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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-26437
- --------------------------------------------------------------------------------
ACCRUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3238684
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48634 MILMONT DRIVE
FREMONT, CA 94538-7353
(Address of principal executive offices, including zip code)
(510) 580-4500
(Registrant's telephone number, including area code)
[FORMER NAME OR FORMER ADDRESS, IF APPLICABLE]
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
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]
As of November 12, 1999, there were 25,055,092 shares of the
registrant's Common Stock outstanding.
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ACCRUE SOFTWARE, INC.
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1999 AND MARCH 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 22
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,888 $ 2,862
Accounts receivable, net 3,785 2,005
Prepaid expenses and other current assets 507 188
-------- --------
Total current assets 45,180 5,055
Property and equipment, net 1,652 894
Other assets, net 24 160
-------- --------
TOTAL ASSETS $ 46,856 $ 6,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 722 $ 475
Accrued liabilities 1,502 791
Accrued liabilities - merger 2,924 --
Deferred revenue 2,661 1,127
Current portion long term debt -- 136
-------- --------
Total current liabilities 7,809 2,529
Long term debt, net of current portion -- 169
-------- --------
Total liabilities 7,809 2,698
-------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; -- 15,517
Common stock, $0.001 par value 25 7
Additional paid-in capital 67,371 6,803
Notes receivable from stockholders (213) (213)
Unearned compensation (6,175) (4,930)
Accumulated deficit (21,961) (13,773)
-------- --------
Total stockholders' equity 39,047 3,411
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,856 $ 6,109
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue:
Software license $ 2,784 $ 573 $ 5,395 $ 1,060
Maintenance and service 766 252 1,341 391
-------- ------- -------- -------
Total revenue 3,550 825 6,736 1,451
Cost of revenues:
Software license 101 65 200 103
Maintenance and service 364 46 600 93
-------- ------- -------- -------
Total cost of revenues 465 111 800 196
-------- ------- -------- -------
Gross profit 3,085 714 5,936 1,255
-------- ------- -------- -------
Operating expenses:
Research and development 1,035 676 1,829 1,463
Sales and marketing 3,125 1,141 5,458 2,142
General and administrative 577 427 1,114 821
Merger costs 3,560 -- 3,560 --
Stock-based compensation expense 1,146 173 2,407 173
-------- ------- -------- -------
Total operating expenses 9,443 2,417 14,368 4,599
-------- ------- -------- -------
Loss from operations (6,358) (1,703) (8,432) (3,344)
Other income, net 288 18 244 3
-------- ------- -------- -------
Net loss $ (6,070) $(1,685) $ (8,188) $(3,341)
======== ======= ======== =======
Net loss per share, basic and diluted $ (0.37) $ (0.36) $ (0.74) $ (0.73)
======== ======= ======== =======
Shares used in computing net loss per
share, basic and diluted 16,283 4,644 11,122 4,575
======== ======= ======== =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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Cash flows from operating activities:
Net loss $ (8,188) $(3,341)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 230 101
Provision for sales returns and doubtful accounts 85 --
Amortization of discount on line of credit 7 --
Stock-based compensation expense 2,407 173
Changes in operating assets and liabilities:
Restricted cash -- 37
Accounts receivable (1,865) (124)
Prepaid expenses and other current assets (319) 1
Other assets 127 --
Accounts payable 247 124
Accrued liabilities 711 165
Accrued costs related to mergers and acquisitions 2,924 --
Deferred revenue 1,534 235
-------- -------
Net cash used in operating activities (2,100) (2,629)
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment (980) (181)
-------- -------
Net cash used in investing activities (980) (181)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of
issuance costs -- 7,360
Proceeds from initial public offering, net of issuance costs 40,854 --
Proceeds from equipment loan 602 --
Proceeds from note payable -- (520)
Proceeds from stock options exercised 557 42
Repayment of equipment loan (907) (34)
-------- -------
Net cash provided by financing activities 41,106 6,848
-------- -------
Net increase in cash and cash equivalents 38,026 4,038
Cash and equivalents at beginning of period 2,862 479
-------- -------
Cash and equivalents at end of period $ 40,888 $ 4,517
======== =======
Supplemental disclosure of cash flow information:
Notes payable converted to preferred stock $ 500
=======
Convertible preferred stock converted to common stock $ 15,517
========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown. The balance sheet as of March 31, 1999 was
derived from audited financial statements, but does not include all required
disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's report
on Form S-1 (File No. 333-79491) and the Company's Form 8-K dated September 30,
1999, filed with the Securities and Exchange Commission. The condensed
consolidated financial statements have been restated to reflect the September
1999 acquisition of Marketwave Corporation, which was accounted for as a pooling
of interests.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.
Components of the consolidated results of operations of Accrue and Marketwave
prior to acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net revenues:
Accrue $ 2,570 $ 484 $ 4,498 $ 765
Marketwave 980 341 2,238 686
------- ------- ------- -------
$ 3,550 $ 825 $ 6,736 $ 1,451
======= ======= ======= =======
Net loss:
Accrue $(5,107) $(1,456) $(7,250) $(2,947)
Marketwave (963) (229) (938) (394)
------- ------- ------- -------
$(6,070) $(1,685) $(8,188) $(3,341)
======= ======= ======= =======
</TABLE>
NOTE 2 - NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options, warrants, shares subject to
repurchase and non-converted convertible preferred stock were not included in
the computation of diluted net loss per share because the effect would be
anti-dilutive.
Net loss per share for the three and six months ended September 30, 1998 does
not include the effect of approximately 10,753,135 shares of convertible
preferred stock outstanding, 1,949,000 stock options outstanding, 350,000 common
stock warrants outstanding, and 1,656,725 shares of common stock issued and
subject to repurchase by the Company, because their effects are anti-dilutive.
Net loss per share for the three and six months ended September 30, 1999 does
not include the effect of approximately 2,505,700 stock options outstanding,
20,000 common stock warrants outstanding, and 2,195,632 shares of common stock
issued and subject to repurchase by the Company, because their effects are
anti-dilutive.
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Pro forma net loss per share is computed using the outstanding number of common
shares, less shares subject to repurchase, at the end of the period and the
assumed conversion of preferred stock, as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRO FORMA NET LOSS PER SHARE, BASIC
AND DILUTED:
Net loss $ (6,070) $ (1,685) $ (8,188) $ (3,341)
======== ======== ======== ========
Shares outstanding at respective period end 24,755 6,365 24,755 6,365
Shares subject to repurchase (2,195) (1,657) (2,195) (1,657)
Adjustment to reflect the assumed
conversion of preferred stock 10,753 10,753
-------- -------- -------- --------
Shares used in computing pro forma
net loss, basic and diluted 22,560 15,461 22,560 15,461
======== ======== ======== ========
Pro forma net loss per share, basic and
diluted $ (0.27) $ (0.11) $ (0.36) $ (0.22)
======== ======== ======== ========
</TABLE>
NOTE 3 - EQUITY TRANSACTIONS
For the three and six months ended September 30, 1998, the Company recorded
unearned stock-based compensation expense of $6,019,638. For the three and six
months ended September 30, 1999, the Company recorded unearned stock-based
compensation of $11,600 and $3,652,282, respectively, for the difference at the
grant date between the exercise price and the deemed fair value of the common
stock underlying the options granted during that period. Amortization of
unearned compensation recognized for the three and six months ended September
30, 1998 was $172,802 and for the three and six months ended September 30, 1999
was $1,146,414 and $2,406,695, respectively.
During the three and six months ended September 30, 1999, the Company granted
options to purchase an aggregate of 792,572 and 1,485,824, shares of common
stock, respectively, pursuant to the Company's 1996 Stock Option Plan (the
"Option Plan"). Also 103,587 and 1,438,054 shares of common stock were exercised
pursuant to the Option Plan.
See Note 5 for acquisition of Marketwave Corporation.
NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Revenue by geographic region is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $3,184 $ 773 $6,002 $1,352
Foreign 366 52 734 99
------ ------ ------ ------
$3,550 $ 825 $6,736 $1,451
====== ====== ====== ======
</TABLE>
One customer accounted for 12% of revenue for the quarter ended September 30,
1999, and one customer accounted for 12% of revenue for the quarter ended
September 30, 1998. No one customer accounted for more
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than 10% of revenue for the six months ended September 30, 1999 and one customer
accounted for 11% of revenue for the six months ended September 30, 1998.
NOTE 5 - ACQUISITION
On September 30, 1999, the Company completed the acquisition of Marketwave
Corporation, a Washington corporation. Under the terms of the acquisition, which
was accounted for as a pooling of interests, the Company exchanged approximately
3,446,414 shares of Accrue Common Stock for all of Marketwave outstanding common
stock and unexpired and unexercised options to acquire Marketwave capital stock.
The condensed consolidated financial statements for the three and six month
periods ended September 30, 1999 include nonrecurring expenses of $3.6 million
relating to costs incurred with this transaction. The costs include investment
banking and financial advisory fees of approximately $1.3 million and other
merger related expenses totaling $2.4 million. Other merger related expenses
consist of professional services ($0.5 million), severance costs, which relate
to termination of certain employees with redundant job functions in
substantially all functional areas ($1.1 million), stock-based compensation
expense ($0.3 million) and other merger related expenses ($0.4 million).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the condensed
historical financial information and the notes thereto included in this report
and Management's Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Company's
Registration Statement on Form S-1 (File No. 333-79491) and subsequently filed
reports on Form 10-Q.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN
EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RICK FACTORS" IN
ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS
INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL
RISKS AND UNCERTAINTIES.
OVERVIEW
Accrue Software was founded in 1996 and is headquartered in Fremont, California
with regional sales offices throughout the US, and an international office in
London, England. Our principle product, Accrue Insight, is a software solution
that collects stores and analyzes detailed Web site traffic information and
visitor activity data and presents this information in detailed reports to help
managers and marketers make more effective merchandising and marketing
decisions. We sell Accrue Insight to customers for a license fee and also
provide related maintenance services. In addition, we provide professional
services to assist customers at every stage of Accrue Insight deployment, from
identification of specific business needs through enterprise integration and
customization of e-business analysis reporting, to delivering a rapid and
effective implementation. We also offer an application hosting service, Accrue
Site Knowledge (ASK) Service, that enables customers to outsource system
administration responsibilities in connection with their purchase of Accrue
Insight.
On September 30, 1999, the Company completed the acquisition of Marketwave
Corporation, a Washington corporation. Under the terms of the acquisition, which
was accounted for as a pooling of interests, the Company
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exchanged approximately 3,446,414 shares of Accrue Common Stock for all of
Marketwave outstanding capital stock and unexpired and unexercised options to
acquire Marketwave capital stock. The condensed consolidated financial
statements for the three and six month periods ended September 30, 1999 include
nonrecurring expenses of $3.6 million relating to costs incurred with this
transaction. The historical financial information has been restated to reflect
the acquisition of Marketwave Corporation.
Marketwave Corporation was founded in 1996 to provide software that allows
marketing and business professional to maximize their Internet marketing
opportunities. Marketwave's Hit List Live 4.0 is an enterprise-class Windows NT
ebusiness analysis program that uses a proprietary technology called DataLink
(TM) to integrate Web traffic with traditional business data such as accounting
and sales databases, allowing marketing and advertising managers to see real
return on investment data and track how changes in visitors' demographics affect
browsing and purchasing behavior. This is accomplished by providing information
about how visitors found the site, what paths the visitors used once at the
site, what type of information visitors are searching for when at the site, and
which parts of the site are getting the most traffic.
Marketwave's Seattle location will become another Accrue facility, focusing on
the Hit List solutions for development, customer service and marketing while
Accrue Insight will continue to be supported and developed in California.
Substantially all of our product revenues through September 30, 1999 were
attributable to licensing Accrue Insight, Accrue Hit List and related products
and support services. We anticipate that these 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 Accrue Insight, Accrue Hit List, or
related products and services, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
We generally recognized license revenue, net of estimated returns allowance,
upon product shipment. Where multiple products or services are sold together
under one contract, we allocate revenue to each element based on their relative
fair value, with fair value being determined using the price charged when that
element is sold separately. We recognize maintenance service revenue ratably
over the term of the service agreement, and we recognize consulting service
revenue as services are performed.
We market our products, both domestically and internationally, through our
direct sales force. Sales derived through indirect channels, which consist
primarily of international resellers and system integrators, accounted for less
than 5% of our total revenue to date. We expect that sales derived through
indirect channels will increase as a percentage of total revenue as we expand
our international efforts. We license our products to our customers primarily on
a perpetual basis. We offer multiple pricing models from usage-based to server-
and CPU-based, allowing for additional revenue as a customer's e-business
expands. Selling prices for our products have typically ranged from ten to
several hundred thousand dollars. Annual support and maintenance contracts,
which are purchased with initial product licenses, entitle customers to
telephone support and upgrades, when and if available. The price for our support
and maintenance program is based on a percentage of list price and is paid in
advance. Consulting fees for implementation services and training are charged on
a time-and-materials basis or a fixed-fee basis for package services.
RESULTS OF OPERATIONS
Revenue. Total revenues were $3.6 million and $6.7 million for the three and six
months ended September 30, 1999, respectively, an increase of 330% from $0.8
million for the quarter ended September 30, 1998 and an increase of 364% from
$1.5 million for the six months ended September 30, 1998. One customer accounted
for 12% of revenue for the quarter ended September 30, 1999, and one customer
accounted for 12% of revenue for the quarter ended September 30, 1998. No one
customer accounted for more than 10% of revenue for the six months ended
September 30, 1999 and one customer accounted for 11% of revenue for the six
months ended September 30, 1998.
Software license revenue. Revenue from software licenses was $2.8 million for
the quarter ended September 30, 1999 an increase of $2.2 million, or 386%, over
$0.6 million for the quarter ended September 30, 1998. For the
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six months ended September 30, 1999, revenue from software licenses was $5.4
million an increase of $4.3 million, or 409%, over $1.1 million for the six
months ended September 30, 1998. The majority of the growth in product revenue
was due to higher unit sales volumes and an increase in the average dollar size
of licenses. We anticipate that revenue from product licenses will continue to
represent a substantial majority of our revenues in the future. We expect that
because of our small but increasing revenue base, historical percentage growth
rates of our product revenue will not be sustainable in the future.
Maintenance and service revenue. Maintenance and service revenues were $0.8
million and $1.3 million for the three and six months ended September 30, 1999,
respectively, representing increases of 204% from $0.3 million and 243% from
$0.4 million from the corresponding periods in fiscal 1998. This growth is
primarily due to expanded service offerings, more proactive sales of these
offerings, and a higher proportion of renewals of maintenance contracts by
existing customers. We expect that historical percentage growth rates of our
maintenance and service revenue will not be sustainable in the future.
Cost of revenue. Cost of revenue consists of royalties paid to third parties and
the salaries and related expenses for maintenance and service personnel. These
costs were $0.5 million and $0.8 million, or 13% and 12% of revenue,
respectively, for the three and six months ended September 30, 1999, as compared
to $0.1 million and $0.2 million or 13% and 14% of revenue in the corresponding
periods in fiscal 1998. These dollar amount increases of cost of revenue reflect
the higher volumes of product shipped and related third-party royalties. Because
all development costs incurred in the research and development of software
products and enhancements to existing software products have been expensed as
incurred, cost of revenue includes no amortization of capitalized software
development costs.
Gross profit. Gross profit remained nearly flat at 86.9% and 86.6% for the
quarters ended September 30, 1999 and 1998, and 88.1% and 86.5% for the six
months ended September 30, 1999 and 1998. In the future, we expect that
royalties paid to third parties will increase in absolute dollars. In addition,
we expect that sales derived through indirect channels will increase as a
percentage of total revenue. We also expect that maintenance and service revenue
will increase as a percentage of total revenue as we expand our service
offerings and maintain our maintenance contract renewal rates with customers.
Maintenance and service revenue has lower gross margins than product revenue.
For all of these reasons, we expect that our gross margins will decline.
Operating expenses. Total operating expenses were $9.4 million for the quarter
ended September 30, 1999, or 266% of net revenues as compared to $2.4 million or
293% of net revenues for the quarter ended September 30, 1998. For the six
months ended September 30, 1999, total operating expenses were $14.4 million, or
213% of revenue, as compared to $4.6 million, or 317% of revenue for the six
months ended September 30, 1998. The increases in absolute dollars were largely
due to increased salaries and related expenses associated with newly hired
employees, stock-based compensation expenses, and nonrecurring expenses of $3.6
million related to the Marketwave acquisition.
Research and development expenses. Research and development expenses consist
primarily of salaries and related costs associated with the development of new
products, the enhancement of existing products, and the performance of quality
assurance and documentation activities. Research and development expenses were
$1.0 million for the quarter ended September 30, 1999, or 29% of revenue, as
compared to $0.7 million, or 82% of revenue for the quarter ended September 30,
1998. For the six months ended September 30, 1999, research and development
expenses were $1.8 million, or 27% of revenue, as compared to $1.5 million, or
101% of revenue for the six months ended September 30, 1998. The increase in
absolute dollars is primarily attributable to increased staffing and associated
support for software engineers required to expand and enhance our product and
services offerings. We believe that research and development expenses will
increase in dollar amount but decrease as a percentage of total revenue in the
future. Research and development expenditures are charges to operations as
incurred.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, and
promotional expenses. Sales and marketing expenses were $3.1 million, or 88% of
revenue, for the quarter ended September 30, 1999, compared to $1.1 million, or
138% of
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revenue for the quarter ended September 30, 1998. For the six months ended
September 30, 1999, sales and marketing expenses were $5.5 million, or 81% of
revenue, as compared to $2.1 million, or 148% of revenue for the six months
ended September 30, 1998. The increases were primarily due to increased
headcount in our sales and marketing departments, and increased marketing
communications expenditures associated with our products and services. We
believe that sales and marketing expenses will increase in dollar amount but
continue to decrease as a percentage of total revenue in the future.
General and administrative expenses. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive,
financial, human resource, business development, and other related
administrative functions, as well as legal and accounting costs. General and
administrative expenses were $0.6 million, or 16% of revenue, for the quarter
ended September 30, 1999, as compared to $0.4 million, or 52% of revenue for the
quarter ended September 30, 1998. For the six months ended September 30, 1999,
general and administrative expenses were $1.1 million, or 17% of revenue, as
compared to $0.8, or 57% of revenue for the six months ended September 30, 1998.
The increase in absolute dollars 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 and facilities, and
incur additional expenses associated with operating as a public company.
However, we believe that general and administrative expenses will decrease as a
percentage of total revenue in the future.
Mergers and acquisitions expense. During September 1999 the Company completed
the acquisition of Marketwave Corporation through the issuance of Accrue Common
Stock. The Company recorded nonrecurring charges of $3.6 million relating to the
costs of this transaction.
Stock-based compensation. Total stock-based compensation as of September 30,
1999 amounted to $9.9 million, of which approximately $1.1 million was amortized
for the quarter ended September 30, 1999 and $2.4 million was amortized for the
six months ended September 30, 1999. Total stock-based compensation as of
September 30, 1998 amounted to $6.0 million, of which approximately $0.2 million
was amortized for the three and six months ended September 30,1998. The
remaining balance will continue to be amortized over the vesting of the related
options.
Other income (expense), net. Other income (expense), net consists of interest
income, interest expense, other income and other expense. Other income
(expense), net was $288,000 for the quarter ended September 30, 1999 and $18,000
for the quarter ended September 30, 1998. Other income (expense), net was
$244,000 for the six months ended September 30, 1999 and $3,000 for the six
months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations principally through private
sales of preferred stock, with net proceeds of $12.9 million, bank loans, and
with the net proceeds of $40.9 million from our initial public offering
completed in August of 1999. We used $1.9 million of cash in operations for the
six months ended September 30, 1999 and $2.6 million of cash in operations for
the six months ended September 30, 1998. We used cash primarily to fund our net
losses from operations. For the six months ended September 30, 1999, cash used
by operating activities was primarily attributable to our net loss of $8.2
million and an increase in accounts receivable of $1.9 million, offset in part
by an increase in deferred revenue of $1.5 million, an increase in accrued
liabilities of $0.7 million, an increase in accrued costs related to mergers and
acquisitions of $2.9 million and stock-based compensation expense of $2.6
million. The increase in accounts receivable, provision for sales returns and
doubtful accounts and deferred revenue were a result of higher unit sales of
Accrue Insight. Cash provided by financing activities was $40.9 million for the
six months ended September 30, 1999 and $6.8 million for the six months ended
September 30, 1998. We have a $2.0 million working capital line of credit with
Silicon Valley Bank, which expires in June 2000. Interest is payable monthly.
There were no amounts outstanding under the line as of September 30, 1999.
Capital expenditures were $1.0 million for the six months ended September 30,
1999, and $0.2 million for the six months ended September 30, 1998. Our capital
expenditures consist primarily of purchases of property and
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equipment, including computer equipment and software. We expect that our capital
expenditures will continue to increase in the future. We expect to experience
significant growth in our operating expenses in the future in order to execute
our business plan, particularly research and development and sales and marketing
expenses. As a result, we anticipate that our operating expenses, as well as
planned capital expenditures, will constitute a material use of our cash
resources. In addition, we may utilize cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. We
believe that the net proceeds from the sale of the common stock in our initial
public offering completed in August 1999 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:
o Correctly handle date information needed for the December 31, 1999
to January 1, 2000 date change;
o 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;
o 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
o Recognize the Year 2000 as a leap year.
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. We have 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.
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.
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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 such costs in the past.
To date, these costs have not been significant. Although we do not expect to, we
may 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 are in process of finalizing 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
The following is a discussion of certain factors which currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our capital stock or other securities is
cautioned to carefully consider these factors, along with the factors discussed
in the Company's Registration Statement on Form S-1 (File No.
333-79491).
WE HAVE A LIMITED OPERATING HISTORY.
Accrue was formed in February 1996, and we introduced Accrue Insight 1.0, our
first software product, in January 1997. For the fiscal year ended March 31,
1998, we generated $2.0 million in revenue, for the fiscal year ended March 31,
1999, we generated $4.7 million in revenue, and for the six months ended
September 30, 1999 we generated $6.7 million in revenue. Thus, we have only a
limited operating history upon which you can evaluate our business and
prospects. Due to our limited operating history, it is difficult or impossible
for us to predict future results of operations. For example, we cannot forecast
operating expenses based on our historical results because they are limited, and
we are required to forecast expenses in part on future revenue projections. Most
of our expenses are fixed in the short term and we may not be able to quickly
reduce spending if our revenue is lower than we had projected, therefore net
losses in a given quarter would be greater than expected. In addition, our
ability to forecast accurately our quarterly revenue is limited due to a number
of factors described in detail below, making it difficult to predict the quarter
in which sales will occur. Moreover, due to our limited operating history, any
evaluation of our business and prospects must be made in light of the risks and
uncertainties often encountered by early-stage companies in Internet-related
products and services markets, which is new and rapidly evolving. Many of these
risks are discussed under the sub-headings below. We may not be able to
successfully address any or all of these risks and our business strategy may not
be successful. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more detailed information on our
historical results of operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
We have not achieved profitability and we expect to incur net losses for the
foreseeable future. We incurred net losses of $2.0 million for the fiscal year
ended March 31, 1997, $4.2 million for the fiscal year ended March 31, 1998,
$7.6 million for the fiscal year ended March 31, 1999 and $8.2 million for the
six months ended September 30, 1999. As of September 30, 1999, we had an
accumulated deficit of $22.0 million. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis in the future, or at all.
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WE EXPECT OPERATING EXPENSES TO INCREASE, WHICH MAY IMPEDE OUR ABILITY TO
ACHIEVE PROFITABILITY.
As we grow our business we expect operating expenses to increase significantly,
and as a result, we will need to generate increased quarterly revenue to achieve
and maintain profitability. In particular, we expect to incur additional costs
and expenses related to the expansion of our sales force and distribution
channels, the expansion of our product and services offerings, the development
of relationships with strategic business partners, the expansion of management
and infrastructure, and brand development, marketing and other promotional
activities.
IF WE CANNOT FUND OPERATIONS FROM CASH GENERATED BY OUR BUSINESS, WE MAY BE
REQUIRED TO SELL ADDITIONAL STOCK, WHICH COULD DEPRESS OUR COMMON STOCK PRICE.
To date, we have been unable to fund operations from cash generated by our
business and have funded operations primarily by selling securities. If our
revenue fails to offset operating expenses, we may be required to fund future
operations through the sale of additional common stock, which could cause our
common stock price to decline.
FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON
STOCK.
Our annual and quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, particularly
as a result of the risks we describe in this section. Because our operating
results are volatile and difficult to predict, you should not rely on the
results of one quarter as an indication of future performance. It is likely that
in some future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock may fall significantly.
OUR SUCCESS DEPENDS ON CERTAIN KEY MANAGEMENT PERSONNEL.
Our success depends largely upon the continued services of our key management
and technical personnel, the loss of which could seriously harm our business. In
particular, we rely on Richard Kreysar, President, Chief Executive Officer and a
director, and Bob Page, Vice President of Product Development and Chief
Technical Officer. Messrs. Kreysar and Page do not have employment or
non-competition agreements and could therefore terminate their employment with
us at any time without penalty. We do not maintain key person life insurance
policies on any of our employees.
WE FACE INTENSE COMPETITION, WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS NOW AND IN THE FUTURE.
The market for e-business analysis solutions 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 they offer. Our principal competitors
today include vendors of software that target e-business customer data
collection and analysis markets such as Andromedia, Inc., net.Genesis
Corporation and WebTrends Corporation;developers of software that address only
certain technology components of our products; and in-house development efforts
by potential customers or partners.
We expect that if we are successful in our strategy to expand the scope of our
products and services, we may 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 traditional business
intelligence and enterprise software vendors as the Internet software market
continues to develop and expand. Some of these companies, as well as some other
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
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customer requirements, devote greater resources to the development, promotion
and sale of their products, or adopt more aggressive pricing policies to gain
market share. 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, in which case our
business could suffer.
WE RELY ON SALES OF A SINGLE PRODUCT LINE FOR OUR REVENUE.
We currently derive all of our revenue from the license and related upgrades,
professional services and support of our Accrue Insight and Accrue Hit List
products. We expect that we will continue to depend on revenue related to new
and enhanced versions of these products for at least the next several quarters.
We cannot be certain that we will be successful in upgrading and marketing our
products and services or that we will successfully develop and market new
products and services on a timely basis. If we do not continue to increase
revenue related to our existing products and services or generate revenue from
new products and services, our business would be seriously harmed.
IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN E-COMMERCE TECHNOLOGY, OUR PRODUCT
REVENUE COULD DECLINE.
The market for our products is marked by rapid technological change, frequent
new product introductions, Internet-related technology enhancements, uncertain
product life cycles, changes in client demands and evolving industry standards.
We cannot be certain that we will successfully develop and market new products,
new product enhancements or new products compliant with present or emerging
Internet technology standards. In developing our products, we have made, and
will continue to make, assumptions with respect to which standards will be
adopted by the industry, our customers and competitors. If the standards adopted
are different from those, which we have chosen to support, market acceptance of
our products may be significantly reduced or delayed and our business will be
seriously harmed. In addition, we may be required to make significant
expenditures to adapt our products to changing or emerging technologies. New
products based on new technologies or new industry standards can render existing
products obsolete and unmarketable. To succeed, we will need to enhance our
current products and develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the increasingly
sophisticated requirements of our clients. E-business analysis technology is
complex and new products and product enhancements can require long development
and testing periods. Any delays in developing and releasing enhanced or new
products could harm our business, operating results and financial condition.
THE FAILURE TO RETAIN AND ATTRACT KEY TECHNICAL PERSONNEL COULD HARM OUR
BUSINESS.
Because of the complexity of our products and technologies, we are substantially
dependent upon the continued service of our existing product development
personnel. In addition, we intend to hire a number of engineers with high levels
of experience in designing and developing software and Internet-related products
in time-pressured environments. The competition in Silicon Valley for qualified
engineers in the computer software and Internet markets is intense. New
personnel will require training and education and take time to reach full
productivity. Our future success depends on our ability to attract, train and
retain these key personnel.
FAILURE TO EXPAND OUR SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD LIMIT
OUR GROWTH.
In order to maintain and increase our market share and revenue, we will need to
expand our direct and indirect sales operations and channels of distribution. We
have recently expanded our direct sales force and plan to hire
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additional sales personnel. Our direct sales and support organization consisted
of 30 employees as of April 30, 1999 and 48 employees as of September 30, 1999,
including the September, 1999 addition of 11 people from Marketwave. 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. In
addition, we need to expand our relationships with domestic and international
channel partners, distributors, value-added resellers, systems integrators,
online and other resellers, Internet service providers, original equipment
manufacturers, and other partners to build our indirect sales channel.
WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE PROFESSIONAL SERVICES
ORGANIZATION WHICH COULD NEGATIVELY AFFECT BOTH OUR OPERATING RESULTS AND OUR
ABILITY TO ASSIST OUR CUSTOMERS WITH THE IMPLEMENTATION OF OUR PRODUCTS.
Customers that license our software typically engage our professional services
organization to assist with support, training, consulting and implementation of
their e-business analysis solutions. We believe that growth in our product sales
depends on our ability to provide our customers with these services and to
educate third-party resellers on how to use our products. We expect our services
revenue to increase in absolute dollars as we continue to provide consulting and
training services that complement our products and as our installed base of
customers grows. We generally bill our clients for our services on a
time-and-materials basis. Failure to estimate accurately the resources and time
required for an engagement, to manage our customers' expectations effectively
regarding the scope of services to be delivered for an estimated price or to
complete fixed-price engagements within budget, on time and to the customer's
satisfaction could expose us to risks associated with cost overruns, and in some
cases, penalties, and may harm our business. Although we plan to expand our
services in order to address our customers' needs we cannot be certain that it
will ever achieve profitability.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND
INTERNATIONALLY.
Licenses and services sold to clients located outside the United State for the
three and six months ended September 30, 1999 were 10.3% and 10.9%,
respectively, of our total revenue and 6.3% and 6.8%, respectively, for the
three and six months ended September 30, 1998. We expect international revenue
to account for an increasing percentage of total revenue in the future. We
believe that we must expand our international sales activities in order to be
successful. We initiated operations in selected international markets in the
first quarter of fiscal 2000. Expansion into international markets will require
management attention and resources. We also intend to enter into a number of
international alliances as part of our international strategy and rely
extensively on these business partners to conduct operations, coordinate sales
and marketing efforts, and provide software localization services. To date, we
have non-exclusive alliances with Sumisho Electronics Company, Ltd., a
subsidiary of Sumitomo Corporation, and Itochu Techno-Science Corporation for
distribution of our products in Japan, and Scientific Computers GmbH for
distribution of our products in Europe. These alliances are not subject to
binding agreements, have no specified performance requirements by us or our
allied partners, and may be terminated by either party at any time. Our success
in international markets will depend on the success of our business partners and
their willingness to dedicate sufficient resources to our relationships.
We cannot assure you that we will be successful in expanding internationally.
International operations are subject to other inherent risks, including such
factors as protectionist laws and business practices that favor local
competition, difficulties and costs of staffing and managing foreign operations,
dependence on local vendors, multiple, conflicting and changing governmental
laws and regulations, longer sales and collection cycles, foreign currency
exchange rate fluctuations, political and economic instability, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity, and expenses associated with localizing
products for foreign countries. If we fail to address these risks adequately our
business may be seriously harmed.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO SUCCESSFULLY IDENTIFY AND INTEGRATE
POTENTIAL ACQUISITIONS AND INVESTMENTS.
Due to the intensely competitive nature of the e-business analysis market, we
believe that our success will depend on our ability to attain significant market
share, which will depend in part on our ability to successfully identify
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and acquire businesses, products and technologies from third parties that are
complementary to our existing products and services. We do not have any present
understanding, nor are we having any discussions relating to any acquisition or
investment. We cannot be certain that we will be able to rapidly expand our
product and services offerings through these acquisitions or investments. Some
of the risks we may encounter include complementary products and services may
not be available on commercially reasonable terms; we may be unable to compete
for acquisitions of products and services with many of our competitors who have
greater financial resources than we do; acquired products and services may not
meet the needs of our customers; we may incur difficulties associated with the
integration of the personnel and operations of an acquired company with our
personnel and operations; we may incur difficulties in assimilating acquired
products, services or technologies, with our existing products, services and
technologies; and integration of acquired and existing products and services may
result in decreases in revenue from existing products and services.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses. Furthermore, we may have to issue
equity securities to pay for any future acquisition which could be dilutive to
our existing stockholders. We may also have to incur debt which could contain
covenants that restrict our operations. In addition, acquisitions and
investments may have negative effect on our reported results of operations from
acquisition-related charges and amortization of acquired technology and other
intangibles. Any of these acquisition-related risks could harm our business.
OUR VARIED SALES CYCLES MAKE IT DIFFICULT TO BUDGET AND FORECAST OUR OPERATING
RESULTS.
We have varied sales cycles because we generally need to educate potential
clients regarding the use and benefits of our product applications. The
stability of our sales cycle continues to evolve as our products mature. Our
long sales cycle makes it difficult to predict the quarter in which sales may
fall and to budget and forecast operating results. In addition, a significant
portion of our sales fall within the last month of a quarter, making it
difficult to predict revenue until late in the quarter and to adjust expenses
accordingly.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY SMALL DELAYS IN CUSTOMER
ORDERS OR PRODUCT INSTALLATIONS.
Small delays in customer orders can cause significant variability in our license
revenue and operating results for any particular period. We derive a substantial
portion of our revenue from the sale of software products and related services.
Our revenue recognition policy requires us to deliver the software prior to
recognizing any revenue for the product and to substantially complete the
implementation of our product before we can recognize service revenue. Any end
of quarter delays in orders for delivery or product installation schedules could
harm operating results for that quarter.
IF THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS IS NO LONGER AVAILABLE, OUR
BUSINESS COULD BE HARMED.
We integrate third-party software as a component of our software. For example,
we rely on Red Brick database technology licensed to us by Informix Software,
Inc. to maintain data stored in our Accrue Insight product. This agreement
terminates in March 2000, and we cannot be certain that Informix will renew this
agreement. If Informix does not renew this agreement, we will be required to
obtain similar technology from other parties, which may not be available to us
on commercially reasonable terms. Although we plan to integrate additional
database technology in our products prior to March 2000, we cannot be certain
that we will be able to successfully integrate this technology prior to this
date. We also incorporate graphic generation tools from VI/Visualize, Inc. in
Accrue Insight. This agreement terminates in July 2000. If we cannot maintain
licenses to key third-party software, shipments of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could seriously harm our business, financial results and results
of operations.
IF WE FAIL TO SUCCESSFULLY PROMOTE OUR ACCRUE BRAND NAME OR IF WE INCUR
SIGNIFICANT EXPENSES PROMOTING AND MAINTAINING OUR ACCRUE BRAND NAME, OUR
BUSINESS COULD BE HARMED.
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Due in part to the emerging nature of the market for e-business analysis
solutions and the substantial resources available to many of our competitors,
there may be a time-limited opportunity for us to achieve and maintain a
significant market share. Developing and maintaining awareness of the Accrue
brand name is critical to achieving widespread acceptance of our e-business
analysis solutions. Furthermore, the importance of brand recognition will
increase as competition in the market for our products increases. Successfully
promoting and positioning the Accrue brand will depend largely on the
effectiveness of our marketing efforts and our ability to develop reliable and
useful products at competitive prices. Therefore, we may need to increase our
financial commitment to creating and maintaining brand awareness among potential
customers.
THE STRAIN THAT OUR GROWTH RATE PLACES UPON OUR SYSTEMS AND MANAGEMENT RESOURCES
MAY ADVERSELY AFFECT OUR BUSINESS.
We have recently experienced a period of significant expansion of our operations
that has placed a significant strain on our management, administrative and
operational 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 22 at March 31, 1997, to 38 at March 31, 1998, to 59 at March 31,
1999, and 95 at September 30, 1999 including the September, 1999 addition of 20
people from Marketwave. Furthermore, our Chief Financial Officer joined us in
April 1999 and has had limited exposure to our prior operations. In addition, we
intend to further expand our finance, administrative and operations staff. Any
failure to properly manage our growth could have a material adverse effect on
our business, results of operations, and financial condition. To properly manage
this growth, we must, among other things, implement and improve additional and
existing administrative, financial, and operational systems, procedures, and
controls on a timely basis. We may not be able to complete the necessary
improvements to our systems, procedures, and controls necessary to support our
future operations in a timely manner. Management may not be able to hire, train,
retain, motivate, and manage required personnel and may not be able to
successfully identify, manage, and exploit existing and potential market
opportunities. In connection with our expansion, we plan to increase our
operating expenses to expand our sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, broaden
professional services and support, and improve operational and financial
systems. Failure of our revenue to increase along with these expenses during any
fiscal period could have a materially adverse impact on our financial results
for that period.
ACCRUE INSIGHT, OUR MOST IMPORTANT PRODUCT, IS NOT PROTECTED BY A PATENT. IF
ANOTHER PARTY WERE TO USE THIS TECHNOLOGY, OUR BUSINESS WOULD SUFFER.
We regard substantial elements of our e-business analysis solutions as
proprietary and attempt to protect them by relying on patent, trademark, service
mark, trade dress, copyright, and trade secret laws and restrictions, as well as
confidentiality procedures and contractual provisions. Any steps we take to
protect our intellectual property may be inadequate, time consuming, and
expensive. In addition, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property,
which could have a material adverse effect on our business. Furthermore, legal
standards relating to the validity, enforceability, and scope of protection of
intellectual property rights in Internet-related industries are uncertain and
still evolving, and the future viability or value of any of our intellectual
property rights is uncertain. Effective trademark, copyright, and trade secret
protection may not be available in every country in which our products are
distributed or made available through the Internet. Furthermore, our competitors
may independently develop similar technology that substantially limits the value
of our intellectual property or design around patents issued to us.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In addition to the technology we have developed internally, we also use code
libraries developed and maintained by third parties and have acquired or
licensed technologies from other companies. Our internally developed technology,
the code libraries, or the technology we acquired or licensed may infringe a
third party's intellectual property rights who may bring claims against us
alleging infringement of their intellectual property rights. We have recently
received a letter from a patent holder regarding possible infringement of their
U.S. patent. We have investigated this patent and believe we have meritorious
defenses to any claims that could be asserted. Any
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infringement or claim of infringement could have a material adverse effect on
our business. In recent years, there has been significant litigation in the
United States involving patents and other intellectual property rights. We are
not currently involved in any intellectual property litigation. However, as the
number of entrants into our market increases, the possibility of an intellectual
property claim against us grows and we may be a party to litigation in the
future to protect our intellectual property or as a result of an alleged
infringement of others' intellectual property. These claims and any resulting
litigation could subject us to significant liability for damages and
invalidation of our proprietary rights, would likely be time-consuming and
expensive to defend and would divert management time and attention. Any
potential intellectual property litigation could also force us to cease selling,
incorporating, or using products or services that incorporate the challenged
intellectual property; obtain from the holder of the infringed intellectual
property right a license to sell or use the relevant technology, which license
may not be available on reasonable terms, or at all; and/or redesign those
products or services that incorporate infringing technology.
Any of these results could seriously harm our business.
PRODUCT DEFECTS COULD LEAD TO LOSS OF CUSTOMERS, WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Despite internal testing and testing by current and potential customers, our
current and future products may contain serious defects, including Year 2000
errors, the occurrence of which could result in adverse publicity, loss of or
delay in market acceptance, or claims by customers against us, any of which
could harm our business, results of operations, and financial condition. In
addition, our products and product enhancements are very complex and may from
time to time contain errors or result in failures that we did not detect or
anticipate when introducing our products or enhancements to the market. The
computer hardware environment is characterized by a wide variety of non-standard
configurations that make pre-release testing for programming or compatibility
errors very difficult and time consuming. Despite our testing, errors may still
be discovered in some new products or enhancements after the products or
enhancements are delivered to customers.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD REQUIRE
CONSIDERABLE EFFORT AND EXPENSE TO DEFEND AND WHICH COULD HARM OUR BUSINESS.
Our products are used to monitor the traffic data of our customers' Web sites,
and to segment, analyze and report this data. These and other functions that our
products provide are often critical to our customers, especially in light of the
considerable resources many organizations spend on the development and
maintenance of their Web sites. Our end-user licenses contain provisions that
limit our exposure to product liability claims, but these provisions may not be
enforceable in all jurisdictions. Additionally, we maintain limited products
liability insurance. To the extent our contractual limitations are unenforceable
or these claims are not covered by insurance, a successful products liability
claim could harm our business.
RISKS RELATED TO OUR INDUSTRY
EVOLVING REGULATION OF THE INTERNET MAY HARM OUR BUSINESS.
As e-commerce continues to evolve, increasing regulation by federal, state, or
foreign agencies becomes more likely. This regulation is likely in the areas of
user privacy, pricing, content, quality of products and services, taxation,
advertising, intellectual property rights, and information security. In
particular, laws and regulations applying to the solicitation, collection, or
processing of personal or consumer information could negatively affect our
activities. Typically, our products capture traffic data when consumers,
business customers or employees visit a Web site. The perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users 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 similar legislation or regulatory requirements currently in effect
in the United States. Other countries and political entities, such as the
European Economic Community, have adopted legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately
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addressed, our business could be harmed. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity and
libel is uncertain and developing. Furthermore, any regulation imposing fees or
assessing taxes for Internet use could result in a decline in the use of the
Internet and the viability of e-commerce. Any new legislation or regulation, or
the application or interpretation of existing laws or regulations, may decrease
the growth in the use of the Internet, may impose additional burdens on
e-commerce or may require us to alter how we conduct our business. This could
decrease the demand for our products and services, increase our cost of doing
business, increase the costs of products sold through the Internet or otherwise
have a negative effect on our business, results of operations and financial
condition.
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET.
Continued expansion in the sales of our e-business analysis solutions will
depend upon the continued growth of the Internet as a widely used medium for
commerce and communication. Rapid growth in the use of the Internet 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 online services as a medium of commerce and communication. Demand
and market acceptance for recently-introduced products and services relating to
the Internet are subject to a high level of uncertainty and few proven products
and services exist. If the Internet does not continue to grow as a widespread
communications medium and commercial marketplace, the demand for our e-business
analysis solutions could be significantly reduced. The Internet may not prove to
be a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone, or timely
development of complementary products, such as high speed modems. The Internet
infrastructure may not be able to support the demands placed on it by continued
growth. Additionally, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, security, reliability, cost, ease of use,
accessibility, and quality of service.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuation, and changes in the market values of it investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company has not used
derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company protects and preserves
its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carries a degree of interest rate risk. Fixed rate securities may have their
fair market value adversely impacted due to a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, the Company's future investment income may
fall short of expectations due to changes in interest rates ot the Company may
suffer losses in principle if forced to sell securities which have declined in
market value due to changes in interest rates.
FOREIGN CURRENCY RISK
To date, international sales are made by our direct sales force or through
international alliances and are all transacted in U.S. dollars. However, as we
continue to increase our international business we could be subject to risks
typical of an international business, including but not limited to differing
economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely impacted
by changes in these or other factors.
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The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge any foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that are material to its
business or financial condition.
ITEM 2. CHANGE IN SECURITIES
a. Not applicable
b. Not applicable
c. Securities sold during the quarter ended September 30, 1999 that were not
registered under the Securities Act.
The sales of the securities listed below were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities Act")
in reliance on Section 4(2) of the Securities Act or Rule 701 promulgated under
section 3(b) of the Securities Act as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contract relating to compensation as provided under such rule 701. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and warrants issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Company.
(i) During the quarter ended September 30, 1999, the Company granted
options to purchase an aggregate of 798,500 shares of Common Stock to an
aggregate of 40 directors, officers and employees pursuant to the Company's
1996 Stock Option Plan (the "Option Plan").
(ii) During the quarter ended September 30, 1999, options to purchase an
aggregate of 103,519 shares of Common Stock were exercised by an aggregate
of 9 directors, officers and employees pursuant to the Option Plan.
(iii) Pursuant to the acquisition of Marketwave Corporation on September
30, 1999, the Company issued 3,446,414 shares of Accrue Common Stock to the
stockholders and optionholders of Marketwave Corporation in exchange for
all outstanding capital stock and all unexpired and unexercised options to
acquire capital stock.
d. Use of proceeds from sale of Registered Securities.
On August 4, 1999, the Company completed an initial public offering of its
Common Stock, $0.001 par value. The managing underwriters in the offering were
BancBoston Robertson Stephens and Thomas Weisel Partners, LLC, (the
"Underwriters"). The shares of Common Stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (the "Registration Statement") (Reg. No. 333-79491) that was declared
effective by the SEC on July 29, 1999. The offering commenced on July 30, 1999,
on which date 3,900,000 shares of Common Stock registered under the Registration
Statement were sold at a price of $10.00 per share. The aggregate price of the
offering amount registered and sold was $39,000,000. In connection with the
offering, the Company paid an aggregate of $2,730,000 in underwriting discounts
and commissions to the Underwriters and the aggregate proceeds to the Company
were approximately $35.6 million after deducting estimated offering expenses of
$700,000. The Underwriters also had an overallotment option to purchase 585,000
shares, which closed on August 26, 1999. The aggregate price of the offering was
$44,850,000. The aggregate underwriting discounts and commissions to the
Underwriters was $3,139,500 and the aggregate net proceeds to the Company was
approximately $40.8 million after deducting offering expenses of $856,000.
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The Company currently expects to use the net proceeds primarily for working
capital and general corporate purposes, including funding product development
and expanding the sales and marketing organization. We have not yet determined
the actual expected expenditures and thus cannot estimate the amounts to be used
for each of these purposes. The amounts and timing of these expenditures will
vary depending on a number of factors, including the amount of cash generated by
our operations, competitive and technological developments and the rate of
growth, if any, of our business. In addition, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses. Accordingly, although we have no present
commitments or agreements with respect to such acquisitions, management will
have significant discretion in applying the net proceeds of this offering.
None of the Company's net proceeds of the offering were paid directly or
indirectly to any director, officer, general partner of Accrue or their
associates, persons owning 10% or more of any class of equity securities of
Accrue, or an affiliate of Accrue.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibit is attached hereto:
27.1 Financial Data Schedule
b. Reports on Form 8-K: On October 12, 1999, the Company filed a report on
Form 8-K announcing the September 30, 1999 acquisition of Marketwave
Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCRUE SOFTWARE, INC.
By: /s/ GREGORY C. WALKER
-------------------------------------
GREGORY C. WALKER
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCE OFFICER)
Date: November 11, 1999
22
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EXHIBIT INDEX
Exhibit
No. Document
------ --------
27.1 Financial Data Schedule
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 40,888 4,572
<SECURITIES> 0 0
<RECEIVABLES> 3,999 996
<ALLOWANCES> 214 25
<INVENTORY> 0 0
<CURRENT-ASSETS> 507 5,637
<PP&E> 2,234 911
<DEPRECIATION> 582 275
<TOTAL-ASSETS> 46,856 6,315
<CURRENT-LIABILITIES> 7,809 1,311
<BONDS> 0 237
0 0
0 13,996
<COMMON> 25 36
<OTHER-SE> 39,022 (9,264)
<TOTAL-LIABILITY-AND-EQUITY> 46,856 6,315
<SALES> 5,395 1,060
<TOTAL-REVENUES> 6,736 1,451
<CGS> 200 103
<TOTAL-COSTS> 800 196
<OTHER-EXPENSES> 14,368 4,599
<LOSS-PROVISION> 85 0
<INTEREST-EXPENSE> 42 28
<INCOME-PRETAX> (8,188) (3,341)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,188) (3,341)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,188) (3,341)
<EPS-BASIC> (0.74) (0.73)
<EPS-DILUTED> (0.74) (0.73)
</TABLE>
