<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 001-15169
PERFICIENT, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2853258
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7600B NORTH CAPITAL OF TEXAS HIGHWAY, SUITE 340
AUSTIN, TX 78731
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 531-6000
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) Yes X No
___, and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 2000 was 6,131,374.
<PAGE>
PERFICIENT, INC.
INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Consolidated Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Risk Factors 15
Item 3. Qualitative and Quantitative Disclosure About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERFICIENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash
$ 5,818,918 $ 3,487,622
Accounts receivable, net of allowance for doubtful accounts
of $68,058 as of December 31, 1999 and $355,581 as of
September 30, 2000 560,149 5,582,971
Other receivable 3,185 -
Income tax receivable 10,916 10,916
Other current assets 68,479 84,842
---------------------- ----------------------
Total current assets 6,461,647 9,166,351
Property and equipment, net 80,827 661,385
Goodwill, net - 48,466,389
Other noncurrent assets 73,943 147,794
---------------------- ----------------------
Total assets $ 6,616,417 $ 58,441,919
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Accounts payable $ 165,176 $ 321,940
Note payable to Compete shareholders - 2,509,204
Current portion of capital lease obligation - 81,415
Other current liabilities 199,150 2,050,785
---------------------- ----------------------
Total current liabilities 364,326 4,963,344
Capital lease obligation, less current portion - 66,097
---------------------- ----------------------
Total liabilities 364,326 5,029,441
Stockholders' equity:
Common Stock, $.001 par value; 20,000,000 shares authorized;
3,503,333 and 6,131,374 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively 3,503 6,131
Additional paid-in capital 7,777,392 63,712,129
Unearned stock compensation (152,000) (95,000)
Accumulated other comprehensive loss - (21,113)
Retained deficit (1,376,804) (10,189,669)
---------------------- ----------------------
Total stockholders' equity 6,252,091 53,412,478
---------------------- ----------------------
Total liabilities and stockholders' equity $ 6,616,417 $ 58,441,919
====================== ======================
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1999 2000 1999 2000
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Consulting revenues $ 825,216 $ 6,719,622 $ 1,596,573 $ 13,217,614
Cost of consulting revenues 268,238 3,351,953 622,450 6,631,876
------------------ ------------------ ------------------ ------------------
Gross margin 556,978 3,367,669 974,123 6,585,738
Selling, general and administrative 734,358 3,074,206 1,159,447 7,332,607
Stock compensation 19,000 19,000 937,000 57,000
Intangibles amortization - 4,730,444 - 8,140,167
------------------ ------------------ ------------------ ------------------
Loss from operations (196,380) (4,455,981) (1,122,324) (8,944,036)
Interest income (expense), net 45,052 (29,256) 36,453 131,173
------------------ ------------------ ------------------ ------------------
Loss before income taxes (151,328) (4,485,237) (1,085,871) (8,812,863)
Provision (benefit) for income taxes - - (4,335) -
------------------ ------------------ ------------------ ------------------
Net loss $ (151,328) $ (4,485,237) $ (1,081,536) $ (8,812,863)
================== ================== ================== ==================
Net loss per share:
Basic and diluted $ (0.04) $ (0.90) $ (0.38) $ (1.98)
================== ================== ================== ==================
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1999 2000
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,081,536) $ (8,812,863)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation 15,693 170,309
Intangibles amortization - 8,140,167
Non-cash stock compensation 937,000 57,000
Non-cash interest expense - 89,514
Loss from disposal of fixed assets - 502
Changes in operating assets and liabilities (net of
the effect of acquisitions)
Accounts receivable (840,795) (2,683,180)
Other current assets (43,846) (16,487)
Other noncurrent assets (80,615) (41,429)
Accounts payable 217,402 129,485
Other liabilities 151,898 1,164,648
------------------- -------------------
Net cash used in operating activities (724,799) (1,802,334)
INVESTING ACTIVITIES
Purchase of property and equipment (22,667) (443,178)
Purchase of businesses, net of cash acquired - (4,837,854)
Proceeds from disposal of fixed assets - 204,977
------------------- -------------------
Net cash used in investing activities (22,667) (5,076,055)
FINANCING ACTIVITIES
Proceeds from shareholder receivable 100,400 -
Payments on shareholder receivable (100,400) -
Payments on capital lease obligation - (40,864)
Proceeds from short-term borrowings 702,273 43,531
Payments on short-term borrowings (702,273) (833,385)
Proceeds from stock issuances, net 6,524,571 5,381,230
------------------- -------------------
Net cash provided by financing activities 6,524,571 4,550,512
------------------- -------------------
Effect of exchange rate on cash and cash equivalents - (3,419)
Increase (decrease) in cash and cash equivalents 5,777,105 (2,331,296)
Cash and cash equivalents at beginning of period 22,996 5,818,918
------------------- -------------------
Cash and cash equivalents at end of period $ 5,800,101 $ 3,487,622
=================== ===================
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Perficient, Inc. (the
"Company"), have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 may not be
indicative of the result for the full fiscal year ending December 31, 2000.
These unaudited financial statements should be read in conjunction with the
Company's financial statements filed with the United States Securities and
Exchange Commission in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
Certain amounts in the three and nine months ended September 30, 1999
have been reclassified to conform to the presentation for the three and nine
months ended September 30, 2000. Reimbursable expense revenue of $167,356 and
$319,556 for the three and nine months ended September 30, 1999, respectively,
are included as a component of cost of consulting revenue in the current
period presentation.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. SEGMENT INFORMATION
The Company follows the provisions of the Financial Accounting Standards
Board Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Statement No. 131 requires a business enterprise, based
upon a management approach, to disclose financial and descriptive information
about its operating segments. Operating segments are components of an
enterprise about which separate financial information is available and
regularly evaluated by the chief operating decision maker(s) of an enterprise.
Under this definition, the Company operates as a single segment for all
periods presented.
4. NET EARNINGS (LOSS) PER SHARE
Basic net loss per share is based on the weighted effect of all common
shares issued and outstanding and is calculated by dividing net loss available
to common stockholders by the weighted average shares outstanding during the
period. Diluted net loss per share is calculated by dividing net loss
available to common stockholders by the weighted average number of common
shares used in the basic net loss per share calculation plus the number of
common shares that would be issued assuming conversion of all potentially
dilutive common shares outstanding. Shares subject to issuance include common
stock subject to repurchase rights, shares of common stock issuable upon the
exercise of stock options and warrants, and shares subject to a contingency
that were issued in connection with certain purchase business combinations.
6
<PAGE>
The following table sets forth the computation of basic net loss per
share for the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (151,328) $(4,485,237) $(1,081,536) $(8,812,863)
Weighted-average common shares
outstanding 3,500,000 6,111,262 2,833,333 5,147,561
Less contingently issuable common stock - (1,131,642) - (686,338)
------------- -------------- -------------- --------------
Shares used in computing basic net
loss per common share 3,500,000 4,979,620 2,833,333 4,461,223
============= ============== ============== ==============
Basic and diluted net loss per share $ (0.04) $ (0.90) $ (0.38) $ (1.98)
============= ============== ============== ==============
</TABLE>
Diluted net loss per share has not been presented as the effect of the
assumed exercise of stock options, warrants and contingently issued shares is
antidilutive due to the Company's net loss for the indicated period. The
Company had weighted average options and warrants outstanding of approximately
748,472 and 704,131 for the three and nine months ended September 30, 2000,
respectively.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. We believe our
current revenue recognition policies and practices are materially consistent
with this statement, and do not expect this statement to have a material
impact on our consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
the Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
137, "Deferral of the Effective Date of FASB Statement No. 133," which is
effective for fiscal years beginning after June 15, 2000. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. SFAS No. 133
will be effective for our financial statements for the year ending December
31, 2001. We do not believe that this statement will have a material impact
on our financial position or results of operations.
The FASB recently issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." This interpretation provides
guidance related to the implementation of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." This interpretation is to
be applied prospectively to all new awards, modifications to outstanding
awards and changes in employee status on or after July 1, 2000. For changes
made after December 15, 1998 to awards that affect exercise prices of the
awards, we must prospectively account for the impact of those changes. We do
not believe the full adoption of this interpretation will have a material
impact on our financial position or results of operations.
6. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
--------------------- ---------------------
(unaudited)
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable $ 544,646 $ 4,541,761
Unbilled contract revenue 83,561 1,396,791
Allowance for doubtful accounts (68,058) (355,581)
--------------------- ---------------------
$ 560,149 $ 5,582,971
===================== =====================
OTHER CURRENT LIABILITIES:
Accrued expenses $ 135,169 $ 678,657
Payroll liability 63,981 1,160,722
Accrued broker fee - Compete acquisition - 211,406
--------------------- ---------------------
$ 199,150 $ 2,050,785
===================== =====================
</TABLE>
7
<PAGE>
7. COMPREHENSIVE LOSS
Total comprehensive loss is computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1999 2000
--------------------- ------------------
<S> <C> <C>
Net Loss $ (1,081,536) $ (8,812,863)
Foreign currency translation adjustments - (21,113)
--------------------- ------------------
Total comprehensive net loss $ (1,081,536) $ (8,833,976)
===================== ==================
</TABLE>
8. BUSINESS COMBINATIONS
On January 3, 2000, the Company acquired LoreData, Inc. ("LoreData").
The Company acquired LoreData for an aggregate purchase price of approximately
$2.4 million, subject to certain post-closing adjustments. The purchase price
of $2.4 million consisted of (1) $385,000 in cash that was paid at closing,
(2) 30,005 shares of our common stock, also paid at closing, and (3) 131,709
shares of common stock that are being held in escrow. The acquisition was
accounted for as a purchase business combination. The excess of purchase price
over fair value of the net assets was recorded as goodwill ($2.3 million), and
is being amortized using the straight-line method over the estimated useful
life of three years. As of September 30, 2000, accumulated amortization of
goodwill related to the LoreData acquisition was approximately $589,000.
On May 1, 2000, the Company acquired all the outstanding shares and
assumed all outstanding options of Compete, Inc. ("Compete"). The aggregate
purchase price of Compete consisted of (1) $3,425,000 in cash, (2) $2,527,500
in non interest bearing promissory notes which were repaid on November 1,
2000, (3) 2,003,866 shares of common stock, of which 1,001,933 shares are
subject to adjustment or forfeiture and which are being held in escrow, and
(4) the assumption of Compete's outstanding employee stock options. The total
cost of the acquisition, including the assumption of outstanding options and
transaction costs, is as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 3,425
Note (less imputed interest of $108) 2,420
Common stock 40,077
Assumption of existing stock option plan 8,278
Transaction broker fees 694
Transaction costs 325
-------------
Total purchase price $ 55,219
=============
</TABLE>
The acquisition was accounted for as a purchase business combination.
Accordingly, the results of operations of Compete have been included with
those of the Company for periods subsequent to the date of acquisition. The
excess of purchase price over fair value of the net assets was recorded as
goodwill ($54.4 million), and is being amortized using the straight-line
method over the estimated useful life of three years. As of September 30,
2000, accumulated amortization of goodwill related to the Compete acquisition
was approximately $7.55 million.
8
<PAGE>
The unaudited pro forma combined results of operations of Perficient,
Compete and LoreData for the nine months ended September 30, 1999 and 2000
after giving effect to certain pro forma adjustments as if the transaction had
occurred at the beginning of each of the nine month periods are as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 2000
--------------- ---------------
<S> <C> <C>
Revenues $ 6,514 $ 16,364
Operating loss $ (15,325) $ (14,379)
Net loss $ (15,303) $ (14,533)
Basic and diluted net loss per $ (3.96) $ (2.96)
share
</TABLE>
Total pro forma intangibles amortization includes approximately $14.2
million during the nine months ended September 30, 1999 and 2000 as a result
of the Compete and LoreData acquisitions. The unaudited pro forma results are
not necessarily indicative of the actual results of operations that would have
occurred had the acquisitions of Compete and LoreData occurred on January 1 of
the period presented or of future results.
9
<PAGE>
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate" and "continue" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future operating results or of our
financial condition or state other "forward-looking" information.
We believe that it is important to communicate our future
expectations to our investors. However, we may be unable to accurately predict
or control events in the future. The factors listed in the sections captioned
"Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as well as any other cautionary
language, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in
our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of certain of the events described in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section could seriously harm our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes thereto and the other financial information included
elsewhere in this filing. In addition to historical information, this
management's discussion and analysis of financial condition and results of
operations and other parts of this filing contain forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking information as a
result of certain factors, including but not limited to, those set forth under
"Risk Factors" and elsewhere in this filing.
We were incorporated in September 1997 and began generating revenue
in February 1998. We are an Internet services firm that uses emerging
technologies to web-enable complex enterprise systems. We build deep
expertise around a targeted set of core technologies through outsourcing
partnerships with leading Internet software makers called "Virtual Services
Organizations" or "VSOs". Perficient's VSOs enable its software company
partners to focus on their core business of improving and selling their
software by outsourcing services delivery to Perficient teams that function
as an extension of the partner's organization. We generate revenues from
professional services performed primarily for our software company partners
and their end-user customers. To date, our partners have consisted of
Internet software companies and we expect that Internet software companies
will be important partners for the foreseeable future. The majority of our
revenue is derived from our partners rather than from our end-user customers.
We established our first partner relationship with Vignette
Corporation ("Vignette"), an Internet relationship management software
company, in February 1998. During 1999 and 2000, we established partner
relationships with several additional Internet software companies. In October
2000 we entered into a new services agreements with IBM under which we will
provide deployment, integration and training services to IBM's WebSphere-TM-
customers. The agreement provides for us to render services over a three-year
period not to exceed $73.5 million in total value. Under the agreement with
IBM, we are paid for services rendered, subject to a guaranteed minimum
utilization by IBM of a specified number of hours for the pool of consultants
per year. The agreement may be terminated at any time by IBM on four months
notice. Revenues from Vignette and IBM would have comprised approximately 32%
and 19%, respectively, of pro forma revenues for the nine months ended
September 30, 2000 (after giving effect to the acquisition of Compete). An
additional 33% of our revenues during the nine months ended September 30,
2000 was derived from projects engaged directly with end-user customers on
which IBM products were used. Accordingly, any deterioration in our
relationship with IBM or Vignette could have a material adverse effect on our
consulting revenue. Generally, our partner agreements may be terminated at
any time by our partners or by us. These agreements generally do not obligate
our partners to use our services for any minimum amount or at all, and our
partners may use the services of our competitors. Under our agreement with
Vignette, we are restricted, for as long as the agreement is in place, from
performing services for their competitors.
We derive our revenues from professional services that are provided
primarily on a time and materials basis. Revenues are recognized and billed
monthly by multiplying the number of hours expended
10
<PAGE>
by our professionals in the performance of the contract by the established
billing rates. We are reimbursed for direct expenses allocated to a project
such as airfare, lodging and meals. Consequently, these direct reimbursements
are excluded from revenues.
Our revenues and operating results are subject to substantial
variations based on our partners' sales and expenditures and the frequency
with which we are chosen to perform services for their end-user customers.
Revenues from any given customer will vary from period to period. We expect,
however, that significant customer concentration will continue for the
foreseeable future. To the extent that any significant customer uses less of
our services or terminates its relationship with us, our revenues may decline
substantially.
Our gross margins are affected by trends in the utilization rate of
our professionals, defined as the percentage of our professionals' time billed
to customers divided by the total available hours in a period. If a project
ends earlier than scheduled or, as has been the case, we retain professionals
in advance of receiving project assignments, our utilization rate will decline
and adversely affect our gross margins.
The number of technology professionals who have agreed to perform
services for the Company has increased from eight at December 31, 1998 to 43
at December 31, 1999 and to over 160 at September 30, 2000. We intend to
increase the number of our technology professionals significantly. Our
personnel costs represent a high percentage of our operating expenses and are
relatively fixed in advance of each quarter. Accordingly, if revenues do not
increase at a rate equal to expenses, we will incur continuing losses and our
business, financial condition, operating results and liquidity will be
materially and adversely affected.
Our plan is to establish additional partner relationships with
Internet software companies and increase our number of technology
professionals. In connection with our planned expansion, we expect to incur
substantial expenses in developing new partner relationships. Therefore, we
expect that we will continue to incur losses during 2000. We plan to spend
significant amounts on:
- recruiting, training and equipping technology professionals;
- marketing and business development expenses; and
- working capital and general corporate purposes, including potential
selective acquisitions.
On May 1, 2000, we acquired all the outstanding shares and assumed
all outstanding options of Compete. The aggregate purchase price of Compete
consisted of (1) $3,425,000 in cash, (2) $2,527,500 in non-interest bearing
promissory notes which were repaid on November 1, 2000, (3) 2,003,866 shares
of common stock, of which 1,001,933 shares are subject to adjustment or
forfeiture and which are now being held in escrow, and (4) the assumption of
Compete's outstanding employee stock options. The total cost of the
acquisition, including the assumption of outstanding options and transaction
costs, was approximately $55.2 million. The acquisition was accounted for as a
purchase business combination. Accordingly, the acquired net assets were
recorded at their estimated fair values at the effective date of the
acquisition and the results of operations of Compete will be included with
ours for the periods subsequent to the acquisition date.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
CONSULTING REVENUES. Revenues increased from $1,596,000 for the nine
months ended September 30, 1999 to $13,218,000 for the nine months ended
September 30, 2000. The increase in revenues reflected the increase in the
number of partners, projects performed and in the number of technology
professionals performing services. The acquisition of Compete on May 1, 2000
also contributed to the increase in revenues for the nine months ended
September 30, 2000. During the nine month period ended September 30, 2000, 40%
of our revenues was derived from Vignette and 41% from projects associated
with IBM practices.
COST OF CONSULTING REVENUES. Cost of revenues, consisting of direct
costs, primarily salaries and benefits for technology professionals assigned
to projects, and of project related expenses, increased from
11
<PAGE>
$622,000 for the nine months ended September 30, 1999 to $6,632,000 for the
nine months ended September 30, 2000. The increase in cost of consulting
revenue is directly attributable to the increase in the number of technology
professionals who have agreed to perform services for the Company. The number
of consultants who had agreed to perform services for the Company increased
from 43 at December 31, 1999 to over 160 at September 30, 2000.
GROSS MARGIN. Gross margin increased from $974,000 for the nine
months ended September 30, 1999 to $6,586,000 for the nine months ended
September 30, 2000. Gross margin as a percentage of consulting revenues was
61% for the nine months ended September 30, 1999 and 50% for the nine months
ended September 30, 2000. The decrease in gross margin as a percentage of
consulting revenues is primarily due to the increased number of consultants
during the period in anticipation of future projects, resulting in lower
effective utilization rates during the period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of marketing activities to solicit
partners, salaries and benefits and non-reimbursable travel costs and
expenses. Selling, general and administrative expenses increased from
$1,159,000 for the nine months ended September 30, 1999 to $7,333,000 for the
nine months ended September 30, 2000. Selling, general and administrative
expenses as a percentage of consulting revenues was 73% for the nine months
ended September 30, 1999 and 55% for the nine months ended September 30, 2000.
The increase in selling, general and administrative expenses was related to
our increased overhead, including recruiting, administrative activities and
marketing to support the development of existing or new partnerships and the
resulting growth in our workforce. We expect these expenses to increase in
absolute dollar amounts in connection with our planned expansion.
STOCK COMPENSATION. Stock compensation expense consists of non-cash
compensation arising from certain sales of stock and option grants to
officers, directors or other affiliated persons. We have recognized $880,000
in non-cash compensation in connection with the sale of stock that occurred in
January 1999. In addition, we have recorded in stockholders' equity on our
balance sheet aggregate deferred stock compensation totaling $228,000 in
connection with stock options that were granted in January 1999. Stock option
expense will be recognized to the extent of approximately $19,000 per quarter
over a three year period ending January 2002, which is the end of the vesting
period for the related options. We have recognized approximately $57,000 in
non-cash compensation expense during the nine month period ended September 30,
2000 relating to the vesting of these options.
INTANGIBLES AMORTIZATION. Intangibles amortization expense consists
of amortization of goodwill arising from our acquisitions of LoreData, Inc. in
January 2000 and Compete, Inc. in May 2000. We are amortizing the goodwill
associated with these acquisitions over a three-year period. Total intangibles
amortization expense for the nine months ending September 30, 2000 was
$8,140,000. We expect to amortize in excess of $4,700,000 in goodwill per
quarter through June 30, 2003.
INTEREST INCOME (EXPENSE). Interest income (expense) for the nine
months ended September 30, 2000 consists of interest income of $238,000 on
cash and investments, imputed interest expense of $90,000 associated with the
non-interest bearing note issued in connection with the acquisition of
Compete, and $18,000 of interest expense associated with capital leases and
other financing activities. Interest income (expense) for the nine months
ended September 30, 1999 consists of $50,000 of interest income on cash and
investments, and interest expense of $13,000. The increase in interest income
for the nine months ended September 30, 2000 was due to interest income from
cash and investment balances on hand as a result of our initial public
offering in July 1999 and private placement in February 2000. The increase in
interest expense is due to the $2.5 million note payable related to the
Compete acquisition.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
CONSULTING REVENUES. Revenues increased from $825,000 for the three
months ended September 30, 1999 to $6,720,000 for the three months ended
September 30, 2000. The increase in revenues reflected the increase in the
number of partners, projects performed and in the number of technology
professionals performing services. The acquisition of Compete on May 1, 2000
also contributed to the increase in revenues for the three months ended
September 30, 2000. During the three month period ended September
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30, 2000, 26% of our revenues was derived from Vignette and 52% from projects
associated with IBM practices.
COST OF CONSULTING REVENUES. Cost of revenues, consisting of direct
costs, primarily salaries and benefits for technology professionals assigned
to projects, and of project related expenses, increased from $268,000 for the
three months ended September 30, 1999 to $3,352,000 for the three months ended
September 30, 2000. The increase in cost of consulting revenue is directly
attributable to the increase in the number of technology professionals who
have agreed to perform services for the Company. The number of consultants who
had agreed to perform services for the Company increased from 43 at December
31, 1999 to over 160 at September 30, 2000.
GROSS MARGIN. Gross margin increased from $557,000 for the three
months ended September 30, 1999 to $3,368,000 for the three months ended
September 30, 2000. Gross margin as a percentage of consulting revenues was
67% for the three months ended September 30, 1999 and 50% for the three months
ended September 30, 2000. The decrease in gross margin as a percentage of
consulting revenues is primarily due to the increased number of consultants
during the period in anticipation of future projects, resulting in lower
effective utilization rates during the period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of marketing activities to solicit
partners, salaries and benefits and non-reimbursable travel costs and
expenses. Selling, general and administrative expenses increased from $734,000
for the three months ended September 30, 1999 to $3,074,000 for the three
months ended September 30, 2000. Selling, general and administrative expenses
as a percentage of consulting revenues was 89% for the three months ended
September 30, 1999 and 46% for the three months ended September 30, 2000. The
increase in selling, general and administrative expenses was related to our
increased overhead, including recruiting, administrative activities and
marketing to support the development of existing or new partnerships and the
resulting growth in our workforce. We expect these expenses to increase in
absolute dollar amounts in connection with our planned expansion.
STOCK COMPENSATION. Stock compensation expense consists of non-cash
compensation arising from certain sales of stock and option grants to
officers, directors or other affiliated persons. We have recognized $880,000
in non-cash compensation in connection with the sale of stock that occurred in
January 1999. In addition, we have recorded in stockholders' equity on our
balance sheet aggregate deferred stock compensation totaling $228,000 in
connection with stock options that were granted in January 1999. Stock option
expense will be recognized to the extent of approximately $19,000 per quarter
over a three year period ending January 2002, which is the end of the vesting
period for the related options. We have recognized approximately $19,000 in
non-cash compensation expense during the three month periods ended September
30, 1999 and 2000, relating to the vesting of these options.
INTANGIBLES AMORTIZATION. Intangibles amortization expense consists
of amortization of goodwill arising from our acquisitions of LoreData, Inc. in
January 2000 and Compete, Inc. in May 2000. We are amortizing the goodwill
associated with these acquisitions over a three-year period. Total intangibles
amortization expense for the three months ending September 30, 2000 was
$4,730,000. We expect to amortize in excess of $4,700,000 in goodwill per
quarter through June 30, 2003.
INTEREST INCOME (EXPENSE). Interest income (expense) for the three
months ended September 30, 2000 consists of interest income of $38,000 on cash
and investments, imputed interest expense of $54,000 associated with the
non-interest bearing note issued in connection with the acquisition of
Compete, and $13,000 of interest expense associated with capital leases and
other financing activities. Interest income (expense) for the three months
ended September 30, 1999 consists of interest income of $50,000 and interest
expense of $5,000. The increase in interest income for the three months ended
September 30,2000 was due to interest income from cash and investment balances
on hand as a result of our initial public offering in July 1999 and private
placement in February 2000. The increase in interest expense is due to the
$2.5 million note payable related to the Compete acquisition.
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LIQUIDITY AND CAPITAL RESOURCES
We received approximately $6.3 million in July 1999 from an initial
public offering of 1,000,000 shares of our common stock, net of underwriting
discounts, commissions and expenses. Subsequent to our initial public offering
in July 1999 we have raised $5,600,000 from private sales of our common stock.
We have a line of credit facility with Silicon Valley Bank, which
provides for us to borrow up to $4,000,000, subject to certain borrowing base
calculations as defined. Borrowings under this agreement, which expires June
29, 2001, bear interest at the bank's prime rate plus 0.85%. As of September
30, 2000, there were no borrowings under this loan agreement.
In connection with the acquisition of Compete, which closed on May 1,
2000, we paid to the shareholders and vested option holders of Compete
approximately $3,425,000 in cash and we paid $2,527,500 on November 1, 2000.
We used the proceeds of the private placement to fund the initial cash payment
and funded the repayment of the notes from working capital including the
remaining funds from the private placement and our line of credit.
Cash used in operations for the nine months ended September 30, 2000
was $1,802,000. As of September 30, 2000, we had $3,488,000 in cash and
working capital of $4,203,000, and up to $4,000,000, subject to certain
borrowing base calculations, available under our line of credit facility
discussed above.
If our capital is insufficient to fund our activities in either the
short or long term, we may need to raise additional funds. We have in the
past and continue to evaluate alternative financing opportunities. No
assurance can be given when or if we will consummate any transactions. If we
raise additional funds through the issuance of equity securities, our
existing stockholders' percentage ownership will be diluted. These equity
securities may also have rights superior to our common stock. Additional debt
or equity financing may not be available when needed or on satisfactory
terms. If adequate funds are not available on acceptable terms, we may be
unable to expand our services, respond to competition, pursue acquisition
opportunities or continue our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
the Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.137,
"Deferral of the Effective Date of FASB Statement No.133," which is effective
for fiscal years beginning after June 15, 2000. This statement requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be
effective for our financial statements for the year ending December 31, 2001.
We do not believe that this statement will have a material impact on our
financial position or results of operations.
The FASB recently issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." This interpretation
provides guidance related to the implementation of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." This
interpretation is to be applied prospectively to all new awards, modifications
to outstanding awards and changes in employee status on or after July 1, 2000.
For changes made after December 15, 1998 to awards that affect exercise prices
of the awards, we must prospectively account for the impact of those changes.
We do not believe the full adoption of this interpretation will have a
material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin No.101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. We believe our current revenue
recognition policies and practices are materially consistent with this
statement, and do not expect this statement to have a material impact on our
consolidated financial position or results of operations.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the financial and other information contained in this prospectus, before you
decide whether to buy our common stock. Additional risks and uncertainties,
including those generally affecting the market in which we operate or that we
currently deem immaterial, may also significantly impair our business. If any
of these risks actually occur, our business, financial condition and results
of operations will likely suffer. In such case, the trading price of our
common stock could decline, and you might lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE LOST MONEY DURING MOST OF THE QUARTERS DURING WHICH WE HAVE BEEN IN
BUSINESS AND WE EXPECT TO LOSE MONEY IN THE FUTURE.
We have incurred operating losses in most of the quarters during which we have
been in business and as a result, we have a retained deficit of $10,190,000 as
of September 30, 2000. As a result of the acquisitions that we recently
completed, we recorded a substantial amount of goodwill. We will be required
to amortize in excess of $4,700,000 in goodwill per quarter over the next
three years. We cannot assure you of any operating results. In future
quarters, our operating results may not meet public market analysts' and
investors' expectations. If that happens, the price of our common stock will
likely fall.
We expect to incur net losses at least through the end of 2000. We plan to
continue to increase our expenditures on infrastructure development,
personnel, marketing and business development and general and administrative
expenses in connection with our efforts to expand our business. As a result,
we will need to generate significant revenues to achieve profitability. Even
if we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. Although our
revenues have grown in recent quarters, you should not view our historical
growth rates as indicative of our future revenues.
WE HAVE A LIMITED NUMBER OF PARTNERS. THE LOSS OF SALES TO VIGNETTE
CORPORATION OR IBM WOULD MATERIALLY HARM OUR BUSINESS.
We have arrangements with only four partners. IBM and Vignette accounted, on a
pro forma basis, for 19% and 32%, respectively, of our revenue during the nine
months ended September 30, 2000. Any termination of our relationship with, or
significant reduction or modification of the services we perform for, IBM,
Vignette or a number of our other partners would have a material adverse
effect on our business, operating results and financial condition. Each of IBM
and Vignette retains our services only on a case-by-case basis and may choose
at any time to use any other firm or to provide the services that we perform
for them. Therefore, any downturn in the business of IBM or Vignette or any
shift in their decisions to continue to use our services could also
substantially reduce our revenues.
IBM MAY TERMINATE ITS AGREEMENT WITH US OR REDUCE SUBSTANTIALLY ITS
OBLIGATIONS TO USE OUR SERVICES.
IBM has the right to reduce by up to one-third the minimum amount of our
services contemplated by our agreement over any 60-day period. In addition,
IBM may terminate the agreement on four months' notice. Any termination of our
agreement with IBM or a reduction of the services performed pursuant to this
agreement would have an adverse effect on our business, operating results and
financial condition.
OUR PARTNERS MAY NOT BE OBLIGATED TO USE OUR SERVICES.
Our contracts with some of our partners do not obligate them to use our
services. A partner may choose at any time to use another consulting firm or
to perform the services we provide through an internal services organization.
Termination of a relationship with certain partners, or such partner's
decision to employ other consulting firms or perform services in-house, could
materially harm our business.
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OUR QUARTERLY OPERATING RESULTS WILL BE VOLATILE AND MAY CAUSE OUR STOCK PRICE
TO FLUCTUATE.
A high percentage of our operating expenses, particularly personnel and rent,
are fixed in advance of any particular quarter. As a result, if we experience
unanticipated changes in our projects or in our employee utilization rates, we
could experience large variations in quarterly operating results and losses in
any particular quarter. Due to these factors, we believe you should not
compare our quarter-to-quarter operating results to predict our future
performance.
Our quarterly revenue, expenses and operating results have varied
significantly in the past and are likely to vary significantly in the future.
These quarterly fluctuations have been and will continue to be based on a
number of factors, including:
- the loss of a significant partner or project;
- the number and types of projects that we undertake;
- our ability to attract, train and retain skilled management and technology
professionals; o seasonal variations in spending patterns;
- our employee utilization rates, including our ability to transition our
technology professionals from one project to another;
- changes in our pricing policies;
- our ability to manage costs; and
- costs related to acquisitions of other businesses.
In addition, many factors affecting our operating results are outside of our
control, such as:
- end-user customer budget cycles;
- changes in demand for our partners' products and our services;
- pricing changes in our industry;
- government regulation and legal developments regarding the use of the
Internet;
- and general economic conditions.
Although we have limited historical financial data, we expect that we will
experience seasonal fluctuations in revenues. We expect that revenues in the
quarter ending December 31 will typically be lower than in other quarters
because there are fewer billable days in this quarter due to vacations and
holidays. This seasonal trend may materially affect our quarter-to-quarter
operating results.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN TECHNOLOGY PROFESSIONALS, WHICH COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
Our business is labor intensive. Accordingly, our success depends in large
part upon our ability to attract, train, retain, motivate, manage and utilize
highly skilled technology professionals. Because of the recent rapid growth of
the Internet and shortage of qualified Internet professional services
personnel, competition for individuals who can perform the services we offer
is intense and such individuals are likely to remain an expensive limited
resource for the foreseeable future. Furthermore, there is a high rate of
attrition among such personnel. This high turnover rate results in additional
training expense, which in turn decreases our profitability. Additionally, our
technology professionals are at-will employees with no restrictions on their
ability to work for our competitors. We may, in the future, retain a
significant number of technology professionals who are not United States
citizens. Hiring non-United States persons involves compliance with
significant regulations and may involve delays in obtaining necessary
clearances. Any inability to attract, train and retain highly skilled
technology professionals would impair our ability to adequately manage, staff
and utilize our existing projects and to bid for or obtain new projects, which
in turn would adversely affect our operating results.
WE MAY ALIGN OUR SELF WITH PARTNERS THAT FAIL.
In selecting our partners, we seek to identify leading Internet software
companies or companies that we believe will develop into leaders in their
respective markets. However, our partners compete in new and rapidly changing
markets. In certain of these markets, only a few companies will survive. If we
align ourselves with companies that fail to become market leaders or whose
products become obsolete, our business may suffer because our partners will
not have significant demand for our services. We invest
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substantial resources to train our technology professionals regarding the use
and features of our partners' software, and we will lose this investment if
our partners fail.
WE HAVE AGREED NOT TO PERFORM SERVICES FOR COMPETITORS OF OUR PARTNERS, WHICH
LIMITS OUR POTENTIAL MARKET PENETRATION.
We have agreed with certain of our partners not to perform services for their
competitors. These non-compete agreements substantially reduce the number of
our prospective partners. In addition, these agreements increase the
importance of our partner selection process, because many of our partners
compete in markets where only a limited number of companies gain significant
market share. If we agree not to perform services for a particular partner's
competitors and our partner fails to gain meaningful market share, we are
unlikely to receive future material revenues in that particular market.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We began our business in September 1997. We only began providing services on
any significant basis in mid-1998. As a result, we have a limited operating
history upon which you may evaluate our business and prospects. Companies in
an early stage of development frequently encounter greater risks and
unexpected expenses and difficulties.
These risks are further amplified by the fact that we are operating in the new
and rapidly evolving Internet services market. These risks and uncertainties
include the following:
- our business model and strategy have evolved and are continually being
renewed;
- we may not be able to successfully implement our business model and
strategy; and
- our management has not worked together for very long.
OUR GROSS MARGINS ARE SUBJECT TO FLUCTUATIONS AS A RESULT OF VARIANCES IN
UTILIZATION RATES.
Our gross margins are affected by trends in the utilization rate of our
professionals, defined as the percentage of our professionals' time billed to
customers divided by the total available hours in a period. Our operating
expenses, including employee salaries, rent and administrative expenses are
relatively fixed and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of projects in process. If a
project ends earlier than scheduled or, as has been the case, we retain
professionals in advance of receiving project assignments, we may need to
redeploy our project personnel. Any resulting non-billable time may adversely
affect our gross margins. The absence of long-term contracts and the need for
new partners and business create an uncertain revenue stream, which could
negatively affect our financial condition.
OUR SUCCESS WILL DEPEND ON RETAINING OUR SENIOR MANAGEMENT TEAM AND KEY
TECHNICAL PERSONNEL.
We believe that our success will depend on retaining our senior management
team, key technical personnel and our Chief Executive Officer, John T.
McDonald. This dependence is particularly important in our business, because
personal relationships are a critical element of obtaining and maintaining our
partners. If any of these people stop working for us, our level of management,
technical, marketing and sales expertise could significantly diminish. These
people would be difficult to replace, and losing them could seriously harm our
business. Our management, generally, does not enter into long term employment
agreements and are generally not bound by non-competition agreements that
extend for a significant period of time.
We may not be able to prevent key personnel, who may leave our employ in the
future, from disclosing or using our technical knowledge, practices or
procedures. One or more of our key personnel may resign and join a competitor
or form a competing company. As a result, we might lose existing or potential
clients.
WE MAY NOT GROW, OR WE MAY BE UNABLE TO MANAGE OUR GROWTH.
Our success will depend on our ability to expand the number of partners and
teams of technology professionals. However, we may not grow as planned or at
all. Many of our competitors have longer operating histories, more established
reputations and potential partner relationships and greater financial,
technical, industrial and marketing resources than we do. If we do not
experience sustained growth, this
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would place us at a disadvantage relative to our competitors. From December
31, 1999 to September 30, 2000, the number of technology professionals that we
employed increased from 43 to over 160. However, if we continue to grow, our
growth will place significant strains on our management, personnel and other
resources. For example, it will be difficult to manage technology
professionals who will be widely dispersed around the country and abroad.
Additionally, our success may depend on the effective integration of acquired
businesses. This integration, even if successful, may be expensive and
time-consuming and could strain our resources. If we are unable to manage our
growth effectively, this inability will adversely affect the quality of our
services and our ability to retain key personnel, and could materially harm
our business.
OUR OPERATIONS IN LONDON EXPOSE US TO CERTAIN RISKS RELATED TO INTERNATIONAL
OPERATIONS.
During the nine months ended September 30, 2000, on a pro forma basis, our
revenues relating to our London operations have accounted for 6% of our
revenues and we anticipate that foreign sales may account for a significant
portion of our revenues in the foreseeable future. Risks inherent in our
international business activities include the fluctuation of currency exchange
rates, recessions in foreign economies, political and economic instability,
reductions in business activity during the summer months in Europe, various
and changing regulatory requirements, increased sales and marketing expenses,
difficulty in staffing and managing foreign operations, potentially adverse
taxes, complex foreign laws and treaties and the possibility of difficulty in
accounts receivable collections. Further, we have only minimal experience in
managing international offices and only limited experience in marketing
services to international clients. Revenues from our international offices may
prove inadequate to cover the expenses of such offices and marketing to
international clients. There can be no assurance that any of these factors
will not have a material adverse effect on our business, financial condition
and results of operations.
WE FACE RISKS ASSOCIATED WITH FUNDING AND INTEGRATING ACQUISITIONS.
We have made two acquisitions in the last nine months and we may continue to
expand our technological expertise and geographical presence through selective
acquisitions. Any acquisitions or investments we make in the future will
involve risks. We may not be able to make acquisitions or investments on
commercially acceptable terms. If we do buy a company, we could have
difficulty retaining and assimilating that company's personnel. In addition,
we could have difficulty assimilating acquired products, services or
technologies into our operations and retaining the customers of that company.
Our operating results may be adversely affected from increased goodwill
amortization, stock compensation expense and increased compensation expense
attributable to newly hired employees. Furthermore, our management's attention
may be diverted from other aspects of our business and our reputation may be
harmed if an acquired company performs poorly. These difficulties could
disrupt our ongoing business, distract our management and employees, increase
our expenses and materially and adversely affect our results of operations.
Furthermore, we may incur debt or issue equity securities to pay for any
future acquisitions. If we issue equity securities, your ownership share of us
could be reduced.
RISKS RELATING TO OUR INDUSTRY
WE FOCUS SOLELY ON COMPANIES IN THE MARKET FOR INTERNET SOFTWARE AND COULD BE
HARMED BY ANY DOWNTURN IN THIS INDUSTRY.
Our business is dependent upon continued growth in the use of the Internet to
fuel demand for the Internet software applications sold by our partners and
prospective partners. If use of the Internet does not continue to grow, or
grows more slowly than expected, our growth would decline and our business
would be seriously harmed. Any downturn in the market for Internet software
would harm our business, financial condition and operating results.
Further, the market for Internet services is relatively new and is evolving
rapidly. Our future growth is dependent upon our ability to provide strategic
Internet services that are accepted by our existing and future partners and
end-user customers as an integral part of their business model. Demand and
market acceptance for recently introduced services are subject to a high level
of uncertainty. The level of demand and acceptance of strategic Internet
services is dependent upon a number of factors, including:
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- the growth in consumer access to and acceptance of new interactive
technologies such as the Internet;
- companies adopting Internet-based business models; and
- the development of technologies that facilitate two-way communication
between companies and targeted audiences.
Significant issues concerning the commercial use of these technologies include
security, reliability, cost, ease of use and quality of service. These issues
remain unresolved and may inhibit the growth of Internet business solutions
that utilize these technologies.
OUR BUSINESS WILL SUFFER IF WE DO NOT KEEP UP WITH RAPID TECHNOLOGICAL CHANGE,
EVOLVING INDUSTRY STANDARDS OR CHANGING PARTNER REQUIREMENTS.
Rapidly changing technology, evolving industry standards and changing partner
needs are common in the Internet professional services market. Accordingly,
our future success will depend, in part, on our ability to:
- continue to develop our technology expertise;
- enhance our current services;
- develop new services that meet changing partner and end-user customer
needs;
- advertise and market our services; and
- influence and respond to emerging industry standards and other
technological changes.
We must accomplish all of these tasks in a timely and cost-effective manner.
We might not succeed in effectively doing any of these tasks, and our failure
to succeed could have a material and adverse effect on our business, financial
condition or results of operations.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
- security;
- cost and ease of Internet access; o intellectual property ownership;
- privacy;
- taxation; and
- liability issues.
Any costs we incur because of these factors could materially and adversely
affect our business, financial condition and results of operations.
OUR MARKET IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY.
The market for services to Internet software companies is relatively new,
intensely competitive, rapidly evolving and subject to rapid technological
change. In addition, there are relatively low barriers to entry into this
market. Because of the rapid changes to and volatility in the Internet
software and service industry, many well-capitalized companies that may have
chosen sectors of the industry that are not competitive with our business,
including our partners, may refocus their activities and resources. As a
result, they could deploy their resources and enter a business that is
competitive with ours. In addition, with consolidation in the Internet
software and service industry, many software developers that may have become
our partners could acquire or develop the capabilities of performing our
services for themselves or merge with our competitors.
Our current competitors include:
- in-house information technology and professional services and support
departments of software companies;
- systems integrators, such as Cambridge Technology Partners, Cysive Inc.,
marchFIRST, Proxicom, Inc., Sapient Corporation, Scient Corporation,
C-Bridge, Viant Corporation;
- large consulting firms, such as Andersen Consulting and the consulting arms
of the large accounting firms; and `Information technology staffing firms,
such as Keane, Inc. and Renaissance Worldwide.
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Many of our current and potential competitors have longer operating histories,
more established reputations and potential partner relationships and greater
financial, technical, industry and marketing resources than we do. This may
place us at a disadvantage to our competitors.
RISKS RELATING TO OWNERSHIP OF OUR STOCK
WE ARE, AND WILL CONTINUE TO BE, CONTROLLED BY OUR OFFICERS AND DIRECTORS,
WHICH COULD RESULT IN US TAKING ACTIONS THAT OTHER STOCKHOLDERS DO NOT APPROVE.
Our executive officers, directors and existing 5% and greater stockholders
beneficially own or control approximately 48% of the voting power of our
common stock. This concentration of ownership of our common stock may make it
difficult for other Perficient stockholders to successfully approve or defeat
matters which may be submitted for action by our stockholders. It may also
have the effect of delaying, deterring or preventing a change in control of
our company. In addition, sales of our common stock by the former Compete Inc.
stockholders to a third party may result in a change of control of our company.
IT MAY BE DIFFICULT FOR ANOTHER COMPANY TO ACQUIRE US, AND THIS COULD DEPRESS
OUR STOCK PRICE.
Provisions of our certificate of incorporation, by-laws and Delaware law could
make it difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. In addition, under our agreement with IBM, we
have granted IBM a right of first refusal with respect to any transaction with
a company that has a substantial portion of its business in the web
application server product and services market, other than a systems
integrator or professional services firm. As a result, a potential acquirer
may be discouraged from making an offer to buy us.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO
US. THE RAISING OF ANY ADDITIONAL CAPITAL MAY DILUTE YOUR OWNERSHIP IN US.
We may need to raise additional funds through public or private debt or equity
financing in order to:
- take advantage of opportunities, including more rapid expansion or
acquisitions of, or investments in, businesses or technologies;
- develop new services; or
- respond to competitive pressures.
Any additional capital raised through the sale of equity may dilute your
ownership percentage in us. Furthermore, we cannot assure you that any
additional financing we may need will be available on terms favorable to us,
or at all. In such case, our business results would suffer.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
On July 31, 2000, we filed a registration statement under the Securities Act
covering 2,226,042 shares of common stock subject to outstanding stock options
or reserved for issuance under our stock plans. The registration statement
became effective upon filing. Accordingly, shares registered under the
registration statement are, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, available for sale in the open
market, and in the case of our officers, directors and stockholders who have
entered into lock-up agreements, available for sale after lock-up agreements
expire. As of September 30, 2000, options to purchase 1,803,752 shares of
common stock were outstanding. On April 28, 2000, we filed a registration
statement under the Securities Act covering 580,000 shares of common stock
issued in connection with our private placement. This registration statement
was declared effective on July 6, 2000. Accordingly, shares registered under
this registration statement are freely tradable without restriction. On July
31, 2000, we filed a registration statement under the Securities Act covering
169,901 shares of common stock (including 125,000 shares issuable upon the
exercise of certain stock purchase warrants). This registration statement was
declared effective on August 18, 2000. Accordingly, shares registered under
this registration statement are freely tradable without restriction. Finally,
we are obligated to file a registration statement by no later than May 1, 2001
covering additional shares issued in connection with our acquisition of
Compete, Inc. Sales of a substantial number of shares of common stock in the
public market and the issuance of shares of common stock upon the exercise of
stock options could adversely
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affect the market place of our common stock and could impair our ability to
raise capital through the sale of additional equity securities.
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Item 3. Qualitative and Quantitative Disclosures about Market Risk
At September 30, 2000, all of our cash, cash equivalents and
investment portfolio carried maturities of less than one year. We have the
ability to hold the portfolio to maturity, if deemed necessary. The effect of
changes in interest rates of plus or minus 10% over a six-month horizon would
not have a material effect on the fair market value of the portfolio.
The majority of our operations are based in the U.S. and,
accordingly, the majority of our transactions are denominated in U.S. dollars.
However, we do have foreign-based operations where transactions are
denominated in foreign currencies and are subject to market risk with respect
to fluctuations in the relative value of currencies. Currently, we have
operations in England and conduct transactions in the local currency of that
location. The impact of fluctuations in the relative value of other currencies
was not material for the nine months ended September 30, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not a party to any material legal proceedings. We
received a demand letter from a company claiming that our Web Site induces
patent infringement by others and requesting that we enter into a license
agreement with the company that could require us to pay up to $150,000. We
believe the claim is without merit and intend to vigorously defend such claim.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
- On July 21, 2000, we filed Amendment No. 2 to the Form 8-K dated May 1,
2000 filed with the Securities and Exchange Commission on May 16, 2000
relating to the acquisition by Perficient of Compete. This Amendment No. 2
amended certain of the financial information referred to in Item 7 of the
Form 8-K and previously reported in Amendment No. 1 to the Form 8-K dated
May 1, 2000.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PERFICIENT, INC.
Dated: November 2, 2000 /s/ John T. McDonald
-------------------------------------
John T. McDonald, Chief Executive
Officer (Principal Executive Officer)
Dated: November 2, 2000 /s/ John A. Hinners
-------------------------------------
John A. Hinners, Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
No. Description
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27 Financial Data Schedule
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