UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26008
CLICKACTION INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0195362
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2197 E. BAYSHORE ROAD
PALO ALTO, CA 94303
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(650) 473-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of July 31, 2000, the registrant had 12,387,637 shares of common stock
outstanding.
<PAGE>
CLICKACTION INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2000
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
b) Condensed Consolidated Statements of Operations 4
for the three and six months ended June 30, 2000 and 1999
c) Condensed Consolidated Statements of Cash Flows for the 5
six months ended June 30, 2000 and 1999
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
CLICKACTION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(in thousands except share data)
June 30, December 31,
---------- --------------
2000 1999
---------- --------------
<S> <C> <C>
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,588 $ 3,214
Accounts receivable, net 7,174 6,633
Inventories 1,237 1,538
Other current asset 557 288
Total current assets 19,556 11,673
Property and equipment, net 4,593 780
Other assets 168 197
------------ ----------
Total assets $ 24,317 $ 12,650
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,082 $ 3,309
Accrued compensation 1,163 745
Other accrued liabilities 3,087 3,090
Deferred revenues --- 193
--------- ---------
Total current liabilities 7,332 7,337
Stockholders' equity:
Preferred stock; $0.001 par value;
2,000,000 shares authorized; none
outstanding ---- ----
Common stock; $0.001 par value;
60,000,000 shares authorized
(20,000,000 as of December 31, 1999);
12,299,762 and 10,812,108
shares issued and outstanding 12 11
Additional paid-in capital 26,856 11,364
Accumulated deficit (9,739) (5,891)
Deferred compensation (144) (171)
--------- ---------
Total stockholders' equity 16,985 5,313
--------- ---------
Total liabilities and stockholders'equity $ 24,317 $ 12,650
========== ==========
<FN> See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLICKACTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended
June 30, 2000 and 1999
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net desktop revenues $4,814 $4,854 $9,706 $9,172
Email marketing services 2,031 56 3,145 75
-------- -------- -------- --------
Gross revenues $6,845 $4,910 $12,851 $9,247
Cost of revenues 1,879 $1,342 3,512 2,739
-------- -------- -------- --------
Gross profit 4,966 3,568 9,339 6,508
-------- -------- -------- --------
Operating expenses:
Product development 2,477 714 4,111 1,341
Sales and marketing 3,219 2,295 7,276 3,941
General and administrative 990 710 1,906 1,312
-------- -------- -------- -------
6,686 3,719 13,293 6,594
-------- -------- -------- -------
Operating (loss) (1,720) (151) (3,954) (86)
Interest income, net 64 56 105 122
-------- -------- -------- -------
Income (loss) before taxes (1,656) (95) (3,849) 36
Income taxes expense ---- 10 ---- 19
-------- -------- -------- -------
Net income (loss) ($1,656) ($105) ($3,849) $17
======== ======== ======== =======
Basic net income (loss) per
share ($0.14) ($0.01) ($0.35) $0.00
======== ======== ======== =======
Shares used in computing
net income(loss) per share 11,541 9,663 11,150 9,634
======== ======== ======== =======
Diluted net income (loss) per share ($0.14) ($0.01) ($0.35) $0.00
======== ======== ======== =======
Shares used in computing diluted
net income (loss) per share 11,541 9,663 11,150 11,710
======== ======== ======== =======
<FN> See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLICKACTION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Six Months Ended
June 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (3,849) $ 17
Adjustments to reconcile net (loss) income to net
cash used for operating activities:
Depreciation and amortization 799 389
Amortization of deferred compensation 26 39
Provision for returns and doubtful accounts (1,380) (82)
Changes in operating assets and liabilities:
Accounts receivable 840 (1,337)
Inventories 301 (240)
Other assets (330) (70)
Accounts payable (227) 84
Accrued compensation 418 (26)
Deferred revenues (193) 1,433
Other accrued liabilities (4) (517)
------- -------
Net cash used for operating activities (3,599) (310)
------- -------
Cash flows from investing activities:
Additions to property and equipment (4,469) (280)
Software production costs and other assets (53) (61)
------- -------
Net cash used for investing activities (4,522) (341)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 989 830
Proceeds from sales of common stock 14,506 ----
-------- -------
Net cash provided by financing activities 15,495 830
-------- -------
Net increase in cash and cash equivalents 7,374 179
Cash and cash equivalents at beginning of period 3,214 5,440
-------- -------
Cash and cash equivalents at end of period $ 10,588 $ 5,619
========== =========
<FN> See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
balance sheets, statements of operations, and statements of cash flows of
ClickAction Inc. ("ClickAction" or the "Company") include all material
adjustments necessary for their fair presentation. The interim results presented
are not necessarily indicative of results for a full year. Certain re-
classifications have been made for consistent presentation. For further
information, refer to the financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-KSB, as amended on Form 10-KSBA, for
the year ended December 31, 1999.
The accompanying condensed consolidated financial statements include the
accounts of ClickAction and its wholly owned-subsidiary, MarketHome. All
significant intercompany accounts and transactions have been eliminated in the
condensed consolidated statements.
2. Per Share Computation
All common shares have been adjusted to reflect a two-for-one split effected in
the form of a stock dividend on April 20, 2000 to all holders of the Company's
common stock as of April 5, 2000. Basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during each
period presented. Diluted net income (loss) per share is computed using the
weighted average number of shares of common stock and potential common stock
using the treasury stock method, when dilutive. The difference between shares
used for basic net income (loss) per share and diluted net income per share for
the three-month and six-month period ended June 30, 2000 and the three-month
period (loss) ended June 30, 1999 is comprised of the weighted average number
of common stock options outstanding during these periods using the treasury
stock method. A total of 4,645,094, and 2,061,052 outstanding stock options
with weighted average exercise prices of $5.74 and $2.19 for the three-month
ended June 30, 2000 and 1999, respectively, were not included in the computation
of diluted loss per share because their effect would have been antidilutive. In
addition, 551,834 shares of preferred stock, using the if-converted method, were
not included in the computation of diluted loss per share for the three month
period ended June 30, 1999 because their effect would have been antidilutive.
3. Business Combination
On August 5, 1999, the Company issued 1,453,606 shares of its common stock in
exchange for all outstanding common stock of MarketHome, an email marketing
services company. In addition, options to acquire MarketHome's common stock
were exchanged for options to acquire 317,522 shares of the Company's common
stock. This business combination has been accounted for as a pooling-of-
interests combination and, accordingly, the condensed consolidated financial
statements for periods prior to the combination have been restated to include
the accounts and results of operations of MarketHome. The results of operations
previously reported by the separate companies and the combined amounts presented
in the accompanying condensed consolidated financial statements are summarized
below (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Net revenues
ClickAction $ 4,854 $ 9,172
MarketHome 56 75
-------- ---------
Combined $ 4,910 $ 9,247
======== =========
</TABLE>
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, which establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133, which defers the effective date of SFAS 133 from fiscal years beginning
after June 15, 1999 to fiscal years beginning after June 15, 2000. Earlier
application of SFAS No.133, as amended by SFAS 138, issued in July, 2000 is
encouraged but should not be applied retroactively to financial statements of
prior periods. The Company expects that the adoption of this statement will not
have a material impact on the Company's financial position, results of
operations or cash flows since the Company does not currently hold derivative
instruments or engage in hedging transactions.
In December 1999, the Securities and Exchange Commission, (or "SEC"), released
Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial
Statements, and amended by SAB No. 101A and SAB No. 101B, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. In June 2000, the SEC issued SAB
No. 101B that delayed the implementation of SAB 101. We have not determined the
impact that SAB No. 101 will have on our financial statements and believe that
such determination will not be meaningful until closer to the date of initial
adoption.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of the Accounting
Principals Board, or APB, Opinion No. 25. This Interpretation clarifies the
application of APB Opinion 25 including:
* the definition of employee for purposes of applying APB Opinion 25;
* the criteria for determining whether a plan qualifies as a
* noncompensatory plan;
* the accounting consequence of various modifications to the
* terms of a previously fixed stock option or award; and
* the accounting for an exchange of stock compensation awards
* in a business combination
In general, this Interpretation is effective July 1, 2000. We do not expect the
adoption of Interpretation No. 44 to have a material effect on our financial
position or results of operations.
5. Common Stock Issuance
In June and July 2000, we issued and sold an aggregate of 716,646 shares of our
common stock in private placements to certain strategic and institutional
investors for an average price per share of $14.07. We received proceeds in
the aggregate amount of $10,081,431 from this issuance of common stock. In
connection with these transactions, we also issued warrants entitling the
investors to purchase an aggregate of 71,666 shares of common stock over a three
year period at an average per share price of $14.07. The issuance of the
shares of common stock and the warrants were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Segment and Geographic Information
The Company is principally engaged in providing email relationship management
products and services and developing, marketing and manufacturing a line of
desktop software applications for small businesses and home offices. Commencing
January 1, 2000, the Company combined the reporting of its annuity products and
services with the reporting of its desktop applications. The Company identifies
and evaluates such segments based principally upon the type of products or
services sold. The accounting policies of these reportable segments are the
same as those described for the consolidated entity. The Company evaluates
the performance of its operating segments based on revenues, gross profit and
segment operating income. The Company does not assess the performance of its
segments on other measures of income or expense, such as depreciation and
amortization, interest revenue and expense, income taxes or net income. In
addition, as the Company's assets are primarily located in its corporate office
in Palo Alto, California and not allocated to any specific segment, the Company
does not produce reports for, or measure the performance of, its segments based
on any asset-based metrics. Therefore, segment information is presented only
for net revenues and operating income (loss).
The Company has not separately reported segment information on a geographic
basis, as international sales represent less than 1% of net revenues to date.
The following segment information is provided for the quarters
ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Segment Information
For the quarter ended June 30, 2000
Net Desktop Email
Applications Marketing Total
------------- ---------- ----------
<S> <C> <C> <C>
Net revenues $ 4,814 $ 2,031 $ 6,845
Cost of revenues 1,319 560 1,879
Gross profit 3,495 1,471 4,966
Segment operating expenses 1,654 3,665 5,319
----------- --------- -------
Segment income (loss)$ 1,841 $ (2,194) (353)
=========== =========
General and administrative expenses (990)
Bonus expense not allocated to segments (377)
Interest income, net 64
------------
(Loss) before taxes, as reported $ (1,656)
=============
</TABLE>
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Segment Information
For the quarter ended June 30, 1999
Net Desktop Email
Applications Marketing Total
------------- ------------ --------
<S> <C> <C> <C>
Net revenues $ 4,854 $ 56 $ 4,910
Cost of revenues 1,342 -- 1,342
--------- ----------- ---------
Gross profit 3,512 56 3,568
Segment operating expenses 2,581 428 3,009
--------- ----------- ---------
Segment income (loss) $ 931 $ (372) 559
========= ===========
General and administrative expenses (710)
Interest income, net 56
---------
(Loss) before taxes, as reported $ (95)
=========
</TABLE>
Segment Information
For the six months ended June 30, 2000
<TABLE>
<CAPTION>
Net Desktop Email
Applications Marketing Total
------------- ---------- -------------
<S> <C> <C> <C>
Net revenues $ 9,706 $ 3,145 $ 12,851
Cost of revenues 2,750 762 3,512
------------- ---------- -------------
Gross profit 6,956 2,383 9,339
Segment operating expenses 4,478 6,359 10,837
------------- ---------- -------------
Segment income (loss) $ 2,478 $ (3,976) (1,498)
============= ==========
General and administrative expenses (1,906)
Bonus expense not allocated to segments (550)
Interest income, net 105
Loss before taxes, as reported -------------
$ (3,849)
=============
</TABLE>
<TABLE>
<CAPTION>
Segment Information
For the six months ended June 30, 1999
Net Desktop Email
Applications Marketing Total
------------ --------- -------------
<S> <C> <C> <C>
Net revenues
$ 9,172 $ 75 $ 9,247
Cost of revenues 2,739 -- 2,739
------------ --------- -------------
Gross profit 6,433 75 6,508
Segment operating expenses 4,693 589 5,282
Segment income (loss) $ 1,740 $ (514) 1,226
General and administrative expenses (1,312)
Interest income, net 122
-------------
Income before taxes, as reported $ 36
=============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion of our financial condition and results
of operations along with our condensed consolidated financial statements and the
related notes. In addition to historical information contained herein, the
following discussion contains words such as "intends," "believes,"
"anticipates," "plans," "expects" and similar expressions which are intended
to identify forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include the factors discussed below under "Factors Which May
Impact Future Operating Results." You should not place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Except as
otherwise required by federal securities laws, we do not intend to update any of
the forward-looking statements after the date of this Form 10-Q to conform them
to actual results or to reflect new information or changed circumstances.
Overview
We incorporated in 1986 and commenced sales of our desktop application software
products in 1987. Following the acquisition of MarketHome in August 1999, we
shifted our strategic focus to Web-based email relationship management, or ERM,
products and services, although we continued to develop, market and manufacture
our line of desktop software application programs for small businesses and home
offices. During the three months ended June 30, 2000, we generated 70.3% of
our total revenues from the sale of our desktop applications and 29.7% of our
total revenues from the sale of our ERM products and services.
Revenues from our ERM products and services consist of setup revenue for
installing our ERM system for our clients, email usage revenues based on the
number of emails sent by our clients, email list management fees, professional
services performed in connection with our clients' email marketing campaigns,
and licensing fees from the license of our ERM system. We account for revenues
related to our ERM products and service as two separate components: set-up
fees and email usage services. We recognize revenue on set-up fees in an amount
equal to incremental direct costs incurred related to the set-up activities.
The remaining set-up fees are then recognized on a straight-line basis over
the term of the service contract. We recognize email usage revenue based on
the number of emails delivered and the related per email delivery charge. We
recognize email list management fees based on the number of email lists
downloaded and delivered, and we recognize professional services fees ratably
over the period the services are rendered.
Distributors and retailers may return our desktop software products
according to negotiated terms or pursuant to any promotional terms that may be
in effect. We also provide end-users with a 30-day money-back guarantee.
Accordingly, we are exposed to the risk of product returns from retailers,
distributors and end-users, particularly during times of product transition.
In addition, promotional or other activities of competitors could cause returns
to increase sharply at any time. We establish reserves based on estimated
future returns of products, taking into account promotional activities, the
timing of new product introductions, distributor and retailer inventories of
our products and other factors. Product returns that exceed our reserves
could materially adversely affect our business.
Effective January 1, 1998, we adopted Statement of Position (SOP) 97-2, Software
Revenue Recognition, which superseded SOP 91-1 and provides guidance on
generally accepted accounting principles for recognizing revenue on software
transactions. Prior to 1998, we recognized revenue in accordance with
SOP 91-1.Under SOP 91-1, revenue was recognized upon shipment of products
provided there were no remaining significant obligations and collection was
probable. We established reserves for estimated returns of product sales to
distributors and retail dealers and accrued for estimated costs of providing
customer support.
<PAGE>
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation and training. Under SOP 97-2, the
determination of fair value is based on objective evidence which is specific to
the vendor. If such evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until such time
that evidence of fair value does exist or until all elements of the arrangement
are delivered. SOP 97-2 was amended in February 1998 by Statement of Position
98-4 (SOP 98-4) "Deferral of the Effective Date of a Provision of SOP 97-2" and
was amended again in December 1998 by Statement of Position 98-9 (SOP 98-9)
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." Those amendments deferred and then clarified, respectively, the
specification of what was considered vendor specific objective evidence of fair
value for the various elements in a multiple element arrangement. We adopted
the provisions of SOP 97-2 and SOP 98-4 as of January 1, 1998 and, as a result,
changed certain business practices. We adopted the provisions of SOP 98-9 for
fiscal year 1999. The adoption of this statement did not have a material impact
on our operating results, financial position or cash flows.
Results of Operations
Three Months Ended June 30, 2000 and 1999
-----------------------------------------
Total revenues for the three months ended June 30, 2000 increased $1.9 million,
or 39%, to $6.8 million, compared with total revenues of $4.9 million for the
corresponding period in 1999. The increase was due to increased sales of our
Web-based ERM products and services. ERM revenues for the three months ended
June 30, 2000 were $2.0 million, or 29.7% of total revenues, compared with ERM
revenues of $56,000, or 1.1% of total revenues, for the corresponding period in
1999. Net desktop revenues for the three months ended June 30, 2000 were $4.8
million, or 70.3% of total revenues, compared with net desktop revenues of $4.9
million, or 98.8% of total revenues, for the corresponding period in 1999. Due
to our shift in strategic focus, we expect revenues from our ERM products and
services to increase as a percentage of total revenues in future periods.
Gross profit for the three months ended June 30, 2000 increased 39% to $5.0
million from $3.6 million in the corresponding period in 1999. Gross margin for
the three months ended June 30, 2000 remained relatively flat at 72.6%, compared
to 72.7% for the corresponding period in 1999. Our gross margins vary from
period to period due primarily to changes in product mix, the direct cost
associated with our ERM set-up activities and professional services, the timing
and nature of promotional activities, changes in product return levels, and the
amortization of capitalized software production costs.
Total operating expenses for the three months ended June 30, 2000 increased 80%
to $6.7 million from $3.7 million for the corresponding period in 1999. The
increase in operating expenses resulted primarily from the investment in product
development and increased marketing and selling expenses related to our ERM
products and services.
Product development expenses increased 247% to $2.5 million in the three months
ended June 30, 2000 from $714,000 in the corresponding period in 1999. As a
percentage of total revenues, product development expenses were 36.2% for the
three months ended June 30, 2000 compared to 14.5% for the corresponding period
in 1999. The increase in product development expenses was primarily due to the
development of our email relationship management product. We expect our product
development expenses to increase as a percentage of total revenues during the
remainder of 2000 due to the continued development of our next generation of ERM
products and services.
Sales and marketing expenses increased 40% to $3.2 million in the three months
ended June 30, 2000 from $2.3 million for the corresponding period in 1999. As
<PAGE>
a percentage of total revenues, sales and marketing expenses were 47.0% for the
three months ended June 30, 2000 compared to 46.7% for the corresponding period
in 1999. Sales and marketing expenses increased principally as a result of
higher marketing, client services and selling expenses associated with our ERM
products and services. We expect our sales and marketing expenses to increase
as a percentage of total revenues during the remainder of 2000 as we continue to
expand and enhance our ERM products and services by building brand awareness and
improving our client services and professional services infrastructure, as well
as providing retail promotional activities for our desktop products.
General and administrative expenses increased 39% to $990,000 in the three
months ended June 30, 2000 from $710,000 in the corresponding period in 1999.
This increase was primarily a result of an increase in the headcount and
infrastructure expenses to support our growth. As a percentage of total
revenues, general and administrative expenses remained unchanged at 14.5% for
the three months ended June 30, 2000 and 1999. We expect our general and
administrative expenses to increase slightly as a percentage of total revenues
for the remainder of 2000 to support our anticipated growth in ERM products and
services.
Net interest income was $64,000 for the three months ended June 30, 2000
compared to $56,000 for the corresponding period in 1999. The increase was due
primarily to higher average cash balances in the three months ended June 30,
2000 compared to the corresponding period in 1999.
We did not record any income tax expense for the three months ended June 30,
2000 since we had an operating loss for this period, compared to an income tax
expense of $10,000 for the corresponding period in 1999.
As a result of the foregoing factors, we incurred a net loss for the three
months ended June 30, 2000 of $1.7 million, compared to net loss of $105,000 in
the corresponding period in 1999.
Six Months Ended June 30, 2000 and 1999
---------------------------------------
Total revenues for the six months ended June 30, 2000 increased $3.6 million, or
39%, to $12.9 million, compared with total revenues of $9.2 million for the
corresponding period in 1999. The increase was due primarily to increased sales
of our Web-based ERM products and services and, to a lesser extent, increased
net desktop revenues. ERM revenues for the six months ended June 30, 2000 were
$3.1 million, or 24.5% of total revenues, compared with ERM revenues of $75,000,
or 0.8% of total revenues, for the corresponding period in 1999. Net desktop
revenues for the six months ended June 30, 2000 were $9.7 million, or 75.5% of
total revenues, compared with net desktop revenues of $9.2 million, or 99.2% of
total revenues, for the corresponding period in 1999.
Gross profit for the six months ended June 30, 2000 increased 44% to $9.3
million from $6.5 million in the corresponding period in 1999. Gross margin for
the six months ended June 30, 2000 was 72.7%, compared to 70.4% for the
corresponding period in 1999. The increase was primarily due to the lower cost
of goods associated with our ERM products and services.
Total operating expenses for the six months ended June 30, 2000 increased 102%
to $13.3 million from $6.6 million for the corresponding period in 1999. The
increase in operating expenses resulted primarily from the investment in product
development and increased marketing and selling expenses related to our ERM
products and services.
Product development expenses increased 207% to $4.1 million in the six months
ended June 30, 2000 from $1.3 million in the corresponding period in 1999. As a
percentage of total revenues, product development expenses were 32.0% for the
six months ended June 30, 2000 compared to 14.5% for the corresponding period in
1999. The increase in product development expenses was primarily due to the
development of our email relationship management product.
<PAGE>
Sales and marketing expenses increased 85% to $7.3 million in the six months
ended June 30, 2000 from $1.3 million for the corresponding period in 1999. As a
percentage of total revenues, sales and marketing expenses were 56.6% for the
six months ended June 30, 2000 compared to 42.6% for the corresponding period in
1999. Sales and marketing expenses increased principally as a result of higher
marketing, client services and selling expenses associated with our ERM products
and services.
General and administrative expenses increased 45% to $1.9 million in the six
months ended June 30, 2000 from $3.9 million in the corresponding period in
1999. This increase was primarily a result of an increase in the headcount and
infrastructure expenses to support our growth. As a percentage of total
revenues, general and administrative expenses were 14.8% for the six months
ended June 30, 2000 compared to 14.2% for the corresponding period in 1999.
Net interest income was $105,000 for the six months ended June 30, 2000 compared
to $122,000 for the corresponding period in 1999. The decrease was due primarily
to lower average cash balances in the six months ended June 30, 2000 compared to
the corresponding period in 1999.
We did not record any income tax expense for the six months ended June 30, 2000
since we had an operating loss for this period, compared to an income tax
expense of $19,000 for the corresponding period in 1999.
As a result of the foregoing factors, we incurred a net loss for the six months
ended June 30, 2000 of $3.8 million, compared to net income of $17,000 in the
corresponding period in 1999.
Liquidity and Capital Resources
Since inception, we have financed our activities almost exclusively from cash
generated by operations and equity financings. Operating activities used cash of
$3.6 million for the six months ended June 30, 2000 compared to a use of
$310,000 for the corresponding period in 1999. Our cash and cash equivalents
balance was $10.6 million on June 30, 2000. We have no interest bearing debt. We
believe that our existing cash and cash that may be generated by our operations,
together with our ability to obtain additional credit or equity financing, will
be sufficient to meet our capital needs through 2001. However, any projections
of future cash needs and cash flows are subject to substantial uncertainty. If
current cash, cash equivalents and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we will likely seek to
sell additional equity or debt instruments. The sale of additional equity or
equity-related securities could result in additional dilution to our
stockholders. In addition, we will from time to time consider the acquisition
of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to
issue additional equity or debt securities. Financing may not be available
in amounts or on terms acceptable to us, or at all.
In June and July 2000, we issued and sold an aggregate of 716,646 shares of our
common stock in private placements to certain strategic and institutional
investors. We received net proceeds in the amount of $10,081,431 from the
issuance of these shares. In connection with these transactions, we also issued
warrants for the purchase of 71,666 shares of our common stock with exercise
prices equal to the fair market value of our common stock on the warrant
issuance dates.
Stock Spilt
On March 22, 2000, our Board of Directors approved a two-for-one stock split in
the form of a stock dividend, effected on April 20, 2000 to all holders of our
common stock as of April 5, 2000 (the "Stock Split"). The accompanying condensed
consolidated financial statements have been adjusted to reflect the Stock
Split.
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, which establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133, which defers the effective date of SFAS 133 from fiscal years beginning
after June 15, 1999 to fiscal years beginning after June 15, 2000. Earlier
application of SFAS No.133, as amended, is encouraged but should not be applied
retroactively to financial statements of prior periods. We do not expect that
the adoption of this statement to have a material impact on our financial
position, results of operations or cash flows since we do not currently hold
derivative instruments or engage in hedging transactions.
In December 1999, the Securities and Exchange Commission, (or "SEC"), released
Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial
Statements, and amended by SAB No. 101A and SAB No. 101B, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. In June 2000, the SEC issued SAB No.
101B that delayed the implementation of SAB 101. We have not determined the
impact that SAB No. 101 will have on our financial statements and believe that
such determination will not be meaningful until closer to the date of initial
adoption.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of the Accounting
Principals Board, or APB, Opinion No. 25. This Interpretation clarifies the
application of APB Opinion 25 including:
* the definition of employee for purposes of applying APB Opinion 25;
* the criteria for determining whether a plan qualifies as a noncompensatory
plan;
* the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
* the accounting for an exchange of stock compensation awards in a business
combination
In general, this Interpretation is effective July 1, 2000. We do not expect the
adoption of Interpretation No. 44 to have a material effect on our financial
position or results of operations.
Year 2000 Disclosure
Since entering the year 2000, we have not experienced any significant year 2000-
related disruption in the operation of our systems. Although most year 2000
problems should have become evident on January 1, 2000, additional year 2000-
related problems may become evident only after that day. We will continue to
monitor our operations and systems, but we do not expect to experience any
significant issues related to year 2000.
Factors Which May Impact Future Operating Results
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the following risk factors may
affect our business, financial condition and results of operations.
<PAGE>
Risks Related to Our Email Relationship Management Business
Our business and future prospects are difficult to evaluate because we have a
limited operating history in email marketing.
Following our acquisition of MarketHome in August 1999, we shifted our strategic
focus to Web-based email marketing products and services. During the six months
ended June 30, 2000, we derived only 24.5% of our total revenues from sales of
our email relationship management products and services. Therefore, we have a
limited operating history in email marketing upon which you can evaluate our
business and future prospects. In addition, our management does not have past
experience in email marketing. These factors make predicting our future
operating results difficult.
If email marketing is not widely accepted or if use of the Internet by consumers
does not continue to grow, there will be a decreased demand for our email
marketing products and services.
The market for email marketing products and services is new and rapidly
evolving. If email marketing does not gain widespread acceptance as a means of
marketing to consumers, our business will suffer. Businesses that have relied
upon traditional means of attracting new customers and maintaining customer
relationships may not accept, or may be slow in accepting, our email marketing
products and services because:
* they have already invested substantial resources in other more traditional
marketing methods;
* they have allocated a limited portion of their marketing budgets to email
marketing;
* they may find email marketing to be less effective for promoting their
products and services;
* their customers may have concerns about security and privacy on the Internet
or confuse our permission-based emails with unsolicited emails; or
* the effectiveness of email marketing may diminish significantly if the volume
of direct marketing email results in a negative reaction from consumers.
Our success also depends on the growth and acceptance of the Internet as a
medium for executing transactions. If consumers do not continue to purchase
products online, then the market for our email marketing solution may disappear.
If that happens, or if the number of business-to-consumer electronic commerce
transactions grows more slowly than we anticipate, our business would suffer.
Many of our agreements with our customers do not contain a minimum payment
obligation, but rather only require the customer to pay us based on the number
of emails actually sent. Our business would be harmed if these customers were
to cease using us for their email marketing campaigns.
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Our business will be harmed if we fail to meet the demands of our email
marketing clients.
The success of our email marketing business depends to a significant extent on
our ability to provide satisfactory services to our clients and meet their
demands. The success of our email marketing business also depends on our
ability to successfully deliver emails over the Internet. Software programs
exist that limit or prevent advertising from being delivered to a user's
computer. Widespread adoption of this software by Web users would significantly
undermine the commercial viability of Internet advertising and marketing. Our
business could also be harmed if we fail to prevent the distribution of
unsolicited bulk email, or spam. Spam-blocking efforts by others may also
result in the blocking of our clients' legitimate messages. In addition, our
ability to perform our email marketing services may be adversely impacted by
computer viruses initiated by third parties. Any of these events may cause
clients to become dissatisfied with our email marketing services and terminate
their use of our email marketing services. In addition, because we provide our
clients with a 100% service guarantee, if our clients are not completely
satisfied with our service, they may require us to refund the delivery fees or
resend an email marketing campaign at our own expense. If these refunds are
large in aggregate amount, or we are required to resend many email marketing
campaigns, our business and financial results could be adversely affected.
Unplanned system interruptions and capacity constraints could disrupt our
business and damage our reputation.
We must offer clients reliable, secure and continuous service to attract and
retain clients and persuade them to increase their reliance on our email
marketing solution. As the volume of emails generated by our clients increases,
we must continuously upgrade and enhance our technical infrastructure to
accommodate the increased demands placed on our systems. Our operations also
depend in part on our ability to protect our systems, currently located in one
facility, against physical damage from fire, earthquakes, power loss,
telecommunications failures, computer viruses, unauthorized user access or
hacker attacks, physical break-ins and similar events. Any interruption or
decrease in response time of our email marketing services could damage our
reputation, reduce customer satisfaction and decrease usage of our services.
If our system security is breached, our business and reputation could suffer.
A fundamental requirement for online communications and transactions is the
secure transmission of confidential information over public networks. Third
parties may attempt to breach our security or that of our clients or their
customers. Any breach in our online security could result in liability to our
clients or their customers, damage to our reputation and harm to our business.
Our servers are vulnerable to computer viruses or software programs that disable
or impair computers, physical or electronic break-ins and similar disruptions,
which could lead to loss of data. We may need to spend significant resources to
license technologies to protect against security breaches or to address problems
caused by a security breach.
If we are unable to license third-party technologies that we need to produce our
ERM products and services, our business will be harmed.
We are highly dependent on technologies we license from third parties to enable
us to send email through the Internet and to offer a variety of database
management and targeted marketing capabilities. The email marketing industry is
rapidly evolving, and we may need to license additional technologies to remain
competitive. We may not be able to license these technologies on commercially
<PAGE>
reasonable terms, or at all. The failure to license these technologies could
adversely affect our ability to offer competitive email marketing products and
services.
Increasing governmental regulation of electronic commerce and legal
uncertainties could decrease demand for our email marketing service or increase
our cost of doing business.
We are subject not only to regulations applicable to businesses generally, but
also to laws and regulations directly applicable to privacy and electronic
commerce, including, without limitation, the Federal Childrens' Online Privacy
Protection Act and the rules and regulations of the Federal Trade Commission
related to this act. Although there are currently few of these laws and
regulations, state, federal and foreign governments may adopt more of these laws
and regulations. The adoption of new laws or the adaptation of existing laws to
the Internet may decrease the growth in the use of the Internet, which could in
turn decrease the demand for our email marketing services, increase our cost of
doing business or otherwise harm our business. Federal, state, local and
foreign governments are considering a number of legislative and regulatory
proposals relating to Internet commerce. As a result, a number of laws or
regulations may be adopted regarding:
* user privacy;
* the pricing and taxation of goods and services offered over the Internet;
* intellectual property ownership; and
* the characteristics and quality of products and services offered over the
Internet.
In particular, a number of states have already passed statutes prohibiting
unsolicited commercial email. A number of statutes have also been introduced in
Congress and state legislatures to impose penalties for sending unsolicited
emails which, if passed, could impose additional restrictions on our business.
In addition, courts are increasing recognizing that unsolicited email
distribution may be actionable as an illegal trespass for which the sender could
be subject to monetary damages or injunctive relief.
The application of existing laws to the Internet in areas such as property
ownership, copyright, trademark and trade secrets is also uncertain. The recent
growth of Internet commerce has been attributed by some to the lack of sales and
value-added taxes on interstate sales of goods and services over the Internet.
Numerous state and local authorities have expressed a desire to impose these
taxes on sales to consumers and businesses in their jurisdictions. The Internet
Tax Freedom Act of 1998 prevents imposition of these taxes through October 2001.
If the federal moratorium on state and local taxes on Internet sales is not
renewed, or if it is terminated before its expiration, sales of goods and
services over the Internet could be subject to multiple overlapping tax schemes,
which could substantially hinder the growth of Internet commerce, including the
use of our email marketing products and services.
<PAGE>
The Internet generates privacy concerns which could result in market perceptions
or legislation which could result in reduced sales of our email marketing
products and services.
We gather and maintain data related to consumers' buying behavior. Recently,
lawsuits have been brought alleging, among other things, that at least one
company, which combines information from online and other sources regarding
users, has improperly collected and used information concerning Internet users
in violation of federal electronics privacy statutes and other privacy laws.
The United States Federal Trade Commission has launched an informal inquiry to
determine whether that company has engaged in unfair or deceptive practices in
collecting and using information concerning Internet users. We may be sued or
investigated regarding our practices. Any similar legal actions, whether
against us or others, could limit our ability to sell our email marketing
products and services or otherwise seriously harm our business.
The perception of security and privacy concerns, whether or not valid, may
inhibit market acceptance of our email marketing services. Privacy concerns may
also cause consumers who use the Internet to decide not to opt in to receive
email marketing. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify users that the data captured
after visiting Web sites may be used to direct product promotions and
advertising to that user. For example, the European Union recently enacted its
own privacy regulations that may result in limits on the collection and use of
some user information. The United States and other countries may adopt similar
legislation or regulatory requirements. If privacy legislation is enacted or
consumer privacy concerns are not adequately addressed, our business could be
harmed.
We may be exposed to liability for information displayed on our Web sites or
within our marketing partners' Web sites or their email messages.
Because our email marketing services often require us to provide a connection to
the Web sites of our clients and partners, we may be perceived as being
associated with the content of these Web sites. We do not and cannot screen all
of the content generated by our clients and partners. As a result, we may face
claims for defamation, negligence, copyright, patent or trademark infringement
and other proceedings based on the materials displayed on our clients' and
partners' sites and their email messages. We may also suffer a loss of clients
or damage to our reputation based on these legal proceedings. Furthermore, some
foreign governments have enforced laws and regulations related to content
distributed over the Internet that are more strict than those currently in place
in the United States.
Risks Related to Our Desktop Software Business
Because we rely on sales of our desktop software to a limited number of
retailers and distributors, our business could be harmed if these retailers and
distributors cease doing business with us or significantly reduce the level of
their purchases.
We sell our desktop products principally to a limited number of major retailers
and to distributors for resale to retailers. These sales have historically
constituted, and may continue to constitute, a majority of our total revenues.
One distributor accounted for 34% and 27% of our total revenues and another
retailer accounted for 31% and 22% of our total revenues for the twelve months
ended December 31, 1999 and six months ended June 30, 2000, respectively. None
of our distributors or retailers has a minimum purchase obligation. The loss
of, or significant reduction in, sales volume attributable to any of our
principal distributors or retail accounts could materially and adversely affect
<PAGE>
our business. We could also be adversely affected if a channel for distribution
of software other than the retail channel were to become a major vehicle for
distributing software.
Our financial results could be harmed if we are unable to collect outstanding
receivables.
Our sales of desktop software products are made on unsecured credit terms, which
means we do not hold collateral to secure payment. We maintain accounts
receivable insurance that covers only a portion of our accounts and we may not
be able to maintain or increase this insurance on acceptable terms or at all.
The inability to collect any significant receivable in a timely manner could
adversely affect our financial results.
Significant returns of our desktop software products could adversely affect our
operating results and financial condition.
Distributors and retailers may return our desktop software products according to
negotiated terms or pursuant to any promotional terms that may be in effect. We
also provide end-users with a 30-day money-back guarantee. Accordingly, we are
exposed to the risk of product returns from retailers, distributors and end-
users, particularly during times of product transition. In addition,
promotional or other activities of competitors could cause returns to increase
sharply at any time. We establish reserves based on estimated future returns of
products, taking into account promotional activities, the timing of new product
introductions, distributor and retailer inventories of our products and other
factors. Product returns that exceed our reserves could materially adversely
affect our business.
If we fail to maintain relationships with our third-party service providers,
suppliers and facilities, our desktop software business will be harmed.
We rely on third-party service providers to perform most of our customer
technical support and product assembly functions for our desktop software
products. One independent firm provides substantially all customer technical
support for our desktop software products. Our agreement with this firm may be
terminated with or without cause on 60 days notice by either party. This firm
also provides services to several larger companies, and demands from these
companies or other factors could cause this firm to terminate its agreement with
us. The unavailability of this firm to perform customer technical support for
us would result in significant disruption to our operations, could lead to
customer dissatisfaction and could have a material adverse effect on our
business and operations. In addition, we rely on two printers for packaging and
two assembly houses to assemble and package our desktop software products and
have only limited sources for some of our supplies. We do not have contracts
with these assembly houses or suppliers. All of our inventory of packaging
components is maintained at third-party facilities. Our ability to assemble and
package our products depends on continued relationships with these third
parties. The failure of these third-party vendors to continue to provide
supplies and services to us on a timely basis, or at all, could adversely affect
our business.
Our success depends on postal regulations and availability of postal
information.
We have developed a line of mailing software products, which in the aggregate
accounted for 16.4% of our total revenues in the year ended December 31, 1999
and 4.2% of our total revenues in the six months ended June 30, 2000, based on
current United States Postal Service regulations. Changes in these regulations,
which historically have occurred frequently, could necessitate updating these
<PAGE>
products or could eliminate or reduce the usefulness of these products. We
license, from an independent third-party, address information software used in
some of our desktop software products. We may not be able to maintain or renew
our relationship with this third party and the software we license may not be
error free or perform to our specifications or in accordance with Postal Service
regulations. Significant changes in Postal Service regulations or the inability
to maintain or renew our license agreement with the independent party on
acceptable terms, or at all, could damage our business. We must also obtain
Postal Service certification on a bi-monthly basis in order to supply updates to
our end-users in a timely manner. We may not be able to continue to secure this
certification on a timely basis, if at all, and the failure to do so could
damage our business.
Risks Related to Our Overall Business
We expect to incur significant future operating losses.
We incurred a net loss of $2.2 million for the year ended December 31, 1999 and
a net loss of $3.8 million for the six months ended June 30, 2000. As of June
30, 2000, we had an accumulated deficit of $9.7 million. We expect to incur
significant operating losses for the foreseeable future because we anticipate
that our operating expenses relating to our email marketing business will
increase more quickly than our total revenues. We rely to a significant extent
on the revenues and cash flow generated from the sale of our desktop software
products to fund the development and expansion of our email marketing strategy.
Our ability to continue to do so would be harmed if we were to experience a
decline in sales of our desktop software products. Our ability to achieve
profitability in the future will depend upon our ability to continue development
of new email marketing products and services, enhance our infrastructure and
expand our customer base and brand awareness. To achieve these goals, we need
to increase spending on product development, sales and marketing and technology.
To the extent that our email marketing revenues do not significantly increase as
a result of this increased spending, we may not achieve profitability. Even if
we do achieve profitability, we may not be able to sustain or increase our
profitability on a quarterly or annual basis in the future.
Our quarterly operating results are subject to significant fluctuations due to
many factors, any of which could adversely affect our stock price.
We have experienced, and may continue to experience, significant fluctuations
inour quarterly operating results due to a variety of factors, many of which are
outside our control. These factors include:
* the rate of growth of the use of the Internet as a medium for consumer and
business communications and transactions, and the size and rate of growth of
the market for email marketing products and services;
* the rate of growth of sales of our ERM products and services;
* the timing and number of product enhancements and new product and services
introductions by us and our competitors;
* the timing and number of email marketing campaigns conducted by our customers;
<PAGE>
* the timing and delivery of strategic alliance arrangements;
* changes in pricing policies by us and our competitors;
* our ability to upgrade and expand our infrastructure;
* technical difficulties or system downtime affecting use of our email marketing
products or services;
* the seasonal nature of our desktop software business and our email
relationship management business;
* changes in the level of our operating expenses to support our growth;
* domestic and international regulation of email marketing, including privacy
legislation;
* timing of the receipt of orders for our desktop software products from major
retailer and distributor customers;
* the amount of desktop software product returns;
* cancellations or terminations by retail or distributor accounts;
* reductions in shelf space for our desktop software products; and
* delays in shipment of our desktop software products.
Due to these factors, we believe that quarter-to-quarter comparisons of our
operating results may not be meaningful and should not be relied upon as an
indication of our future performance. In addition, a significant portion of our
operating expenses, particularly labor costs and rent, are relatively fixed, and
planned expenditures are based, in part, on expectations with regard to future
sales. As a result, we will likely be unable, or may elect not to, reduce
spending quickly enough to offset any unexpected revenue shortfall. In the
event of a revenue shortfall or unanticipated expenses in any given quarter, our
operating results may be below the expectations of securities analysts or
investors. If this occurs, the market price of our common stock may decline
significantly.
Intense competition could impair our ability to grow and achieve profitability.
The market for email marketing products and services is intensely competitive
and rapidly evolving. We expect competition to increase significantly in the
future because of the attention the Internet has received as a means of
advertising and direct marketing and because there are relatively low barriers
to entry in our market. We also compete directly with publicly traded email
service providers such as Digital Impact, MessageMedia and Exactis.com, as well
as numerous private companies. We compete with the information technology
departments of current and prospective clients who use in-house email systems to
manage and deliver email marketing campaigns. We also compete with companies
providing software and services for outsourced solutions such as email
<PAGE>
distribution, list management, reporting and bounce processing, email consulting
and campaign analysis.
The market for our desktop software products is also intensely competitive, and
is characterized by pressure to reduce prices, capture limited retail shelf
space, increase marketing and promotional activity, incorporate new features and
release new product versions. The competition for retail shelf space is likely
to increase. Failure to achieve and maintain unit sales volumes may result in
loss of shelf space, which may, in turn, lead to further reductions in sales
volumes. Existing software companies may broaden or enhance their product lines
to compete with our desktop software products, and other potential new
competitors, including computer hardware manufacturers, diversified media
companies, and small business service companies, may enter or increase their
focus on the small business software market, resulting in even greater
competition.
Many of our current and potential competitors in both the market for email
marketing products and services and the desktop software market have longer
operating histories, greater name recognition, larger customer bases, more
diversified lines of products and services and significantly greater resources
than we have. These competitors may be able to devote significant resources to
sales and marketing, adopt more aggressive pricing policies and deliver superior
solutions. If we are not able to compete effectively with our current or future
competitors, our business would be harmed.
Our current products and services may become obsolete and unmarketable if we are
not able to adequately respond to rapidly changing technology and customer
demands.
Our industry is characterized by rapid changes in technology and customer
demands. As a result, our current products and services may quickly become
obsolete and unmarketable. We believe that our future success depends in large
part upon our ability to keep pace with competitive offerings and customer
requirements, to adapt to new operating systems, hardware platforms, media and
industry standards, and to provide additional functionality by enhancing our
existing products and services and introducing new products and services on a
timely and cost-effective basis. We may be unable to do this due to resource
constraints or technological or other reasons. Any failure or delay in adapting
to technological advances or emerging industry standards or developing,
introducing or marketing new products and services could cause us to lose
clients or fail to gain new clients. If this happens, our business could suffer
and our stock price could decline.
Our business could be harmed if external coding contractors on which we depend
compete with us or are not available to provide us with their coding services.
We generally develop internally the specifications for both new products and
updates of our existing products. From time to time, we also license third-
party products that are complementary to our core product line. In addition to
our own development team, we have relied on two independent firms to assist us
with the coding of our desktop product software products. While we generally
own the code that is developed by these firms, the base code used in developing
our brochures and business cards products is owned by the third-party coder.
With respect to these products, we hold an irrevocable, non-exclusive license to
copy and distribute the executable code compiled from the base code and to make
limited modifications. Although the agreements with these firms contain various
protective terms, these provisions may not effectively protect our interests and
third-party coders may develop or market products that compete with our products
<PAGE>
or services. Independent coders are in high demand, and independent coders,
including those who have developed products for us in the past, may not be
available to provide coding services to us in the future. In addition, we may
not be able to obtain or renew coding or licensing agreements on favorable
terms, or at all.
We may not be able to hire and retain the qualified personnel necessary to
support our growth.
The success of our business depends on the continued services of our key
technical, sales and senior management personnel, particularly our president and
chief executive officer Gregory W. Slayton, and our chief technical officer,
Kentyn Reynolds. Any officer or employee can terminate his or her relationship
with us at any time, and we do not maintain key man insurance policies for
either Mr. Slayton or Mr. Reynolds. In addition, the future growth of our
business will depend to a significant extent on our ability to attract and
retain qualified, highly-skilled employees, particularly persons with marketing,
Internet and information technology experience. Because of the recent
substantial growth in email marketing and Internet related industries,
competition for these employees with technical, management, marketing, sales,
product development and other specialized skills is intense. We may not be
successful in attracting and retaining these personnel.
Our business would suffer if we are not able to manage our growth and implement
our email marketing strategy.
We have experienced periods of growth that have placed, and are expected to
continue to place, a significant strain on our financial, management,
operational and other resources. Our ability to manage growth and execute our
email marketing strategy effectively will require us to continue to improve our
operational, financial and information management systems and controls on a
timely basis. If our management is unable to manage growth, and expand our
ability to offer email marketing products and services, our business could be
harmed.
Our limited protection of intellectual property and proprietary rights may
adversely affect our business.
We rely primarily on a combination of trademarks, copyright and trade secret
laws, employee and third-party nondisclosure agreements and other methods to
protect our proprietary rights. These measures may not be adequate to prevent
unauthorized use of our proprietary technology and other intellectual property
rights. We have no patents. We do not include in our desktop software products
any mechanism to prevent or inhibit unauthorized copying. Unauthorized copying
occurs frequently within the software industry, and if a significant amount of
unauthorized copying of our products were to occur, our business could be
adversely affected. In addition, as the number of software products in the
industry increases and the functionality of these products further overlaps,
software developers and publishers may increasingly become subject to
infringement claims. Third parties may assert infringement claims against us in
the future with respect to current or future products. Use of third-party
coders or publishing of licensed products may increase the risk of infringement.
In the event that our third-party coders or licensors were to use infringing
code in our products, we could be required to pay damages or be subject to an
injunction to prevent us from shipping our products. The third-party coders'
liability to us for any infringement of copyrights, trade secrets, or patents is
contractually limited to amounts received from us. There has been substantial
litigation regarding copyright, trademark and other intellectual property rights
in our industry. Any claims or litigation, with or without merit, could be
<PAGE>
costly to defend or litigate and divert resources and our management's
attention. Adverse determinations in any claim or litigation could also require
us to pay damages or change our technologies.
Our growth may be impaired and our business may suffer if we do not successfully
address risks associated with acquisitions.
As part of our growth strategy, we may pursue the acquisition of businesses,
technologies or products that are complementary to our business. We may
encounter a number of risks associated with acquisitions that could harm our
business, including the diversion of management's attention, the assimilation of
the operations, technologies, products and personnel of the acquired companies,
the amortization or write-off of acquired intangible assets and the potential
loss of key employees or clients of acquired companies. Our failure to address
these risks or unexpected difficulties encountered during expansion could harm
our business.
We have implemented anti-takeover provisions that could delay or prevent a
change in control that may offer you a premium.
Various provisions of our certificate of incorporation and bylaws, our
stockholder rights plan and Delaware law may have the effect of delaying or
preventing changes in control or management, even if the change in control would
be beneficial to you. These provisions may deprive you of an opportunity to
sell your shares at a premium over prevailing prices. The potential inability
of our stockholders to obtain a control premium could adversely affect the
market price of our common stock.
Risks Related to Securities Markets
Our stock price has been volatile, and this volatility could result in
substantial losses for individual stockholders.
The market price of our common stock has been, and is likely to continue to be,
volatile. Fluctuations in market price and volume are particularly common among
securities of Internet and other technology companies. As a result, you may not
be able to resell your shares at or above your purchase price. The market price
of our common stock may fluctuate significantly in response to the following
factors, many of which are beyond our control:
* quarterly fluctuations in our revenues or results of operations;
* general conditions in the computer software and Internet industries;
* announcements of new products and services by us or by our competitors;
* new regulations or interpretations of existing regulations applicable to our
email marketing activities;
* announcements of alliances by us or by our competitors;
* system slowdowns or failure by us or by our competitors;
* changes in earnings estimates by securities analysts and in analyst
recommendations; and
* changes in market valuations of other Internet companies.
<PAGE>
Substantial sales of our common stock could cause our stock price to fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock could fall. These sales might also make it more difficult for us
to sell equity or equity-related securities in the future at a time and price
that we deem appropriate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We currently provide our services to clients primarily in the United States.
As a result, it is unlikely that our financial results would be directly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. All of our sales are currently
denominated in United States dollars.
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio. Given the short-term nature of these investments, we
believe we are not subject to significant interest rate risk with respect to
these investments. We currently have no interest bearing debt outstanding and
we do not plan to use derivative financial instruments in our investment
portfolio.
<PAGE>
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
In June and July 2000, we issued and sold an aggregate of 716,646 shares of our
common stock in private placements to certain strategic and institutional
investors for an average price per share of $14.07. We received proceeds in the
aggregate amount of $10,081,431 from this issuance of common stock. In
connection with these transactions, we also issued warrants entitling the
investors to purchase an aggregate of 71,666 shares of common stock over a three
year period at an average per share price of $14.07. The issuance of the
shares of common stock and the warrants were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of ClickAction was held on May 18, 2000.
The matters voted upon at the meeting and the voting of stockholders with
respect thereto are as follows:
(1) The election of David P. Mans, Gregory W. Slayton, Gary J. Daichendt,
Howard M. Love, Jr., Edwin R. Niehaus, III, Donald F. Wood, and Emerick M. Woods
as directors to hold office until the 2001 annual meeting of stockholders:
Directors For Withheld
--------------------- --------- --------
David P. Mans 4,924,583 85,842
Gregory W. Slayton 4,924,108 86,317
Gary J. Daichendt 4,924,048 86,317
Howard M. Love, Jr. 4,924,508 85,917
Edwin R. Niehaus, III 4,924,308 86,117
Donald F. Wood 4,924,508 85,917
Emerick M. Woods 4,924,308 86,117
(2) Amendment to the Company's 1995 Equity Incentive Plan to increase the
aggregate number of shares of Common Stock authorized for issuance under
such plan by 1,500,000 shares:
For: 2,207,710 Against: 624,523 Abstain: 19,859
Non-Vote: 2,158,333
(3) Approval of the Company's 1999 Employee Stock Purchase Plan:
For: 2,720,858 Against: 115,605 Abstain: 15,629
Non-Vote: 2,158,333
(4) Amendment to the Company's Amended and Restated Certificate of Incorporation
to increase the Authorized number of shares of the Company's Common Stock
from 20,000,000 to 60,000,000:
For: 4,763,631 Against: 232,680 Abstain: 14,114
(5) Ratification of the selection of KPMG LLP as independent auditors of the
Company for its fiscal year ending December 31, 2000:
For: 4,990,832 Against: 4,735 Abstain: 14,858
<PAGE>
Item 6. Exhibits and reports on form 8-K
(a) Exhibits
Exhibit 3. Certificate of Amendment of Certificate of Incorporation of
ClickAction Inc. filed with Secretary of Delaware on May 24, 2000.
Exhibit 27. Financial Data Schedule.
(b) A report on Form 8-K under Item 5 with respect to the Private Placement
was filed on June 29, 2000.
<PAGE>
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.
ClickAction Inc.
Date: Aug 14, 2000 By: /s/Sharon S. Chiu
---------------------
Sharon S. Chiu
Chief Financial Officer
