/Foundation and the various
Broadbase EPM applications we provide as well as the level of sales of
professional services as compared to product licenses;
o changes in the mix of our domestic and international sales; and
o changes in general economic and market conditions.
Our quarterly revenue increased 208% from the first quarter of 1998 to the first
quarter of 1999, increased 113% from the second quarter of 1998 to the second
quarter of 1999 and increased 179% from the third quarter of 1998 to the third
quarter of 1999. We do not believe that these rates of growth are indicative of
the growth in revenues, if any, that we can expect in the future. Accordingly,
we believe that period-to-period comparisons of our operating results may not be
meaningful and you should not rely on these comparisons as an indication of our
future performance. Our operating results may fall below the expectations of
investors. In this event, the market price of our common stock would likely
fall.
Our operating expenses are increasing and we would not be able to reduce them
quickly, which could result in lower than expected operating results if we do
not achieve expected revenue levels
We plan to significantly increase our operating expenses as we expand our
sales, marketing, research and development, professional services, customer
support and administrative groups. These expenses will be incurred before we
generate any revenues from this increased spending. If we do not significantly
increase revenues as a result of these efforts, we will not achieve
profitability. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. As a result, we would not
be able to reduce spending quickly if our revenue were lower than we had
projected. Our ability to accurately forecast our quarterly revenue is limited
because of our limited operating history, the rapidly evolving nature of our
market and the sales cycle for our products, which can be long and
unpredictable. If our revenue falls below our expectations in any quarter, or if
we increase our spending ahead of our revenue growth, our operating results
would be lower than expected.
The unpredictable timing of our sales and implementation cycle makes it
difficult to forecast our operating results
Our products can have a long and unpredictable sales cycle. Consequently, we
face difficulty predicting the quarter in which sales to expected customers will
occur. This contributes to the uncertainty of our future operating results.
Potential customers often require time to weigh the costs and benefits of our
products compared to those of in-house development and integration efforts. As a
result, our sales cycle has typically ranged from approximately two to four
months, although it can take longer.
In a typical application license transaction, a portion of the
implementation of our products is performed by our professional services group,
which connects our products to the customer's systems and data sources. Upon
completion of that connection, no significant obligations remain with respect to
implementation, and we recognize the revenue related to that license. The actual
connection process can often be completed in approximately two to four weeks.
However, the timing of the commencement and completion of this connection
process is subject to factors that may be beyond our control, as this process
requires access to the customer's facilities and coordination with the
customer's personnel after delivery of the software. As a result, we typically
do not recognize the license revenue from an application license until one to
three months after our product is shipped to the customer. Uncertainty as to
when our
15
<PAGE> 16
product can be connected at the customer's facilities makes it more difficult to
forecast our operating results and can result in significant variability in our
period to period results.
We need to attract, train and retain additional qualified personnel in a
competitive employment market
Our success depends on our ability to attract, train and retain qualified,
experienced employees. There is substantial competition for experienced
management, engineering, sales and marketing personnel, particularly in the
market segment in which we compete. If we are unable to retain our existing key
personnel, or to attract, train and retain additional qualified personnel, we
may experience inadequate levels of staffing to develop and sell our products
and perform services for our customers.
We believe that our success will depend on the continued services of our
executive officers. The loss of any of our executive officers could harm our
business. Certain of our executive officers joined us only recently and have had
a limited time to work together. We cannot assure you that they will be able to
work effectively together to manage our growth and continuing operations. If we
are unable to expand our sales and marketing organizations in a timely manner,
our growth could be limited.
Our business will suffer if we do not increase market awareness of our products
by significantly expanding our sales capabilities
We sell our products primarily through our direct sales force. We must
significantly expand our direct sales operations to increase market awareness of
our products and increase revenue. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts. As a result, our ability to increase our direct sales operation
will depend on our ability to recruit, train and retain top sales people with
advanced sales skills and technical knowledge. There is a shortage of sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry.
Prior to 1999, our sales force sold our EPM/Foundation product and
applications designed to provide analysis for customer relationship management.
The skills required to sell these products differ in many respects from the
skills required to sell applications designed for Internet-based systems.
Accordingly, the introduction of our new e-business applications has required us
to hire new sales personnel with these skills and train existing personnel to
sell these new applications. As a result, most of our current direct sales force
has been with us for a relatively short period. New sales personnel require
training and take time to achieve full productivity. If we are unable to hire or
retain qualified sales personnel, or if newly hired personnel fail to develop
the necessary skills or reach productivity more slowly than anticipated, our
business could be harmed.
We are dependent on marketing, technology and distribution relationships that
may generally be terminated at any time, and if our current and future
relationships are not successful, our growth may be limited
We rely on marketing and technology relationships with a variety of
companies which, in part, generate leads for the sale of our products. If we
cannot maintain successful marketing and technology relationships or cannot
enter into additional marketing and technology relationships, we may have
difficulty expanding the sales of our products and our growth may be limited.
While these companies do not sell or distribute our products, we believe that
many of our direct sales are the result of leads generated by vendors of
e-business and enterprise applications that work with our products. Our
marketing and technology relationships are generally not documented in writing,
or are governed by agreements that can be terminated by either party with little
or no prior notice. Some of these agreements specify that payments are to be
made by us to these companies for providing us with qualifying customer leads.
The generation of leads to date by these companies has not generally satisfied
the specified criteria and therefore payments for leads have been immaterial in
amount.
In addition, we have distribution relationships with companies located in
the United States, Japan and the Netherlands that distribute or resell our
products -- our indirect sales channel. Sales through our indirect sales channel
accounted for approximately 20.5% of our total revenue for the nine months ended
September 30, 1998 and 36.4% for the nine months ended September 30, 1999. Sales
of our products to Indus, which integrates EPM/Foundation into certain of its
enterprise solutions for the energy and utility industries, represented 14.2% of
our total revenue for the nine months ended September 30, 1998 and 8.7% of our
total revenue for the nine months ended September 30,
16
<PAGE> 17
1999. Substantially all of our sales in Japan have been made through
distributors. If we cannot maintain successful relationships with our indirect
sales channel, we may have difficulty expanding the sales of our products and
our growth may be limited.
Companies with which we have a marketing, technology or distribution
relationship may promote products of several different companies, including, in
some cases, products that compete with our products. These companies may not
devote adequate resources to selling our products. We may not be able to
maintain these relationships and enter into additional relationships that will
provide timely and cost-effective customer support and service.
Customer satisfaction and demand for our products will depend on our ability to
expand our professional services group, which assists our customers with the
implementation of our products
We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation of our products and to educate
third-party systems integrators in the use of our products. As a result, we plan
to increase the number of professional services personnel to meet these needs.
New professional services personnel will require training and take time to reach
full productivity. We may not be able to attract or retain a sufficient number
of highly qualified professional services personnel. Competition for qualified
professional services personnel with the appropriate knowledge is intense. We
are in a new market and there is a limited number of people who have the
necessary skills. To meet our customers' needs for professional services, we may
also need to use more costly third-party consultants to supplement our own
professional services group. In addition, we could experience delays in
recognizing revenue if our professional services group falls behind schedule in
connecting our products to customers' systems and data sources.
We may be unable to attract new customers if we do not develop new products and
enhancements
If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we may be unable to attract new customers. For example, we are
developing new applications as well as new versions of a number of our existing
applications, which are scheduled for release in the second half of 1999. We may
not be successful in developing and marketing these applications and new
versions, or other product enhancements and new products that respond to
technological advances and market changes, on a timely or cost-effective basis.
In addition, even if these products are developed and released, they may not
achieve market acceptance. We have in the past experienced delays in releasing
new products and product enhancements and may experience similar delays in the
future. These delays or problems in the installation or implementation of our
new releases may cause customers to forego purchases of our products.
Market acceptance of our products may suffer if we are unable to keep pace with
rapid technological changes in our industry
Rapidly changing technology and operating system standards may impede market
acceptance of our products. Our new Broadbase EPM applications have been
designed based upon currently prevailing Internet technology. If new Internet
technologies emerge that are incompatible with Broadbase EPM applications, our
key products may become obsolete and our existing and potential customers may
seek alternatives to our products. We may not be able to quickly adapt our
products to any new Internet technology.
Additionally, we have designed our products to work with databases such as
Oracle and Microsoft SQL Server. Any changes to those databases, or increasing
popularity of other databases, could require us to modify our products, and
could cause us to delay releasing future products and enhancements. Furthermore,
software adapters are necessary to integrate our products with other systems and
data sources used by our customers. We must develop and update these adapters to
reflect changes to these systems and data sources in order to maintain the
functionality provided by our products. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, databases, customer relationship
management software, web servers and other enterprise and Internet-based
applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase and
deployment of our products.
17
<PAGE> 18
We are dependent on the acceptance and use of the Windows NT operating system
Our products currently run only on the Windows NT operating system. Any
change to this operating system could require us to modify our products and
could cause us to delay product releases. Any decline in the market acceptance
of the Windows NT operating system for any reason, including as a result of
errors or delayed introduction of enhancement or upgrades, could seriously harm
us. If potential customers do not want to use the Windows NT operating system,
we will need to develop products that run on other operating systems such as
UNIX. The development of new products in response to these risks would require
us to commit a substantial investment of resources, and we may not be able to
successfully develop or introduce such products on a timely or cost-effective
basis, or at all, which could lead potential customers to choose alternatives to
our products.
We face intense competition which could make it difficult to acquire and retain
customers
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Our competitors vary in size and in the scope and breadth of
products and services offered.
We have three primary sources of competition:
o providers of consulting services-based analysis solutions, such as
E.PIPHANY;
o vendors of Point Solutions that provide website analysis, such as
Accrue, Andromedia and Net Perceptions; and
o in-house development efforts by potential customers using traditional or
generic decision support tools.
In addition, we face potential competition from vendors of other enterprise
applications as they expand the functionality of their product offerings,
including companies that design software for decision support, management of
customer relationships or of organizations' operational information, as well as
vendors of database applications. Accordingly, it is possible that new
competitors may emerge and acquire our market share.
Some of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have wider name recognition and more extensive
customer bases that they could leverage, thereby gaining market share to our
detriment. They may be able to undertake more extensive promotional activities,
adopt more aggressive pricing strategies, and offer purchasers more attractive
terms than we can. Our competitors may develop products that are superior to
ours or that achieve greater market acceptance. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties to enhance their products to address customer needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
We depend on our intellectual property, and litigation regarding our
intellectual property could harm our business
Our intellectual property is important to our business. We have no patents,
although patents may become increasingly important in software and e-business
applications. Unauthorized use or misappropriation of our intellectual property
could seriously harm our business. Third parties may infringe upon our
intellectual property rights, and we may be unable to detect this unauthorized
use or effectively enforce our rights. In addition, any legal action that we may
bring to protect our intellectual property rights could be expensive and
distract management from day-to-day operations.
18
<PAGE> 19
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. If we become liable
to any third party for infringing its intellectual property rights, we could be
required to pay substantial damage awards and to develop non-infringing
technology, obtain licenses or cease selling the applications that contain the
infringing intellectual property. Litigation is subject to inherent
uncertainties and any of these results in connection with a lawsuit could
seriously harm our business. Furthermore, we could incur substantial costs in
defending against any intellectual property litigation, and these costs could
increase significantly if any dispute were to go to trial. Our defense of any
litigation, regardless of the merits of the complaint, will likely be
time-consuming, costly and a distraction for our management personnel. Publicity
related to any intellectual property litigation could also harm the sale of our
products.
Software defects could lead to loss of revenue or delay in market acceptance for
our products
Our software products are internally complex and may contain defects,
especially when they are first introduced or when new versions are released. In
the past we have discovered software errors in some of our products after their
introduction. If we are not able to detect and correct errors in products or
releases before commencing commercial shipments, we may experience loss of
revenue or delays in market acceptance for our products. We continue to evaluate
our products for errors following the commencement of commercial shipments and
receive information from customers regarding errors they detect, as well as
requests for future enhancements to our products. Our license agreements with
our customers typically contain provisions designed to limit our exposure to
potential product liability claims. However, all domestic and international
jurisdictions may not enforce these limitations. We may encounter product
liability claims in the future. Product liability claims brought against us
could divert the attention of management and key personnel, could be expensive
to defend and may result in adverse settlements and judgments.
Barriers to international expansion could limit our future growth
We intend to expand our international operations, but we may face
significant barriers to this expansion. Our failure to manage our international
operations effectively could limit the future growth of our business.
International sales represented approximately 0% of our total revenue for the
first nine months of 1998 and 24.1% of our total revenue in the first nine
months of 1999, substantially all of which consisted of sales of EPM/Foundation
to customers in Japan. We conduct our international sales primarily through
direct sales offices in Germany, the Netherlands and the United Kingdom, and
through distributors in Japan. The expansion of our existing international
operations and entry into additional international markets will require
significant management attention and financial resources.
Our international operations face numerous risks. Our products must be
localized -- customized to meet local user needs -- in order to be sold in
particular foreign countries. Developing local versions of our products for
foreign markets is difficult and can take longer than we anticipate. We cannot
assure you that our localization efforts will be successful. In addition, we
have only a limited history of marketing, selling and supporting our products
and services internationally. As a result, we must hire and train experienced
personnel to staff and manage our foreign operations. However, we may experience
difficulties in recruiting and training an international staff. We must also be
able to enter into strategic relationships with companies in international
markets, particularly in Japan where all of our sales have been made through
distributors. If we are not able to maintain successful strategic relationships
internationally or recruit additional companies to enter into strategic
relationships, our future growth could be limited.
We also face certain other risks inherent in conducting business
internationally, such as:
o difficulties and costs of staffing and managing international
operations;
o language and cultural differences;
o difficulties in collecting accounts receivable and longer collection
periods;
o seasonal business activity in certain parts of the world;
o fluctuations in currency exchange rates;
o legal and governmental regulatory requirements;
19
<PAGE> 20
o trade barriers; and
o potentially adverse tax consequences.
Any of these factors could seriously harm our international operations and,
consequently, our business.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We have not engaged in any foreign exchange
hedging transactions, and we are therefore subject to foreign currency risk.
We are growing rapidly, and the failure to manage our growth, including
expansion of our management systems, could adversely affect our business
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Our total number of
full-time employees grew from 41 at December 31, 1997 to 120 at September 30,
1999, and we anticipate further significant increases in the number of our
employees. Our growth has placed significant demands on management as well as on
our administrative, operational and financial resources and controls. We expect
our future growth to cause similar, and perhaps increased, strain on our systems
and controls. In particular, we need to substantially upgrade our information
systems including accounting and order entry. We also will need to institute new
systems such as human resource management and time and billing systems. If we
cannot effectively establish and improve our processes, we may not be able to
manage our growth successfully or sustain and manage the growth rates we have
experienced in the past.
Risks Related to Our Industry
We depend on the growth in the use of the Internet for our business
Our future success depends heavily on the increased acceptance and use of
the Internet for business. Although the Internet is experiencing rapid growth in
the number of users and traffic, this growth is a recent phenomenon and may not
continue. If use of the Internet for business does not continue to increase or
increases more slowly than expected, our business would be seriously harmed.
Consumers and businesses may reject the Internet as a viable commercial medium,
or be slow to adopt it, for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
concerns about the security of transactions and confidential information and
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased governmental regulation, could cause the Internet to lose
its viability as a commercial medium. Even if the required infrastructure,
standards, protocols or complementary products, services or facilities are
developed, we may incur substantial expenses adapting our products to changing
or emerging technologies.
Increasing governmental regulation of the Internet could limit the market for
our products
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, such as user privacy,
taxation of goods and services provided over the Internet, pricing, content and
quality of products and services. Legislation could dampen the growth in
Internet usage and decrease or limit its acceptance as a communications and
commercial medium. If enacted, these laws and regulations could limit the market
for our products. In addition, existing laws could be applied to the Internet,
including consumer privacy laws. Legislation or application of existing laws
could expose companies involved in electronic commerce, or e-commerce, to
increased liability, which could limit the growth of e-commerce generally.
Government regulation of the collection and use of personal data could reduce
demand for our products
Our products connect to and analyze data from various applications,
including Internet applications, that enable businesses to capture and use
information about their customers. Government regulation which limits our
customers' use of this information could reduce the demand for our products. A
number of jurisdictions have adopted, or are considering adopting, laws that
restrict the use of customer information from Internet applications. The
European Union
20
<PAGE> 21
has required that its member states adopt legislation that imposes restrictions
on the collection and use of personal data on the Internet, and that limits the
transfer of personally-identifiable data to countries that do not impose
equivalent restrictions. In the United States, the Children's Online Privacy
Protection Act was enacted in October 1998. This legislation directs the Federal
Trade Commission to regulate the collection of data from children on commercial
websites. In addition, the Federal Trade Commission has begun investigations
into the privacy practices of businesses that collect information on the
Internet. These and other privacy-related initiatives could reduce demand for
some of the Internet applications with which our products operate, and could
restrict the use of our products in some e-commerce applications. This could
reduce demand for our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
During the first nine months of 1999, our exposure to market risk for
changes in interest rates related primarily to our long-term debt obligations.
We primarily used proceeds from these debt obligations to support general
corporate requirements including capital expenditures and working capital needs.
On September 27, 1999, all of the outstanding Series D convertible debentures
representing $9.5 million in aggregate principal, were converted into shares of
the Company's common stock. We continue to have interest rate exposure on
borrowings under our revolving line of credit and equipment line of credit which
bear interest at variable rates based on the prime interest rate. We have no
interest rate exposure on our notes payable to a financial institution, as the
interest rates on this obligations are fixed.
We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment grade, highly
liquid investments, consisting of money market instruments and bank certificates
of deposit. We have invested our net proceeds from our initial public offering
in similar investment grade and highly liquid investments.
We are exposed to market risk from fluctuations in foreign currency exchange
rates. We manage exposure to variability in foreign currency exchange rates
primarily through the use of natural hedges, as both liabilities and assets are
denominated in the local currency. However, different durations in our funding
obligations and assets may expose us to the risk of foreign exchange rate
fluctuations. We have not entered into any derivative instrument transactions to
manage this risk. Based on our overall foreign currency rate exposure at
September 30, 1999, we do not believe that a hypothetical 10% change in foreign
currency rates would materially adversely affect our financial position.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Item 1 of this Form 10-Q for information regarding the Company's settlement of
litigation with Timeline, Inc.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1999, the Company or its
predecessor, Broadbase Information Systems, Inc., a California corporation
("Broadbase California"), made the following offers and sales of its securities,
all in reliance on the exemptions from registration pursuant to the exemption
indicated (all information reflects the merger of Broadbase California into the
Company).
<TABLE>
<CAPTION>
PURCHASER SECURITY DATE OF SALE CONSIDERATION EXEMPTION
- --------- -------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
13 employees 69,663 shares of Common Stock 7/05/99-9/17/99 $94,260 Section 4(2)/Rule 701
17 consultants 48,900 shares of Common Stock 7/15/99-8/26/99 $222,984 Section 4(2)/ Rule
701
Timeline Inc. 40,000 shares of Common Stock 8/31/99 Execution of a license Section 4(2)
agreement and settlement
of pending litigation
6 investors 45,063 shares of Common Stock 9/28/99 $630,882 Section 4(2)
</TABLE>
21
<PAGE> 22
The sales of shares of Common Stock to the employees and consultants
set forth in the above table were made pursuant to the Company's stock option
plans. All of the sales were made without general solicitation or advertising.
Unless the Company was relying on Rule 701 each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Company that the shares were being acquired
for investment.
The Company's Registration Statement on Form S-1 (File No. 333-82251)
was declared effective by the SEC on September 21, 1999. A total of 4,600,000
shares of the Company's Common Stock were registered with the SEC with an
aggregate registered offering price of $64,400,000, all of which were registered
on behalf of the Company. The offering commenced on September 21, 1999 and all
4,600,000 shares of Common Stock being offered by the Company were sold for the
aggregate registered offering price through a syndicate of underwriters managed
by Deutsche Banc Alex. Brown, Dain Rauscher Wessels, Thomas Weisel Partners LLC
and E*Offering. The sale of 4,000,000 of such shares closed on September 27,
1999 and the sale of the remaining 600,000 of such shares closed on October 18,
1999.
The Company paid to the underwriters underwriting discounts and
commissions totaling $4,508,000 in connection with the offering. In addition,
the Company reasonably estimates that it incurred additional expenses of
approximately $1.5 million in connection with the offering, which when added to
underwriting discounts and commissions paid by the Company amounts to total
estimated expenses of $6,008,000. Thus the net offering proceeds to the Company
(after deducting underwriting discounts and commissions and estimated offering
expenses) were approximately $58,392,000. No offering expenses were made
directly or indirectly to any directors or officers of the Company (or their
associates), or persons owning ten percent (10%) or more of any class of equity
securities of the Company or to any other affiliates of the Company.
As of September 30, 1999, the Company had used the estimated aggregate
net proceeds of $50,580,000 that it had received as of that date from its
initial public offering (excluding the net proceeds from the sale of 600,000
shares that it received after that date) as follows:
<TABLE>
<S> <C>
Construction of plant, building and facilities: $0
Purchase and installation of machinery and equipment: $0
Purchases of real estate: $0
Acquisition of other businesses: $0
Repayment of indebtedness: $0
Working capital: $0
Temporary investments (short term, interest bearing securities): $50,580
Other purposes: $0
</TABLE>
The foregoing amounts represent the Company's best estimate of its use of
proceeds for the period indicated. No such payments were made to directors or
officers of the Company or their associates, holders of 10% or more of any class
of equity securities of the Company or to affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 9, 1999, Broadbase California solicited the written consents
of its shareholders to approve the following matters: (i) changing the state of
incorporation of Broadbase California from California to Delaware by means of a
merger of Broadbase California into the Company, the Agreement and Plan of
Merger, the Certificate of Incorporation, Certificate of Designation and Bylaws
of the Company; (ii) amending the Certificate of Incorporation and Certificate
of Designation of the Company following the reincorporation and conversion of
all outstanding Preferred Stock into Common Stock in connection with the
Company's initial public offering by filing a Certificate of
22
<PAGE> 23
Retirement; (iii) the form of Indemnity Agreement for use between the Company
and each of its officers and directors; (iv) the adoption of the Company's 1999
Employee Stock Purchase Plan and the reservation of Common Stock for issuance
thereunder; and (v) the adoption of the Company's 1999 Equity Incentive Plan and
the reservation of 3,500,000 shares of Common Stock for issuance thereunder.
Broadbase California received the following written consents for the
above-referenced actions:
<TABLE>
<CAPTION>
For* Against Abstain
---- ------- -------
<S> <C> <C> <C>
Item (i) 10,501,736(88%) -- 3,118(1%)
Item (ii) 10,501,736(88%) -- 3,118(1%)
Item (iii) 10,236,085(86%) -- 268,769(2%)
Item (iv) 10,245,591(86%) 4,333(1%) 254,930(2%)
Item (v) 10,227,883(86%) 4,333(1%) 272,638(2%)
</TABLE>
On August 10, 1999, Broadbase California solicited the written consents
of its shareholders to approve the amendment of its Articles of Incorporation to
decrease from $11.08 to $10.00 the price per share threshold above which an
initial public offering would cause all of the Company's Preferred Stock to
convert automatically into Common Stock. Broadbase California received the
following written consent for the above-referenced action:
<TABLE>
<CAPTION>
For* Against* Abstain*
---- -------- --------
<S> <C> <C> <C>
9,925,913(83%) -- --
</TABLE>
On August 19, 1999, Broadbase California solicited the written consents
of its shareholders to approve the following matters: (i) amendment of the
Certificate of Designation of the Company to reflect the change in the automatic
conversion price included in the Articles of Incorporation of Broadbase
California from $11.08 to $10.00 per share; (ii) confirmation of the reservation
of 500,000 shares of the Company's Common Stock for issuance under the Company's
1999 Employee Stock Purchase Plan; and (iii) amendment of the Company's 1999
Equity Incentive Plan to amend the formula under which increases are
automatically made each year in the number of shares reserved for issuance under
that Plan.
Broadbase California received the following written consents for the
above-referenced actions:
<TABLE>
<CAPTION>
For* Against* Abstain*
---- -------- ---------
<S> <C> <C> <C>
Item (i) 9,633,772(80%) -- 254,930(2%)
Item (ii) 9,191,442(77%) 442,330(4%) 254,980(2%)
Item (iii) 9,553,253(80%) 22,041(1%) 313,408(3%)
</TABLE>
On August 26, 1999, Broadbase California solicited the written consents
of its shareholders to approve an amendment of the Articles of Incorporation of
Broadbase California and the Certificate of Designation of the Company to
exclude from the definition of Additional Shares of Common Stock under the
antidilution provisions included in those documents for the issuance of up to
40,000 shares of Common Stock to Timeline Inc. Broadbase California received the
following written consents for the above-referenced action:
<TABLE>
<CAPTION>
For* Against* Abstain*
---- -------- --------
<S> <C> <C> <C>
10,009,673(84%) 2,094(1%) 5,325(1%)
</TABLE>
- ----------
* Common and Preferred Stock (on an as-if-converted basis). There were no
broker non-votes.
23
<PAGE> 24
In August 1999, the Company solicited the written consent of its then
sole stockholder, Broadbase California, to approve the matters that had been
approved on August 9, 1999 by the shareholders of Broadbase California with such
changes as were reflected in the consent approved by the shareholders of
Broadbase California on August 19, 1999. The Company received Broadbase
California's written consents approving each of such matters as to all of the
[1,000] shares of the Company's then outstanding stock.
ITEM 5. OTHER INFORMATION
Effective October 15, 1999, Chuck Bay was named the Company's
President, in addition to continuing as the Company's Chief Operating Officer
and Chief Financial Officer. Mark Kremer remains as the Company's Chief
Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits have been filed with this report:
27.1 Financial Data Schedule
b. Reports on Form 8-K.
None
24
<PAGE> 25
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.
BROADBASE SOFTWARE, INC.
Dated: November 12, 1999 By: /s/ Chuck Bay
--------------------------------------
Chuck Bay
President, Chief Operating Officer and
Chief Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 76,784
<SECURITIES> 0
<RECEIVABLES> 1,885
<ALLOWANCES> 50
<INVENTORY> 0
<CURRENT-ASSETS> 79,688
<PP&E> 3,353
<DEPRECIATION> 1,378
<TOTAL-ASSETS> 82,256
<CURRENT-LIABILITIES> 11,776
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 69,876
<TOTAL-LIABILITY-AND-EQUITY> 82,256
<SALES> 4,808
<TOTAL-REVENUES> 6,304
<CGS> 910
<TOTAL-COSTS> 2,593
<OTHER-EXPENSES> 4,387
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 837
<INCOME-PRETAX> (17,516)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,516)
<EPS-BASIC> (6.80)
<EPS-DILUTED> (6.80)
</TABLE>
