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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________TO ________.
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COMMISSION FILE NUMBER: 000-25781
NET PERCEPTIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1844584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices, Zip Code)
(612) 903-9424
(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]
ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT BECOME
SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN SHARES
OF ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE
"REGISTRATION STATEMENT") WAS DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION ON APRIL 22, 1999.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF MAY
26, 1999 WAS 21,975,159.
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NET PERCEPTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
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INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998 3
Condensed Statements of Operations for the three-month periods ended March 31, 1999 and 1998 4
Condensed Statements of Cash Flows for the three-month periods ended March 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET PERCEPTIONS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 2,331 $ 972
Accounts receivable, net.............................................. 4,275 3,382
Prepaid expenses and other current assets............................. 346 142
Deferred offering costs............................................... 700 -
--------- --------
Total current assets............................................... 7,652 4,496
--------- --------
Property and equipment, net............................................. 1,503 1,019
Other assets............................................................ 116 122
--------- --------
Total assets....................................................... $ 9,271 $ 5,637
--------- --------
--------- --------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable.............................................. $ 4,000 $ -
Accounts payable and accrued expenses................................. 3,162 1,666
Deferred revenue...................................................... 2,547 2,107
Current portion of capital lease obligations.......................... 253 255
--------- --------
Total current liabilities.......................................... 9,962 4,028
--------- --------
Long-term liabilities:
Capital lease obligations, net of current portion..................... 479 538
Deferred rent......................................................... 109 -
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Total liabilities.................................................. 10,550 4,566
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Commitments and contingencies
Series A Convertible Redeemable Preferred Stock at redemption value..... 650 650
--------- --------
Stockholders' equity:
Series B Convertible Preferred Stock.................................. - -
Series C Convertible Preferred Stock.................................. - -
Common Stock.......................................................... 1 1
Additional paid-in capital............................................ 11,663 11,137
Accumulated deficit................................................... (13,593) (10,717)
--------- --------
Total stockholders' equity......................................... (1,929) 421
--------- --------
Total liabilities, convertible redeemable preferred stock and
stockholders' equity....................................... $ 9,271 $ 5,637
--------- --------
--------- --------
</TABLE>
See accompanying notes to the financial statements.
3
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NET PERCEPTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Product............................................................ $ 1,561 $ 617
Service and maintenance............................................ 334 53
---------- ----------
Total revenues.................................................. 1,895 670
---------- ----------
Cost of revenues:
Product............................................................ 36 6
Service and maintenance............................................ 313 35
---------- ----------
Total cost of revenues.......................................... 349 41
---------- ----------
Gross margin......................................................... 1,546 629
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Operating expenses:
Sales and marketing................................................ 1,737 932
Research and development........................................... 1,536 368
General and administrative......................................... 574 226
Stock compensation expense......................................... 503 7
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Total operating expenses....................................... 4,350 1,533
---------- ----------
Loss from operations................................................. (2,804) (904)
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Other income (expense), net.......................................... (72) 28
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Net loss............................................................. $ (2,876) $ (876)
---------- ----------
---------- ----------
Net loss per share:
Basic and diluted.................................................... $ (0.64) $ (0.31)
---------- ----------
---------- ----------
Shares used in computing basic and diluted net loss per share........ 4,518,784 2,839,996
---------- ----------
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Unaudited pro forma basic and diluted net loss per share............. $ (0.19) $ (0.07)
---------- ----------
---------- ----------
Shares used in computing unaudited pro forma basic and diluted
net loss per share................................................. 15,187,484 13,102,617
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the financial statements.
4
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NET PERCEPTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (2,876) $ (876)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization.................................... 135 53
Stock compensation expense....................................... 503 7
Changes in operating assets and liabilities:
Accounts receivable............................................ (894) (502)
Accounts payable and accrued expenses.......................... 1,496 85
Deferred offering costs........................................ (700) -
Deferred revenue............................................... 440 125
Other.......................................................... (80) 43
-------- ---------
Net cash used by operating activities........................ (1,976) (1,065)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments.................................. - 493
Purchases of property and equipment................................. (626) (75)
-------- ---------
Net cash provided by (used in) investing activities.......... (626) 418
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock.............................. - 1,091
Principal payments under capital lease obligations................. (61) (28)
Proceeds from exercise of stock options............................ 22 1
Proceeds from issuance of short-term debt.......................... 4,000 -
-------- ---------
Net cash provided by financing activities.................... 3,961 1,064
-------- ---------
Net increase in cash and cash equivalents............................. 1,359 417
Cash and cash equivalents at beginning of period...................... 972 1,407
-------- ---------
Cash and cash equivalents at end of period............................ $ 2,331 $ 1,824
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to the financial statements.
5
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NET PERCEPTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto for the
year ended December 31, 1998, which are contained in the Company's Registration
Statement filed on Form S-1, as amended, declared effective by the Securities
and Exchange Commission on April 22, 1999 (File No. 333-71919). The results of
operations for the interim periods presented are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
year.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We do not expect SFAS No. 133 to have a significant effect on our financial
condition or results of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions," which
will retain the limitations of SOP 97-2 on what constitutes vendor specific
objective evidence of fair value. SOP 98-9 will be effective for transactions
entered into in fiscal years beginning after March 15, 1999. We believe that our
current revenue recognition policies and practices are consistent with the
provisions of the new guidance.
NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was $339 and $74 at March 31, 1999 and 1998,
respectively.
NOTE 4. CONVERTIBLE NOTE PAYABLE
On February 4, 1999, we borrowed $4.0 million from a foreign corporate investor
pursuant to a convertible promissory note due January 31, 2000 and bearing
interest at the rate of 8% per annum. The note automatically converted into
shares of our common stock upon the closing of our initial public offering (See
Note 7). Accordingly, on April 28, 1999, the principal and accrued interest on
the note were converted to 290,911 shares of common stock at $14 per share.
NOTE 5. STOCK SPLIT
On April 20, 1999, we effected a 2-for-1 stock split of the then issued and
outstanding capital stock. All references to common stock and preferred stock
amounts, shares and per share data included in the financial statements and
related notes have been adjusted to give retroactive effect to the stock split.
6
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NOTE 6. NET LOSS PER SHARE
Net loss per share is computed under SFAS No. 128, "Earnings Per Share." Basic
net loss per share is computed using the weighted-average number of shares of
common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase, which consisted
primarily of founders' shares, aggregated 1,908,510 and 3,290,092 at March 31,
1999 and 1998, respectively. Diluted net loss per share does not differ from
basic net loss per share, since potential shares of common stock from the
exercise of stock options and warrants and outstanding shares of common stock
subject to repurchase are anti-dilutive for all periods presented. Unaudited pro
forma basic and diluted net loss per share has been calculated assuming the
conversion of all outstanding shares of preferred stock into shares of common
stock, as if the shares had converted immediately upon their issuance (See Note
7).
NOTE 7. SUBSEQUENT EVENTS
On April 28, 1999, we completed an initial public offering, selling 3,650,000
shares of common stock at a price of $14 per share, raising a total of
$46,273,000 in net proceeds after payment of underwriting discounts and
commissions and estimated offering expenses. Concurrent with the closing of the
initial public offering, all shares of preferred stock outstanding were
converted on a 1-to-1 basis into 10,668,700 shares of common stock. Pro forma
net loss per share figures have therefore been presented to reflect all
preferred shares as if they were converted to common shares at the time of
issuance.
On May 20, 1999, the underwriters on our initial public offering exercised their
right to purchase additional shares of common stock to cover over-allotments.
Accordingly, on May 25, 1999, we sold 547,500 shares of common stock, generating
an additional $7,128,000 in net proceeds after payment of underwriting discounts
and commissions and estimated offering expenses. Including the over-allotment
shares, we sold a total of 4,197,500 shares of common stock in our initial
public offering, raising a total of $53,401,000, net of underwriting discounts
and commissions and estimated offering expenses.
The accompanying balance sheet is as of March 31, 1999, and does not reflect the
net proceeds of our initial public offering.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those described in our forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
under the heading "Risk Factors" and the risks and factors discussed in our
Registration Statement on Form S-1 declared effective on April 22,1999 by the
Securities and Exchange Commission (File No. 333-71919).
OVERVIEW
Net Perceptions is a leading provider of marketing solutions that enable
Internet and traditional retailers to market to customers on a personalized,
one-to-one-basis in real time. With our software solutions, a retailer learns
from each customer interaction and, based on the information received, adjusts
marketing messages or product offerings to that customer in real time. We define
our product offerings as real-time relationship marketing solutions. Our
products enable effective real-time relationship marketing by analyzing past and
current customer behavior, including purchase history, stated preferences,
demographic information and Internet browsing behavior. Based on this analysis,
our products use proprietary collaborative filtering technology to anticipate
other merchandise or information a customer is likely to be interested in
purchasing or viewing. We believe that retailers that implement our solutions
can attract more customers, generate more products per order and increase
customer loyalty.
We also provide our customers with a comprehensive array of services, including
training and consulting services, software updates, documentation updates,
telephone support and web-based support. We market our products and services
through our direct sales organization and through indirect distribution
channels, including resellers, systems integrators and original equipment
manufacturers.
To date, we have focused on providing solutions to electronic commerce retailers
and substantially all of our product revenues through March 31, 1999 were
attributable to our Net Perceptions for E-commerce product. We anticipate that
Net Perceptions for E-commerce will continue to account for a substantial
portion of our product revenues for the foreseeable future. Consequently, a
decline in the price of or demand for Net Perceptions for E-commerce, or its
failure to achieve broad market acceptance, would seriously harm our business,
financial condition and results of operations.
During the quarter ended March 31, 1999, two customers deployed our technology
in call center applications, demonstrating that we are beginning to provide
real-time relationship marketing solutions to traditional customer touch-points.
These implementations were complimented by sales to two new customers who plan
to deploy our products both on the Internet and in call centers. We believe
these transactions signal an early trend in real-time marketing, in which
companies will seek to leverage data gathered from all customer interactions to
deliver personalized service. Net Perceptions for Call Centers has not received
any degree of market acceptance. We expect that our future financial performance
will depend significantly on the successful sales, implementation and market
acceptance of Net Perceptions for Call Centers, which may not occur on a timely
basis or at all.
We market the majority of our products through our direct sales force. Sales
derived through indirect channels accounted for approximately 15% and 8% of our
total revenues for the three months ended March 31, 1999 and the year ended
December 31, 1998, respectively. We expect that sales derived through indirect
channels will increase as a percentage of total revenues. Sales through indirect
channels have lower average selling prices and gross margins than direct sales.
As a result, we expect that our gross margins on product sales will decline if
sales through indirect channels increase.
We have sustained losses on a quarterly and an annual basis since inception. As
of March 31, 1999, we had an accumulated deficit of $13.6 million. Our net loss
was $2.9 million for the three months ended March 31, 1999, $5.0 million in 1998
and $4.7 million in 1997. These losses resulted from significant costs incurred
in the
8
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development and sale of our products and services. We expect to
experience significant growth in our operating expenses for the foreseeable
future in order to execute our business plan, particularly research and
development and sales and marketing expenses. As a result, we anticipate that
such operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. As a result, we expect to incur
additional losses and continued negative cash flow from operations for the
foreseeable future, and such losses are anticipated to increase significantly
from current levels. We do not expect to achieve profitability in 1999 or 2000.
Our limited operating history makes the prediction of future operating results
very difficult. We believe that period-to-period comparisons of our operating
results should not be relied upon as predictive of future performance. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early state of development, particularly
companies in new and rapidly evolving markets. We may not be successful in
addressing these risks and difficulties. We have experienced significant
percentage growth in revenues in recent periods; however, we do not believe that
prior growth rates are sustainable or indicative of future growth rates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
The following table sets forth certain items in the Company's statements of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
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Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
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<S> <C> <C>
Revenues:
Product 82% 92%
Service and maintenance 18 8
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Total revenues 100 100
Cost of revenues:
Product 2 1
Service and maintenance 16 5
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Total cost of revenues 18 6
Gross margin 82 94
Operating expenses:
Sales and marketing 92 139
Research and development 81 55
General and administrative 30 34
Stock compensation expense 27 1
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Total operating expenses 230 229
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Loss from operations (148) (135)
Other income (expense), net (4) 4
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Net loss (152%) (131%)
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</TABLE>
9
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REVENUE
TOTAL REVENUES. Total revenues were $1.9 million and $670,000 for the three
months ended March 31, 1999 and 1998, respectively. Revenues from international
sales were $327,000 and $95,000, or 17% and 14% of total revenues, for the three
months ended March 31, 1999 and 1998, respectively. The majority of
international sales to-date were made in Canada, Europe and Asia by our direct
sales force located in the United States. In April 1999, we commenced efforts to
establish European operations and hired a Vice President residing in the United
Kingdom to lead those efforts.
We recognize revenue in accordance with the Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2), as amended by Statement of Position
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2". We derive
revenues from the sale of software licenses, post-contract support ("support")
and consulting services. Support includes telephone technical support, bug
fixes, and rights to upgrades on a when-and-if available basis. Services include
implementation, training, and consulting. In software arrangements that include
rights to multiple software products, specified upgrades, support and/or
services, we allocate the total arrangement fee among each deliverable based on
the relative fair value of each of the deliverables determined based on
vendor-specific objective evidence. Revenue from license fees is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations with regard to implementation
remain, the fee is fixed or determinable and collectibility is probable. If the
fee due from the customer is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collectibility is not considered
probable, revenue is recognized when the fee is collected. Revenue allocable to
support is recognized on a straight-line basis over the periods in which the
support is provided. Arrangements that include consulting services are evaluated
to determine whether those services are essential to the functionality of other
elements of the arrangement. When services are considered essential, revenue
under the arrangement is recognized using contract accounting. When services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed.
PRODUCT REVENUES. We currently derive substantially all of our product revenues
from licenses of our Net Perceptions for E-commerce product. Revenue from
product licenses increased by 153% from $617,000 for the quarter ended March 31,
1998 to $1.6 million in the comparable quarter in 1999. The growth of revenue in
absolute dollars is largely a result of our sales and marketing efforts,
specifically the expansion of our direct sales force, and the increased market
acceptance of our products. While higher unit sales volumes accounted for the
majority of the growth in revenues, we have also achieved an increase in our
average order size through sales efforts focused on larger accounts. We intend
to continue to enhance our current software products as well as to develop new
software products. As a result, we anticipate that revenue from product licenses
will continue to represent a majority of our revenue in the foreseeable future.
SERVICE AND MAINTENANCE REVENUES. Revenue from services increased by 530% from
$53,000 for the quarter ended March 31, 1998 to $334,000 in the comparable
quarter in 1999. This growth is due to increased licensing activity, which has
resulted in increased revenue from maintenance and support, training and
consulting services and the expansion of our services capabilities through the
hiring of additional services personnel. Although prior quarters' licensing
growth has resulted in increased revenue from maintenance and support, training
and consulting services, prior growth rates of our installed base and,
consequently, in our service revenues, may not be sustainable in the future.
COSTS OF REVENUES
COST OF PRODUCT REVENUES. Cost of product revenues consists primarily of the
costs of royalties paid to third-party vendors, product media and duplication,
manuals, packaging materials, personnel-related costs and shipping expenses.
Cost of product revenues was $36,000 or 2% of product revenues in the quarter
ended March 31, 1999 as compared to $6,000 or 1% for the same period in 1998.
The increase in the dollar amount of cost of product revenues from 1998 to 1999
reflects the higher volumes of product shipped in 1999. Because all development
costs incurred in the research and development of new software products and
enhancements to existing software products have been expensed as incurred, cost
of product revenues includes no amortization of capitalized software development
costs.
COST OF SERVICES AND MAINTENANCE REVENUES. Cost of services and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone support, consulting services and training to customers. Cost
10
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of services and maintenance revenues increased to $313,000 for the quarter ended
March 31, 1999 from $35,000 in the comparable quarter in 1998, representing 94%
and 66% of the related services and maintenance revenues for the respective
quarters. Cost of services and maintenance revenues increased significantly in
absolute dollars and as a percentage of revenue primarily due to increased
personnel-related costs incurred as we continue to build our customer support,
education and training, and consulting services organization. We believe that
the cost of service and maintenance revenues will increase in dollar amounts but
decrease as a percentage of service and maintenance revenues in the future due
to higher utilization of our services personnel.
OPERATING EXPENSES
Operating expenses were $4.4 million in the first quarter of 1999 and $1.5
million in the first quarter of 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and incentive compensation for sales and marketing personnel and promotional
expenses. Sales and marketing expenses were $1.7 million and $932,000, or 92%
and 139% of total revenues, for the quarters ended March 31, 1999 and March 31,
1998, respectively. The increases in sales and marketing expenses in absolute
dollar amounts is primarily due to increased personnel-related costs related to
increased headcount in our sales and marketing organizations and a related
increase in incentive compensation paid to sales personnel. We believe that
sales and marketing expenses will continue to increase in absolute dollar
amounts in the future as we continue to expand our direct sales force and
further promote our products.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily of
personnel-related costs, contractor expenses and related equipment costs.
Research and development expenses were $1.5 million and $368,000, or 81% and 55%
of total revenues, for the quarters ended March 31, 1999 and March 31, 1998,
respectively. The increase in research and development in absolute dollar
amounts was primarily attributable to increased staffing and associated support
for software engineers required to expand and enhance our product line. We
believe that continued investment in research and development expenses is
critical to attaining our strategic objectives and, as a result, expect research
and development expenses to increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $574,000
and $226,000, or 30% and 34% of total revenues, for the quarters ended March 31,
1999 and March 31, 1998, respectively. The increase in dollar amounts was
primarily the result of increased staffing and associated expenses necessary to
manage and support our growth. We believe that general and administrative
expenses will increase in dollar amount as we continue to increase staffing to
manage expanding operations. However, we believe that general and administrative
expenses will decrease as a percentage of total revenues in the future.
STOCK COMPENSATION. Compensation related to stock options granted through the
first quarter of 1999 was approximately $3,146,000. Of this amount, we recorded
stock compensation expense of $503,000 and $7,000 in the three months ended
March 31, 1999 and 1998, respectively. These amounts represent the difference
between the exercise price of certain stock option grants and the deemed fair
value of the common stock at the time of such grants. Deferred stock
compensation expense is amortized over the vesting period of the options,
generally four years. As a result, the amortization of stock compensation will
impact our reported results of operations through early 2003.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists of interest
income, income expense and other expense. Other income (expense), net was
($72,000) and $28,000 for the three months ended March 31, 1999 and 1998,
respectively. The net expense for the three months ended March 31, 1999 is
primarily due to interest expense on $4,000,000 borrowed in February 1999
pursuant to a convertible note payable.
PROVISION FOR INCOME TAXES
We have incurred significant operating losses for all periods from inception
through March 31, 1999. As the future realization of the tax benefit resulting
from these losses is not sufficiently assured, we have recorded a valuation
allowance for the full amount of our deferred tax asset.
11
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LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999 and March 31, 1998, cash used in
operating activities was $2.0 million and $1.1 million, respectively. Net cash
used in operations for the three months ended March 31, 1999 was primarily
attributable to our operating loss.
During the three months ended March 31, 1999, our investing activities consisted
primarily of purchases of property and equipment, primarily for computer
workstations and file servers for our growing employee base. During the three
months ended March 31, 1998, we generally funded the purchase of property and
equipment with capital leases. We expect that the rate of purchases of property
and equipment will continue to increase as our employee base grows. Our
principal commitments consist primarily of leases on our facilities.
The net cash provided by financing activities during the three months ended
March 31, 1999 was $4.0 million versus the $1.1 million provided by financing
activities during the three months ended March 31, 1998. The $4.0 million
represents proceeds from the issuance of a $4,000,000 convertible note
payable offset somewhat by repayments on capital lease obligations. The $1.1
million represents the sale of preferred stock in February 1998.
As of March 31, 1999, we had $2.3 million in cash and cash equivalents. On April
28, 1999, we completed an initial public offering, selling 3,650,000 shares of
common stock at a price of $14 per share, raising a total of $46,273,000 in net
proceeds after payment of underwriting discounts and commissions and estimated
offering expenses. On May 20, 1999, the underwriters on our initial public
offering exercised their right to purchase additional shares of common stock to
cover over-allotments. Accordingly, on May 25, 1999, we sold 547,500 shares of
common stock, generating an additional $7,128,000 in net proceeds after payment
of underwriting discounts and commissions and estimated offering expenses.
Including the over-allotment shares, we sold a total of 4,197,500 shares of
common stock in our initial public offering, raising a total of $53,401,000, net
of underwriting discounts and commissions and estimated offering expenses.
We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan, particularly research
and development and sales and marketing expenses. 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 or investments in complementary businesses,
technologies or product lines. We believe that current cash balances will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.
YEAR 2000 READINESS
"Year 2000 Issues" refer generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31, 1999
to January 1, 2000 date change;
- Function according to the product documentation provided for this
date change, without changes in operation resulting from the advent
of a new century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the ambiguity
as to century in a disclosed, defined and predetermined manner;
- Store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and
data storage specify the century; and
- Recognize the Year 2000 as a leap year.
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We designed our current products to be Year 2000 compliant when configured and
used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. However, we have
not tested our products for Year 2000 compliance. We continue to respond to
customer questions about prior versions of our products on a case-by-case basis.
We have not tested software obtained from third parties. However, we are seeking
assurances from our vendors that licensed software is Year 2000 compliant.
Despite assurances from developers of products incorporated into our products,
our products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could result
in delay or loss of revenues, diversion of development resources, damage to our
reputation, or increased service and warranty costs, any of which could
seriously harm our business, financial condition and results of operations. Some
commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of such lawsuits against other software
vendors. Because of the unprecedented nature of such litigation, it is uncertain
whether or to what extent we may be affected by it.
We are assessing our material internal information technology systems, including
both our own software products and third-party software and hardware technology,
but we have not initiated an assessment of our non-information technology
systems. We expect to complete testing of our information technology systems in
1999. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from such vendors that their
systems are Year 2000 compliant. We are not currently aware of any significant
operational issues or costs associated with preparing our internal information
technology and non-information technology systems for the Year 2000. However, we
may experience significant unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information technology
and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, financial condition
and results of operations.
We have not yet fully developed a contingency plan to address situations that
may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.
RISK FACTORS
In addition to the other information in this Report, the following risk factors
should be carefully considered in evaluating our business and us:
NET PERCEPTIONS IS AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY
EVOLVING MARKETS.
Net Perceptions was founded in July 1996. We began shipping product in
the first quarter of 1997. The market for our products is unproven. Our limited
operating history makes an evaluation of our future prospects very difficult. We
will encounter risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. We may not successfully address
any of these risks. If we do not successfully address these risks, our business,
financial condition and results of operations would be seriously harmed.
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OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our operating results are volatile and
difficult to predict, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
likely that in some future quarter or quarters our operating results will be
below the expectations of public market analysts and investors. In such event,
the market price of our common stock may decrease significantly.
Our quarterly operating results will vary depending on a number of
factors, including:
- Demand for our products and services;
- Amount and timing of sales transactions for our products and services;
- Actions taken by our competitors, including new product introductions;
- Our ability to develop, introduce and market new products and
enhancements to our existing products on a timely basis;
- Market readiness for our products;
- Changes in our pricing policies or those of our competitors;
- Our ability to expand our sales and marketing operations, including
hiring additional sales personnel;
- Our success in developing indirect sales channels;
- The deferral of significant revenues until acceptance of software or
delivery of services as required by an individual license transaction;
- Our ability to control costs;
- Technological changes in our markets;
- The mix of sales among our direct and indirect channels and between
domestic and international markets;
- Deferrals of customer orders in anticipation of product enhancement or
new products;
- The rate of growth in the use of the Internet for commerce and
communication;
- Customer budget cycles and changes in these budget cycles;
- Difficulties experienced by our customers or us as a result of Year
2000 issues; and
- General economic factors.
We cannot predict our future quarterly revenues with any degree of
certainty for several reasons, including:
- Product revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter, because we operate with very
little order backlog;
- The market in which we compete is relatively new and rapidly evolving;
- We expect that, for the foreseeable future, revenues will come from
licenses to a small number of customers, so delays or cancellations of
orders by a few customers can significantly impact revenues within a
quarter;
- Our sales cycle varies substantially from customer to customer; and
- The timing of large orders can significantly affect revenues within a
quarter.
Historically, we have recognized a substantial portion of our revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last two weeks of the quarter. Accordingly, we cannot predict our
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financial results for any quarter until very late in the quarter. A delay in an
anticipated sale near the end of a quarter can seriously harm our operating
results for that quarter.
Our expense levels are relatively fixed in the short term and are based,
in part, on our expectations as to our future revenues. As a result, any delay
in generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We had net losses of $2.9 million in the three months ended March 31,
1999, $5.0 million in 1998 and $4.7 million in 1997. As of March 31, 1999, we
had an accumulated deficit of $13.6 million. We have not had a profitable
quarter and do not expect to have a profitable quarter in 1999 or 2000. We
expect that our losses will continue to increase in 1999. We expect to continue
to incur significant sales and marketing, research and development and general
and administrative expenses. As a result, we will need to generate significant
quarterly revenues to achieve profitability. We may never achieve profitability.
Although our revenues have grown, we do not believe that we can sustain these
growth rates, or that such growth rates are indicative of future revenue growth
rates.
WE DEPEND ON OUR NET PERCEPTIONS FOR E-COMMERCE PRODUCT. A DECLINE IN THE PRICE
OF, OR DEMAND FOR, OR MARKET ACCEPTANCE OF NET PERCEPTIONS FOR E-COMMERCE WOULD
SERIOUSLY HARM OUR BUSINESS.
We currently derive a substantial portion of our revenues from our Net
Perceptions for E-commerce product. We anticipate that Net Perceptions for
E-commerce will continue to account for a substantial portion of our revenues
for the foreseeable future. Consequently, a decline in the price of or demand
for Net Perceptions for E-commerce, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR
BUSINESS WILL BE SERIOUSLY HARMED.
The market for our products is intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.
OUR PRODUCTS HAVE A LENGTHY SALES CYCLE. AS A RESULT, IT IS DIFFICULT TO
PREDICT THE QUARTER IN WHICH A SALE MAY OCCUR.
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We are one of the first companies to market real-time relationship
marketing software. As a result, we must educate potential customers on the use
and benefits of our products. In addition, we believe that the purchase of our
products is relatively discretionary and involves a significant commitment of
capital and other resources by a customer. As a result, it usually takes our
sales organization several months to finalize a sale. This makes it difficult to
predict the quarter in which a sale may occur.
WE HAVE A LENGTHY IMPLEMENTATION CYCLE. IN ADDITION, ONLY A SMALL NUMBER OF OUR
CUSTOMERS HAVE A DEPLOYED AND OPERATING APPLICATION UTILIZING OUR PRODUCTS. AS A
RESULT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL PERFORM AND BE RECEIVED AS
WE EXPECT.
The implementation, including application design and deployment, of our
products requires a significant commitment of resources by our customers. The
time required for implementation of Net Perceptions for E-commerce has varied
depending on the customer's application of the product. Additionally,
implementation often does not begin until a customer otherwise undertakes to
update its web site, which generally occurs only once or twice per year. We
anticipate that implementation of our Net Perceptions for Call Centers product
may take longer than Net Perceptions for E-commerce due to more extensive
integration requirements.
We have currently licensed our products to more than 85 customers.
However, only a limited number of these customers have a deployed and operating
application utilizing our products. Because most of our customers have not yet
fully implemented and deployed our products, we cannot be certain that our
products will:
- Perform as designed;
- Deliver the desired level of economic benefit to our customers;
- Meet the other expectations and needs of our customers;
- Achieve any significant degree of market acceptance; or
- Perform to the level necessary to generate good customer references
and repeat customers.
If implementation services constitute a significant part of a product
sales transaction, we recognize a substantial portion of our revenues from such
sales transaction upon the delivery of these services. As a result, delays in
service delivery could cause significant reduction in our license revenues and
operating results for any particular period. The occurrence of any of these
events could seriously harm our business, financial condition and results of
operations.
WE NEED TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO
INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES. IF WE FAIL TO
DO SO, OUR BUSINESS WILL BE SERIOUSLY HARMED.
We need to substantially expand our direct sales operations if we are to
increase market awareness and sales of our products and services. If we fail to
increase our direct sales capabilities as we have planned, our business,
financial condition and results of operations would be seriously harmed. Our
products and services require a sophisticated sales effort targeted at senior
management of our prospective customers. We have recently expanded our direct
sales force and plan to hire additional sales personnel. As of March 31, 1999,
our direct sales organization consisted of 26 employees. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires will require extensive
training and typically take several months to achieve productivity. We cannot be
certain that our recent hires will be as productive as necessary.
WE ARE DEPENDENT ON AND PLAN TO INCREASE THE SIZE OF OUR PROFESSIONAL SERVICES
ORGANIZATION. IF WE DO NOT ADD MORE CUSTOMER SUPPORT PERSONNEL, OUR BUSINESS
WILL BE SERIOUSLY HARMED.
Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our clients with these services and to educate resellers on
how to use our products. From time to time, we receive customer complaints about
the timeliness and accuracy of our customer support. We plan to add more
customer support personnel in order to address current customer support needs.
If we are not successful hiring such
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personnel, our business, financial condition and results of operations could be
seriously harmed. As of March 31, 1999, our professional services organization
consisted of 11 employees. We are in a new market and there are a limited number
of people who have the skills needed to provide the services that our customers
demand. Competition for qualified service personnel is intense. We cannot be
certain that we can attract or retain a sufficient number of the
highly-qualified service personnel that our business needs.
OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY THE PRIVACY CONCERNS OF ELECTRONIC
COMMERCE USERS.
Typically, our Net Perceptions for E-commerce product captures customer
preference and profile information each time a customer visits a web site or
volunteers information in response to survey questions. Privacy concerns may
cause visitors to resist providing the personal data necessary to support this
profiling capability. More importantly, even the perception of privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of our products.
In addition, legislative or regulatory requirements may heighten such concerns
if web site users must be notified that the data captured after visiting web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. We are not aware of any such legislation or
regulatory requirements currently in effect in the United States. Various other
countries and political entities, such as the European Economic Community, have
adopted such legislation or regulatory requirements. The United States may adopt
similar legislation or regulatory requirements. If customer privacy concerns are
not adequately addressed or if restrictive legislation is adopted in the United
States, our business, financial condition and results of operations could be
seriously harmed.
Our Net Perceptions for E-commerce product can use data captured with
"cookies" to track demographic information and user preferences. A "cookie" is a
bit of information keyed to a specific server, file pathway or directory
location that is stored on a computer user's hard drive, possibly without the
user's knowledge, but generally removable by the user. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, financial condition and results of operations could be
seriously harmed.
WE RECENTLY ANNOUNCED NET PERCEPTIONS FOR CALL CENTERS, WHICH MAY NOT ACHIEVE
MARKET ACCEPTANCE.
We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and made our initial shipments in early 1999. Net Perceptions for
Call Centers has not received any degree of market acceptance. There are
significant risks inherent in product introductions such as Net Perceptions for
Call Centers. This product may not address some or all of the needs of customers
and may contain undetected errors or failures. A lack of necessary features or
errors or failures in Net Perceptions for Call Centers will likely result in
loss or delay of market acceptance for this product. We expect that our future
financial performance will depend significantly on the successful sales,
implementation and market acceptance of Net Perceptions for Call Centers, which
may not occur on a timely basis or at all.
WE ARE DEPENDENT ON POTENTIAL NEW PRODUCTS. IF THESE POTENTIAL NEW PRODUCTS ARE
NOT LAUNCHED ON A TIMELY BASIS OR DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS
WILL BE SERIOUSLY HARMED.
We currently have plans to introduce and market potential new products in
1999. If these potential new products are not launched on a timely basis or do
not achieve market acceptance, our business, financial condition and results of
operations will be seriously harmed. Our potential new products are:
- Net Perceptions for Marketing Campaigns, which is being designed to
be a tool for producing targeted promotional electronic mail
messages; and
- Net Perceptions for Knowledge Management, which is being designed to
apply the real-time relationship management capabilities of our
recommendation platform to knowledge management.
Our potential new products are subject to significant technical risks. We
may fail to introduce or deploy such potential new products on a timely basis,
or at all. In the past, we have experienced significant delays in the
commencement of commercial shipments of our new releases and new products. These
delays caused customer frustrations and delay or loss of product revenues. Some
of our competitors currently offer products with features
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and functionality similar to those that may be offered in our potential new
products. In the past, we have also experienced delays in purchases of our
products by customers anticipating our launch of new releases or new products.
Our business, financial condition and results of operations would be seriously
harmed if customers defer material orders in anticipation of new releases or new
product introductions.
The software products we offer are complex and may contain undetected
errors or failures when first introduced or as new versions are released. We
have in the past discovered software errors in our new releases and new products
after their introduction. We experienced delays in release or lost revenues
during the period required to correct these errors. We may discover errors in
new releases or new products after the commencement of commercial shipments,
despite testing by our personnel and our current and potential customers. This
may result in loss of or delay in market acceptance of our products, which could
seriously harm our business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF OUR CUSTOMER BASE AND THE RETENTION OF OUR
CUSTOMERS. IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT
AND FUTURE CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our success is dependent on the continued growth of our customer base and
the retention of our customers. We currently depend on a limited number of key,
high-profile customers. Our ability to attract new customers will depend on a
variety of factors, including the accuracy, scalability, reliability and
cost-effectiveness of our products and services and our ability to effectively
market such products and services. In the past, we have lost potential customers
to competitors for various reasons, including lower prices and other incentives
not matched by us. Many of our current customers initially purchase a limited
license for our products and services for evaluation. If such evaluation is
successful, the customer may purchase a license to expand the use of our
products in its organization or license additional products and services. If we
fail to generate repeat and expanded business from our current and future
customers, our business, financial condition and results of operations would be
seriously harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS WILL BE SERIOUSLY HARMED.
The life cycles of our products are difficult to predict because the
markets for our products are characterized by rapid technological change,
changing customer needs, frequent new software product introductions, and
evolving industry standards.
The introduction of products embodying new technologies and the emergence
of new industry standards could render our existing products obsolete and
unmarketable. To be successful, we need to develop and introduce new software
products and enhancements to existing products on a timely basis that:
- Keep pace with technological developments and emerging industry
standards; and
- Address the increasingly sophisticated needs of our customers.
In addition, we may:
- Fail to develop and market new products and enhancements to existing
products that respond to technological changes or evolving industry
standards;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
enhancements to existing products; and
- Fail to develop new products and enhancements to existing products
that adequately meet the requirements of the marketplace or achieve
market acceptance.
In any such event, our business, financial condition and results of
operations would be seriously harmed.
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WE RELY ON RESELLERS AND NEED TO DEVELOP THIS SALES CHANNEL. IF OUR RESELLER
CHANNEL DOES NOT PERFORM ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase the proportion of our customers licensed through
our reseller channels, which include distributors, resellers and systems
integrators. Our failure to achieve this could seriously harm our business,
financial condition and results of operations. Our agreements with such
resellers are generally not exclusive and in many cases may be terminated by
either party without cause. Many of these resellers do not have minimum purchase
or resale requirements. Many of these resellers carry product lines that are
competitive with our product lines. These resellers may not give a high priority
to the marketing of our products or may not continue to carry our products. They
may give a higher priority to other products, including the products of
competitors. We may not retain any of our current resellers or successfully
recruit new resellers. Events or occurrences of this nature could seriously harm
our business, financial condition and results of operations. In addition, any
sales through resellers will have lower gross margins than direct sales.
WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND NEED TO DEVELOP THIS SALES
CHANNEL. IF OUR ORIGINAL EQUIPMENT MANUFACTURER CHANNEL DOES NOT PERFORM
ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase sales through original equipment manufacturers. We
may fail to implement this strategy, which could seriously harm our business,
financial condition and results of operations. We are currently investing, and
intend to continue to invest, resources to develop this sales channel. Such
investments could seriously harm our operating margins. We depend on our
original equipment manufacturers' abilities to develop product enhancements or
new products on a timely and cost-effective basis that will meet changing
customer needs and respond to emerging industry standards and other
technological changes. Our original equipment manufacturers may not effectively
meet these technological challenges. These original equipment manufacturers:
- Are not within our control;
- May incorporate into their products the technologies of other
companies in addition to or in place of our technologies; and
- Are not obligated to purchase our products.
Our original equipment manufacturers may not continue to carry our products. Our
inability to recruit, or our loss of, important original equipment manufacturers
could seriously harm our business, financial condition and results of
operations. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales.
WE DEPEND ON INTERNATIONAL SALES AND, THEREFORE, OUR BUSINESS IS SUSCEPTIBLE TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We recognized 17% of our total revenues for the three months ended March
31, 1999 and 13% in 1998 through licenses and services sold to customers located
outside of the United States. We expect international revenues to account for a
significant percentage of total revenues in the future, and we believe that we
must continue to expand our international sales and marketing activities in
order to be successful. To successfully expand international sales, we must:
- Establish international operations;
- Hire international personnel; and
- Recruit additional international resellers.
This will require significant management attention and financial
resources and could seriously harm our operating margins. We have very limited
experience in marketing, selling and distributing our products and services
internationally. We currently have one employees located in the United Kingdom.
All other employees are located in the United States. The acceptance and use of
the Internet in international markets are in earlier stages of
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development than in the United States, particularly with the Internet as a
method for conducting commerce. If the Internet or electronic commerce fail to
gain sufficient acceptance in international markets or we fail to further expand
our international operations in a timely manner, our business, financial
condition and results of operations could be seriously harmed. In addition, we
may fail to maintain or increase international market demand for our products.
WE DEPEND ON TECHNOLOGY LICENSED FROM OTHER PARTIES. IF WE ARE UNABLE TO
CONTINUE TO UTILIZE SUCH TECHNOLOGY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We license personalization screening and collaborative filtering
technology known as the "GroupLens" technology from the University of Minnesota
pursuant to an exclusive, worldwide, license agreement. The exclusive rights
granted are subject to non-exclusive rights retained by:
- AT&T Corporation, for portions of the technology funded by AT&T;
- The United States government, for government-funded aspects of the
technology, but solely for government purposes; and
- The University of Minnesota, for its own educational and research
purposes.
The license agreement also provides that for the three academic years
ending in the spring of 2000, we will pay research fees to the University of
Minnesota for exclusive rights to commercial applications that the research may
produce related to improvements to the GroupLens technology. If the agreement is
terminated prior to the end of the 1999-2000 academic year or if we are unable
to renew the agreement, we will no longer have access to the research conducted
by the University of Minnesota, which could result in an increased burden on our
product development department, as well as a reduction in improvements to our
core technology. We may not be able to renew the agreement, hire adequate
personnel to meet any increased demands on our product development department,
or continue to advance our technology on a timely basis. If we are unable to
renew the agreement, hire sufficient personnel or develop product improvements
in a timely manner, our business, financial condition and results of operations
would be seriously harmed.
We integrate third-party software in our software products. For instance,
we license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.
WE ARE DEPENDENT UPON KEY PERSONNEL. THE LOSS OF THE SERVICES OF ONE OR MORE OF
OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY
QUALIFIED PERSONNEL IN THE FUTURE WOULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of
one or more of our key personnel could seriously harm our business, financial
condition and results of operations. None of these persons is bound by an
employment agreement. As of March 31, 1999, Net Perceptions consisted of only 99
employees. We only carry key person life insurance on Steven J. Snyder, our
President and Chief Executive Officer. The amount of such policy is $1,000,000.
Our future success also depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. Competition for such personnel
is intense, and we may fail to retain our key employees, or attract, assimilate
or retain other highly qualified personnel in the future. If so, our business,
financial condition and results of operations could be seriously harmed.
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WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our future revenues depend upon the increased acceptance and use of the
Internet and other online services as a medium of commerce. Rapid growth in the
use of the Internet, the web and online services is a recent phenomenon.
Acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of customers may not adopt or continue to use the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently-introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services and products
exist.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability as a commercial medium due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased governmental regulation. Changes in,
or insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.
Our business, financial condition and results of operations would be
seriously harmed if:
- Use of the Internet, the web and other online services does not
continue to increase or increases more slowly than expected;
- The infrastructure for the Internet, the web and other online
services does not effectively support expansion that may occur; or
- The Internet, the web and other online services do not become a
viable commercial marketplace, which would inhibit the development of
electronic commerce and of the need for our Net Perceptions for
E-commerce product.
PROTECTION OF OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE.
We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations will be seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
including but not limited to requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
We have four pending U.S. patent applications. We also have license
rights to one issued U.S. patent, one allowed U.S. patent application and one
pending U.S. patent application from the University of Minnesota. We have no
issued foreign patents, nor do we have any pending foreign patent applications.
It is possible that no patents will issue from the currently pending patent
applications. It is also possible that our current patents or potential future
patents may be found invalid or unenforceable, or otherwise be successfully
challenged. It is also possible that any patent issued to us may not provide us
with any competitive advantages. It is also possible that we may not develop
future proprietary products or technologies that are patentable, and that the
patents of others may seriously limit our ability to do business. In this
regard, we have not performed any comprehensive analysis of patents of others
that may limit our ability to do business.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is
21
<PAGE>
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. We have from time to time
received claims that we are infringing third parties' intellectual property
rights. It is possible that in the future third parties may claim that our
current or potential future products infringe their intellectual property. We
expect that software developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. Our headcount has increased
from 14 at December 31, 1996 to 34 at December 31, 1997 to 70 at December 31,
1998 to 99 at March 31, 1999. We also plan to expand the geographic scope of our
customer base and operations. This expansion has resulted and will continue to
result in substantial demands on our management resources. Our ability to
compete effectively and to manage future expansion of our operations, if any,
will require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and manage
our employee work force. Our failure to do so could seriously harm our business,
financial condition and results of operations.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Readiness.")
OUR CURRENT REVENUE RECOGNITION PRACTICES MAY NEED TO CHANGE, WHICH COULD
SERIOUSLY HARM OUR BUSINESS.
The American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," in October 1997 and
amended it by Statement of Position 98-4. We adopted SOP 97-2 effective January
1, 1998. We believe our current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. However, full implementation guidelines
for these standards have not yet been issued. Once available, our current
revenue accounting practices may need to change and such changes could seriously
harm our future revenues and earnings.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services, which could
seriously harm our business, financial condition and results of operations.
Although many of these regulations may not apply to our business directly, we
expect that laws regulating the solicitation, collection or processing of
personal/customer information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits some types of information and content
from being transmitted over the Internet. The prohibition's scope and the
liability associated with a Telecommunications Act violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
such legislation could expose companies involved in Internet commerce to
liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth in web usage and decrease its acceptance as a
communications and commercial medium.
22
<PAGE>
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We expect that the net proceeds from the initial public offering will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds and
we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise funds, if needed, on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition and
results of operations.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
Because our customers use our products for mission-critical applications
such as electronic commerce, errors or defects in or other performance problems
with our products could result in financial or other damages to our customers.
Our customers could seek damages for losses from us. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-consuming
and costly. A product liability claim could seriously harm our business,
financial condition and results of operations.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business, financial condition and
results of operations.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1999, the Company submitted two matters to
its stockholders by written consent in lieu of a stockholders meeting:
On January 20, 1999, the Company's stockholders approved an amendment to the
Company's 1996 Stock Plan, which amendment increased the number of shares
reserved for issuance under the plan by 550,000. The number of shares of each
class and series outstanding was as follows (of which a majority of the
holders of each class and series of stock outstanding voted to approve the
action):
<TABLE>
<CAPTION>
Outstanding
<S> <C>
Series A Preferred Stock 1,084,065
Series B Preferred Stock 1,982,368
Series C Preferred Stock 2,317,917
Common Stock 3,316,654
</TABLE>
On April 8, 1999, the Company's stockholders approved (i) an amendment and
restatement of the Company's Certificate of Incorporation filed prior to the
initial public offering, which, among other things, effected a two-for-one stock
split of the Company's outstanding Preferred Stock and Common Stock; (ii) an
amendment and restatement of the Company's Certificate of Incorporation filed
following the closing of the initial public offering, which, among other things,
increased the number of authorized shares of Common Stock and eliminated the
right of stockholders to take action by written consent; (iii) an amendment and
restatement of the Company's bylaws, which, among other things, limited the
stockholders' right to call a special meeting of the stockholders and provided
for indemnification of officers and directors of the Company to the full extent
authorized or permitted by under Delaware law; (iv) the adoption of the
Company's 1999 Equity Incentive Plan; (v) the adoption of the Company's Employee
Stock Purchase Plan; (vi) the adoption of the Company's 1999 Non-Employee
Director Option Plan; and (vii) a form of indemnification agreement to be
entered into with each of the officers and directors of the Company. The
number of shares of each class and series outstanding was as follows (of
which a majority of the holders of each class and series of stock outstanding
voted to approve the action):
<TABLE>
<CAPTION>
Outstanding
<S> <C>
Series A Preferred Stock 1,084,065
Series B Preferred Stock 1,932,368
Series C Preferred Stock 2,317,917
Common Stock 3,353,206
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were filed by Net Perceptions during the quarter
ended March 31, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NET PERCEPTIONS, INC.
Date: [ June 1, 1999] By: /s/ Thomas M. Donnelly
-----------------------------------
Thomas M. Donnelly
CHIEF FINANCIAL OFFICER
(Duly authorized officer and
prinicpal financial and accounting
officer)
------------------
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,331
<SECURITIES> 0
<RECEIVABLES> 4,614
<ALLOWANCES> 339
<INVENTORY> 0
<CURRENT-ASSETS> 7,652
<PP&E> 1,999
<DEPRECIATION> 496
<TOTAL-ASSETS> 9,271
<CURRENT-LIABILITIES> 9,962
<BONDS> 0
650
0
<COMMON> 1
<OTHER-SE> (1,930)
<TOTAL-LIABILITY-AND-EQUITY> 1,929
<SALES> 1,895
<TOTAL-REVENUES> 1,895
<CGS> 349
<TOTAL-COSTS> 349
<OTHER-EXPENSES> 4,350
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> (2,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,876)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
