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, 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 October 31,2000,the registrant had 12,488,686 shares of common stock
outstanding.
<PAGE>
CLICKACTION INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2000
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Balance Sheets
as of September 30, 2000 and December 31, 1999 3
b) Condensed Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 4
c) Condensed Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 5
d) Notes to Condensed 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 6. Exhibits and Reports on Form 8-K 26
Signatures 27
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
CLICKACTION INC.
CONDENSED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(in thousands except share data)
September 30, December 31,
2000 1999
------------ --------------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,392 $ 3,214
Accounts receivable, net 9,569 6,633
Inventories 2,078 1,538
Other current assets 338 288
Total current assets ----------- ----------
22,377 11,673
Property and equipment, net 4,494 780
Other assets 427 197
Total assets ----------- ------------
$ 27,298 $ 12,650
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,089 $ 3,309
Accrued compensation 1,069 745
Other accrued liabilities 4,325 3,090
Deferred revenues ---- 193
Total current liabilities ----------- -------------
9,483 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);
12,456,855 and 10,812,108 shares
issued and outstanding, respectively 12 11
Additional paid-in capital 28,217 11,364
Accumulated deficit (10,283) (5,891)
Deferred compensation (131) (171)
Total stockholders' equity ------------ -------------
17,815 5,313
------------ -------------
Total liabilities and stockholders' equity $ 27,298 $ 12,650
============ =============
<FN> See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLICKACTION INC.
CONDENSED STATEMENTS OF OPERATIONS
For the three and nine months ended
September 30, 2000 and 1999
(Unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
------------------------------ ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net desktop revenues $ 5,381 $ 4,943 $ 15,087 $ 14,115
Email marketing services 3,632 260 6,778 335
--------- --------- --------- ----------
Gross revenues 9,013 5,203 21,865 14,450
Cost of revenues 2,503 1,368 6,016 4,107
--------- --------- --------- ----------
Gross profit 6,510 3,835 15,849 10,343
--------- --------- --------- ----------
Operating expenses:
Product development 2,401 747 6,512 2,088
Sales and marketing 3,662 2,803 10,938 6,744
General and administrative 1,120 904 3,026 2,216
Merger related expenses ---- 232 ---- 232
--------- --------- --------- -----------
7,183 4,686 20,476 11,280
--------- --------- --------- -----------
Operating loss (673) (851) (4,627) (937)
Interest income, net 130 63 235 184
--------- --------- --------- -----------
Loss before taxes (543) (788) (4,392) (753)
Income tax expense ---- ---- ---- 19
---------- --------- --------- -----------
Net loss $ (543) $ (788) $ (4,392) $ (772)
========== ========= ========== ===========
Basic and diluted net loss per share
$ (0.04) $ (0.08) $ (0.38) $ (0.08)
========== ========= ========== ===========
Shares used in computing basic and
diluted net loss per share
12,404 10,255 11,581 9,819
========== ========= ========== ===========
<FN> See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLICKACTION INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2000 and 1999
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
------------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,392) $ (772)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 1,095 574
Amortization of deferred compensation 39 59
Provision for returns and doubtful accounts (2,969) 51
Changes in operating assets and liabilities:
Accounts receivable 33 (2,065)
Inventories (540) (479)
Other assets (137) (8)
Accounts payable 780 626
Accrued compensation 324 158
Other accrued liabilities 1,235 610
Deferred revenues (193) 130
---------- ----------
Net cash used for operating activities (4,724) (1,116)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (4,624) (363)
Software production costs and other assets (329) (77)
---------- ----------
Net cash used for investing activities (4,953) (440)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,196 309
Proceeds from sale of preferred stock ---- 668
Proceeds from sales of common stock 15,659 ----
---------- ---------
Net cash provided by financing activities 16,855 977
---------- ---------
Net increase (decrease) in cash and cash equivalents
7,178 (579)
Cash and cash equivalents at beginning of period
3,214 5,440
------------ ----------
Cash and cash equivalents at end of period $ 10,392 $ 4,861
============ ==========
<FN> See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed balance
sheets, statements of operations, and statements of cash flows of ClickAction
Inc. ("ClickAction" or the "Company") include all material adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for their fair presentation. The interim results presented
are not necessarily indicative of results for a full year. Certain reclassifi-
cations have been made for consistent presentation. For further information,
refer to the financial statements and notes 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.
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 loss per share is computed using the
weighted average number of common shares outstanding during each period
presented. Diluted net 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. A total of 4,887,846 and 2,914,936 outstanding
stock options with weighted average exercise prices of $6.46 and $3.27 for the
nine months ended September 30, 2000 and 1999, respectively, were not included
in the computation of diluted loss per share because their effect would have
been antidilutive.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting. In June 1999, the FASB issued SFAS 137, which
defers the implementation of SFAS 133. In June 2000, the FASB issued SFAS 138,
which amends SFAS 133 with regards to specific hedging risks, foreign-currency-
dominated assets and liabilities, and inter-company derivatives. The Company
believes the adoption of SFAS No. 133 will not have a material effect on its
results of operations, financial position or cash flows. The Company will be
required to implement SFAS 133 in the first quarter of fiscal 2001. This
statement will be effective for the Company beginning January 1, 2001.
In December 1999, the Securities and Exchange Commission, ("SEC"), released
Staff Accounting Bulletin, No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), and amended by SAB No. 101A and SAB No. 101B. These Staff
Accounting Bulletins (SAB No. 101) 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 until October 1, 2000. We will assess the impact of
the application of SAB 101 on our financial statements.
In March 2000, the Emerging Issues Task Force (EITF) published their consensus
on EITF Issue No. 00-2, Accounting for Web Site Development Costs, which
requires that costs incurred during the development of web site applications and
infrastructure, involving developing software to operate the Web site, including
graphics that affect the "look and feel" of the web page and all costs relating
to software used to operate a web site should be accounted for under SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. However, if a plan exists or is being developed to market the software
externally, the costs relating to the software should be accounted for pursuant
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
to FASB Statement No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. We adopted EITF Issue No. 00-2 in the
quarter beginning on July 1, 2000. The adoption of EITF Issue No. 00-2 will not
have a material effect on our financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 states that a software element covered by
SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. The adoption of EITF Issue No.
00-3 will not have a material effect on our financial position or results of
operations.
4. Segment and Geographic Information
The Company is principally engaged in providing email relationship management
products and services ("ERM") 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 are 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 three months and nine
months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Segment Information
For the three months ended September 30, 2000
---------------------------------------------
Net Desktop Email Marketing
Revenue Services Total
------------- --------------- ------------
<S> <C> <C> <C>
Net revenues $ 5,381 $ 3,632 $ 9,013
Cost of revenues 1,557 946 2,503
------------- -------------- ------------
Gross profit 3,824 2,686 6,510
Segment operating expenses 1,937 4,126 6,063
------------- -------------- ------------
Segment income (loss) $ 1,887 $ (1,440) 447
============= ===============
General and administrative expenses (1,066)
Compensation expense not allocated to segments (54)
Interest income, net 129
------------
Loss before taxes, as reported $ (543)
=============
</TABLE>
<PAGE>
CLICKACTION INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Segment Information
For the three months ended September 30, 1999
---------------------------------------------
Net Desktop Email Marketing
Revenue Services Total
----------- --------------- ------------
<S> <C> <C> <C>
Net revenues $ 4,943 $ 260 $ 5,203
Cost of revenues 1,359 9 1,368
----------- --------------- ------------
Gross profit 3,584 251 3,835
Segment operating expenses 2,671 879 3,550
----------- --------------- ------------
Segment income (loss) $ 914 $ (628) 285
=========== ===============
General and administrative expenses (905)
Merger related expenses (232)
Interest income, net 63
-------------
Loss before taxes, as reported $ (788)
=============
</TABLE>
<TABLE>
<CAPTION>
Segment Information
For the nine months ended September 30, 2000
--------------------------------------------
Net Desktop Email Marketing
Revenue Services Total
----------- --------------- -----------
<S> <C> <C> <C>
Net revenues $ 15,087 $ 6,778 $ 21,865
Cost of revenues 4,307 1,709 6,016
----------- --------------- -----------
Gross profit 10,780 5,069 15,849
Segment operating expenses 6,415 10,486 16,900
----------- --------------- -----------
Segment income (loss) $ 4,366 $ (5,417) ( 1,051)
=========== ===============
General and administrative expenses (2,972)
Compensation expense not allocated to segments (604)
Interest income, net 235
------------
Loss before taxes, as reported $ (4,392)
============
</TABLE>
<TABLE>
<CAPION>
Segment Information
For the nine months ended September 30, 1999
--------------------------------------------
Net Desktop Email Marketing
Revenue Services Total
----------- --------------- -----------
<S> <C> <C> <C>
Net revenues $ 14,115 $ 335 $ 14,450
Cost of revenues 4,098 9 4,107
----------- --------------- -----------
Gross profit 10,017 326 10,343
Segment operating expenses 7,363 1,468 8,832
----------- --------------- -----------
Segment income (loss) $ 2,654 $ (1,142) 1,512
=========== ===============
General and administrative expenses (2,217)
Merger related expenses (232)
Interest income, net 184
------------
Loss before taxes, as reported $ (753)
</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 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 September 30, 2000, we generated 59.7%
of our total revenues from the sale of our desktop applications and 40.3% 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. 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
<PAGE>
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 September 30, 2000 and 1999
----------------------------------------------
Total revenues for the three months ended September 30, 2000 increased $3.8
million, or 73%, to $9.0 million, compared with total revenues of $5.2 million
for the corresponding period in 1999. The increase was primarily due to
increased sales of our Web-based ERM products and services. ERM revenues for the
three months ended September 30, 2000 were $3.6 million, or 40.3% of total
revenues, compared with ERM revenues of $260,000, or 5.0% of total revenues, for
the corresponding period in 1999. Net desktop revenues for the three months
ended September 30, 2000 were $5.4 million, or 59.7% of total revenues, compared
with net desktop revenues of $4.9 million, or 95.0% 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 September 30, 2000 increased 70% to $6.5
million from $3.8 million in the corresponding period in 1999. Gross margin for
the three months ended September 30, 2000 was 72.2%, compared to 73.7% for the
corresponding period in 1999. The decrease in gross margin was primarily due
to the cost of sales associated with ERM products and services as well as the
higher promotional cost of sales of the desktop applications. 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 September 30, 2000 increased
53% to $7.2 million from $4.7 million for the corresponding period in 1999. The
operating expenses for the three months ended September 30, 1999 also included
one-time merger related expenses of $232,000 in connection with the acquisition
of MarketHome in August 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 221% to $2.4 million in the three months
ended September 30, 2000 from $747,000 in the corresponding period in 1999. As a
percentage of total revenues, product development expenses were 26.6% for the
three months ended September 30, 2000 compared to 14.4% 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 31% to $3.7 million in the three months
ended September 30, 2000 from $2.8 million for the corresponding period in 1999.
As a percentage of total revenues, sales and marketing expenses were 40.6% for
the three months ended September 30, 2000 compared to 53.9% for the
corresponding period in 1999. Sales and marketing expenses decreased as a
percent of revenues primarily as a result of marketing expenses associated with
the change of our corporate name and shift of our product strategy in 1999. We
<PAGE>
expect our sales and marketing expenses to remain flat or slightly higher 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 24% to $1.1 million in the three
months ended September 30, 2000 from $904,000 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 were 12.4% for the three months
ended September 30, 2000 compared to 17.4% for the corresponding period in
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. In addition, there was
$232,000 of one-time merger-related expenses associated with the acquisition of
MarketHome in August 1999 in the three months ended September 30, 1999.
Net interest income was $130,000 for the three months ended September 30, 2000
compared to $63,000 for the corresponding period in 1999. The increase was due
primarily to higher average cash balances in the three months ended September
30, 2000 compared to the corresponding period in 1999.
We did not record any income tax expense for the three months ended September
30, 2000 and 1999.
As a result of the foregoing factors, we incurred a net loss for the three
months ended September 30, 2000 of $543,000, compared to net loss of $788,000 in
the corresponding period in 1999.
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
Total revenues for the nine months ended September 30, 2000 increased $7.4
million, or 51%, to $21.9 million, compared with total revenues of $14.5 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 nine months ended
September 30, 2000 were $6.8 million, or 31.0% of total revenues, compared with
ERM revenues of $335,000, or 2.3% of total revenues, for the corresponding
period in 1999. Net desktop revenues for the nine months ended September 30,
2000 were $15.1 million, or 69.0% of total revenues, compared with net desktop
revenues of $14.1 million, or 97.7% of total revenues, for the corresponding
period in 1999.
Gross profit for the nine months ended September 30, 2000 increased 53% to $15.8
million from $10.3 million in the corresponding period in 1999. Gross margin
for the nine months ended September 30, 2000 was 72.5%, compared to 71.6% 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 nine months ended September 30, 2000 increased
81.5% to $20.5 million from $11.3 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 212% to $6.5 million in the nine months
ended September 30, 2000 from $2.1 million in the corresponding period in 1999.
As a percentage of total revenues, product development expenses were 29.8% for
the nine months ended September 30, 2000 compared to 14.4% for the corresponding
period in 1999. The increase in product development expenses was primarily due
to the development of our email relationship management product.
Sales and marketing expenses increased 62% to $10.9 million in the nine months
ended September 30, 2000 from $6.7 million for the corresponding period in 1999.
As a percentage of total revenues, sales and marketing expenses were 50.0% for
<PAGE>
the nine months ended September 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.
General and administrative expenses increased 37% to $3.0 million in the nine
months ended September 30, 2000 from $2.2 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 13.8% for the nine months
ended September 30, 2000 compared to 15.3% for the corresponding period in 1999.
In addition, there is a one-time merger related expense of $232,000 associated
with the acquisition of MarketHome in August 1999 in the nine months ended
September 30, 1999.
Net interest income was $235,000 for the nine months ended September 30, 2000
compared to $184,000 for the corresponding period in 1999. The increase was due
primarily to higher average cash balances in the nine months ended September 30,
2000 compared to the corresponding period in 1999.
We did not record any income tax expense for the nine months ended September 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 nine
months ended September 30, 2000 of $4.4 million, compared to net loss of
$772,000 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
$4.7 million for the nine months ended September 30, 2000 compared to a use of
$1.1 million for the corresponding period in 1999. Our cash and cash
equivalents balance was $10.4 million on September 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.
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
financial statements have been adjusted to reflect the Stock Split.
Recent Accounting Pronouncements
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for depending on the use of the derivative and whether it is designated and
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qualifies for hedge accounting. In June 1999, the FASB issued SFAS 137, which
defers the implementation of SFAS 133. In June 2000, the FASB issued SFAS 138,
which amends SFAS 133 with regards to specific hedging risks, foreign-currency-
dominated assets and liabilities, and inter-company derivatives. The Company
believes the adoption of SFAS No. 133 will not have a material effect on its
results of operations, financial position or cash flows. The Company will be
required to implement SFAS 133 in the first quarter of fiscal 2001. This
statement will be effective for the Company beginning January 1, 2001.
In December 1999, the Securities and Exchange Commission, ("SEC"), released
Staff Accounting Bulletin, No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), and amended by SAB No. 101A and SAB No. 101B. These Staff
Accounting Bulletins (SAB No. 101) 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 until October 1, 2000. We will assess the impact of
the application of SAB 101 on our financial statements.
In March 2000, the Emerging Issues Task Force (EITF) published their consensus
on EITF Issue No. 00-2, Accounting for Web Site Development Costs, which
requires that costs incurred during the development of web site applications and
infrastructure, involving developing software to operate the Web site, including
graphics that affect the "look and feel" of the web page and all costs relating
to software used to operate a web site should be accounted for under SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. However, if a plan exists or is being developed to market the software
externally, the costs relating to the software should be accounted for pursuant
to FASB Statement No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. We adopted EITF Issue No. 00-2 in the
quarter beginning on July 1, 2000. The adoption of EITF Issue No. 00-2 will not
have a material effect on our financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 states that a software element covered by
SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. The adoption of EITF Issue No.
00-3 will not have a material effect on our financial position or results of
operations.
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.
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
nine months ended September 30, 2000, we derived only 31.0% 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
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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.
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
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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
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
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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 increasingly 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.
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
<PAGE>
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 38% of our total revenues
and another retailer accounted for 31% and 7% of our total revenues for the
twelve months ended December 31, 1999 and nine months ended September 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 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.
<PAGE>
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 8.6% of our total revenues in the six months ended September 30,
2000, based on current United States Postal Service regulations. Changes in
these regulations, which historically have occurred frequently, could
necessitate updating these 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.
<PAGE>
Risks Related to Our Overall Business
We may 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 $4.4 million for the nine months ended September 30,2000.
As of September 30, 2000, we had an accumulated deficit of $10.3 million. While
we expect to realize nominal operating income in the foreseeable future because
we anticipate that our operating revenues relating to our email marketing
business and desktop software business will exceed our total operating expenses,
we may incur significant future operating losses if our operating revenue
declines or fails to grow as quickly as our operating expenses. 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
in our 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;
* 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;
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* 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 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
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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-
arty products that are complementary to our core product line. In addition to
our own development team, we have relied on two independent firms in the past to
assist us with the coding of our desktop product software products. While we
enerally 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 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,
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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
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
<PAGE>
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 recommen-
dations; and
* changes in market valuations of other Internet companies.
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.
<PAGE>
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 6. Exhibits and reports on form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) A report on Form 8-K under Item 5 with respect to quarterly stockholder
letter was filed on July 26, 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: Nov 14, 2000 By: /s/Sharon S. Chiu
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Sharon S. Chiu
Chief Financial Officer
