UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-28897
EXTENSITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
68-0368868
(IRS Employer Identification Number)
2200 POWELL STREET, SUITE 300, EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices and zip code)
(510) 594-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of October
31, 2001 was 24,793,461
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the 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 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities and Use of Proceeds 26
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
EXTENSITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 18,741 $ 40,695
Short-term investments 30,947 38,925
Restricted short-term investments 1,397 1,436
Accounts receivable, net 6,223 8,527
Prepaid and other current assets 2,700 3,443
------------ ------------
Total current assets 60,008 93,026
Property and equipment, net 4,059 6,279
Other assets 595 457
------------ ------------
Total assets $ 64,662 $ 99,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,970 $ 6,434
Accrued liabilities 4,280 5,125
Deferred revenue 5,959 16,041
Notes payable and capital lease obligations 532 1,269
------------ ------------
Total current liabilities 14,741 28,869
Capital lease obligations and other long term liabilities 1,851 647
------------ ------------
Total liabilities 16,592 29,516
------------ ------------
Stockholders' equity:
Common stock 25 24
Additional paid-in capital 147,009 147,475
Deferred stock compensation (752) (2,679)
Notes receivable from stockholders (380) (380)
Accumulated comprehensive income 268 295
Accumulated deficit (98,100) (74,489)
------------ ------------
Total stockholders' equity 48,070 70,246
------------ ------------
Total liabilities and stockholders' equity $ 64,662 $ 99,762
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
License $ 4,886 $ 4,021 $ 16,559 $ 9,280
Service and maintenance 3,174 3,005 10,434 6,802
Hosted 48 -- 48 --
-------- -------- -------- --------
Total revenues 8,108 7,026 27,041 16,082
-------- -------- -------- --------
Cost of revenues:(*)
License 384 267 1,092 482
Service and maintenance 2,901 3,912 10,419 10,782
Hosted 211 -- 211 --
-------- -------- -------- --------
Total cost of revenues 3,496 4,179 11,722 11,264
-------- -------- -------- --------
Gross profit 4,612 2,847 15,319 4,818
-------- -------- -------- --------
Operating expenses:(*)
Sales and marketing 4,694 7,344 19,651 20,289
Research and development 2,244 3,633 9,981 10,181
General and administrative 1,821 1,671 5,449 4,762
Restructuring, impairment loss and other non-recurring charges 5,797 -- 6,174 --
In-process research and development -- 318 -- 318
-------- -------- -------- --------
Total operating expenses 14,556 12,966 41,255 35,550
-------- -------- -------- --------
Loss from operations (9,944) (10,119) (25,936) (30,732)
Interest income, net 565 1,417 2,325 3,828
-------- -------- -------- --------
Net loss $ (9,379) $ (8,702) $(23,611) $(26,904)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.39) $ (0.38) $ (1.00) $ (1.31)
Shares used in computing basic and diluted net loss per share 23,970 22,742 23,680 20,607
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
Service and maintenance $ -- $ 154 $ 59 $ 578
Operating expenses:
Sales and marketing -- 326 112 1,227
Research and development -- 202 68 759
General and administrative -- 279 109 1,048
-------- -------- -------- --------
$ -- $ 961 $ 348 $ 3,612
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
EXTENSITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $(23,611) $(26,904)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,915 1,182
Amortization of deferred stock compensation and other 434 3,612
Amortization of debt discount and lease line issuance costs 42 74
Write-off of computer equipment and software 2,882 --
In-process research and development -- 318
Changes in operating assets and liabilities:
Accounts receivable 2,304 (3,970)
Prepaid and other current assets 556 (1,016)
Other assets (138) --
Accounts payable (2,464) 2,540
Accrued liabilities (845) 3,407
Deferred revenue (10,082) 4,484
Other liabilitiies 1,461 93
Restricted short-term investments 39 (943)
-------- --------
Cash used in operating activities (27,507) (17,123)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (39,545) (56,336)
Sales of short-term investments 47,523 25,268
Capital expenditures (2,389) (4,109)
Business acquisition -- (90)
-------- --------
Cash provided by (used in) investing activities 5,589 (35,267)
-------- --------
Cash flows from financing activities:
Payments on notes payable (770) (800)
Payments on capital lease obligations (308) (299)
Proceeds from employee stock plans 1,028 743
Net proceeds from issuance of common stock -- 83,348
-------- --------
Cash provided by (used in) financing activities (50) 82,992
-------- --------
Effect of exchange rate on cash and cash equivalents 14 20
Increase (decrease) in cash and cash equivalents (21,954) 30,622
Cash and cash equivalents, beginning of period 40,695 10,416
-------- --------
Cash and cash equivalents, end of period $ 18,741 $ 41,038
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
EXTENSITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown. The balance sheet as of December 31, 2000 was
derived from audited financial statements, but does not include all necessary
disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's report on Form 10-K (File No. 000-28897), filed with the Securities
and Exchange Commission (the "SEC") on March 30, 2001.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Extensity Europe Limited, which
commenced operations in September 1999, and Extensity Australia PTY Limited,
which commenced operations in February of 2001. In July of 2001, the Company
closed the Australian office as part of the restructuring plan. All significant
intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the current interim period are not necessarily
indicative of the results to be expected for the entire current year or other
future interim periods.
2. Net Loss Per Share
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options and warrants were not included in
the computation of diluted net loss per share because the effect would be
antidilutive.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net loss $ (9,379) $ (8,702) $(23,611) $(26,904)
Denominator:
Weighted average shares 24,541 23,789 24,369 21,753
Weighted average unvested common shares (571) (1,047) (689) (1,146)
-------- -------- -------- --------
Total weighted average shares 23,970 22,742 23,680 20,607
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.39) $ (0.38) $ (1.00) $ (1.31)
======== ======== ======== ========
Diluted net loss per share does not include the effect of the following
potential common shares at September 30, 2001 and 2000 (in thousands):
September 30,
-------------------------
2001 2000
----- -----
Shares issuable under stock options 3,348 3,948
Shares of unvested stock subject to repurchase 249 840
Shares issuable pursuant to warrants to purchase common stock 20 --
----- -----
3,617 4,788
===== =====
The weighted-average exercise price of stock options outstanding was $5.52 and
$8.35 as of September 30, 2001 and 2000, respectively. The weighted average
repurchase price of unvested stock was $1.57 and $1.32 as of September 30, 2001
and 2000, respectively. The weighted average exercise price of warrants was
$14.50 as of September 30, 2001.
3. Significant Customers
For the three and nine months ended September 30, 2001, there were no customers
that accounted for more than 10% of total revenues. For the three months ended
September 30, 2000, sales to one customer accounted for 10% of total revenues.
For the nine months ended September 30, 2000, sales to one customer accounted
for 14% of total revenues.
4. Stock Option Exchange
Pursuant to a Tender Offer Statement filed with the SEC on May 4, 2001,
employees surrendered for cancellation 1,744,400 options to purchase shares of
the Company's common stock at exercise prices ranging from $5.44 to $38.81. In
exchange, the Company on June 5, 2001 granted short-term options to purchase
174,440 shares of the Company's common stock at an exercise price of $8.82
covering ten percent (10%) of the number of shares that were cancelled. The
short-term options will become 100% vested six months after the date of grant
and will expire if not exercised before March 5, 2002 or earlier if employment
is terminated.
On a date between December 6, 2001 and December 12, 2001, subject to continued
employment, the Company will grant a new option ("New Option") equal to ninety
percent (90%) of the number of shares that were cancelled. The exercise price of
the New Option will be equal to the closing price of the Company's Common Stock
on the date of grant.
The grant of short-term options will result in compensation charges over the
nine-month life of the options as prescribed under the provisions of FIN No. 44,
"Accounting for Certain Transactions Involving Stock Compensation". For the nine
months ended September 30, 2001, there was no compensation expense associated
with such options, as the Company's stock price was lower than the exercise
price.
5. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net loss $ (9,379) $ (8,702) $(23,611) $(26,904)
Foreign currency translation adjustment 31 (89) 28 (107)
-------- -------- -------- --------
Total comprehensive loss $ (9,348) $ (8,791) $(23,583) $(27,011)
======== ======== ======== ========
6. Restructuring, Impairment Loss and Other Non Recurring Charges
In response to the continuing economic slowdown, the Company implemented a
restructuring plan in the third quarter of fiscal 2001 and recorded a
restructuring charge of $4.5 million. The goal of the restructuring plan is to
reduce costs and improve operating efficiencies in order to match the current
business environment. The restructuring charge consisted of severance and
benefits of $729,000 related to the involuntary termination of 70 employees.
These terminations were from all functions across the Company. In addition, the
Company accrued for lease costs of $2.2 million pertaining to the estimated
obligations for non-cancelable lease payments for excess facilities in the
United States, Europe and Australia. The Company also wrote off computer
equipment and software with a net book value of $1.6 million as these assets
were taken out of service because they were deemed unnecessary due to the
reductions of workforce.
The following table sets forth an analysis of the components of the
restructuring charge and the payments made against the reserve through September
30, 2001 (in thousands):
Computer
Severance and Equipment and Accrued Lease
Benefits Software Costs
------- ------- -------
Restructuring provision:
Severance and benefits $ 729 $ -- $ --
Accrued lease costs -- -- 2,187
Property and equipment write-off -- 1,577 --
------- ------- -------
Total 729 1,577 2,187
Cash paid (729) -- (683)
Non cash charges -- (1,577) --
------- ------- -------
Reserve balance at September 30, 2001 $ -- $ -- $ 1,504
======= ======= =======
The Company expects to pay the remaining obligations relating to the
non-cancelable lease obligations over the remaining lease terms through 2006.
In the third quarter of 2001, the Company incurred an impairment loss of $1.3
million. This charge was attributed to the write-down of assets acquired in
conjunction with building the hosted offering. These assets were written down to
a level commensurate with the expected future cash flows as prescribed by SFAS
No. 121 Accounting For the Impairment of Long-Lived Assets and for Long-Lived
Asset to Be Disposed Of.
During the first quarter of 2001, the Company incurred $377,000 of other
non-recurring general and administrative expenses. This expense was incurred in
connection with exploring potential merger and acquisition transactions.
7. Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separately from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement, which apply to goodwill
and intangible assets acquired prior to June 30, 2001, will be adopted by the
Company on January 1, 2002. We do not expect the adoption of these accounting
standards to result in a significant impact on our financial position or results
of operations for any historic transactions.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30
(APB 30), "Reporting Results of Operations Reporting the Effects of Disposal of
a Segment of a Business". SFAS 144 develops one accounting model (based on the
model in SFAS 121) for long-lived assets that are to be disposed of by sale, as
well as addresses the principal implementation issues. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. That requirement eliminates APB 30's
requirement that discontinued operations be measured at net realizable value or
that entities include under "discontinued operations" in the financial
statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS 144 to have a material impact on
the Company's financial position or results of operations.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions, or future strategies that are signified by
the words "expects," "anticipates," "intends," "believes," or similar language.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
In evaluating the Company's business, prospective investors should carefully
consider the information set forth below under the caption "Risk Factors" in
addition to the other information set forth herein. The Company cautions
investors that its business and financial performance are subject to substantial
risks and uncertainties.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our Summary of
Condensed Consolidated Financial Statements, our condensed consolidated
financial statements and related notes included in this report, and Management's
Discussion and Analysis of Financial Condition and Results of Operations and
related financial information contained in the Company's Form 10-K (File No.
000-28897).
Overview
Extensity was formed in November 1995 and introduced its first commercial
product for general availability in March 1998. During this period, our
operating activities consisted of the design and development of our product
architecture and our first application, the building of our corporate
infrastructure, and the development of our professional services and customer
support organizations. Our first application, Extensity Expense Reports, was
released for general availability in March 1998. We released Extensity Travel
Plans in December 1998 and Extensity Timesheets and Extensity Purchase Reqs in
July 1999. Extensity Connect, our portalized application front end, role-based
reporting tool, and content and commerce gateway was released in March 2000.
We generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis depending on various factors, such as the
number of seats covered by a contract and the degree of customization requested
by the particular customer. The dollar amounts of our contracts depend on the
number of users and applications being used and the professional services
requested. In the third quarter of 2001, we began recognizing revenue from our
hosted offering. Under this offering, customers pay a monthly usage fee based on
the number of users and a one-time set-up fee to access the Extensity
application on our servers.
Our software products typically require significant customization,
installation and other services. Prior to the release in July 1999 of Version
4.0 of our application suite, it was difficult to generate dependable estimates
of the costs necessary to complete product implementations. Therefore, we
accounted for our software licenses and implementation revenues using the
completed contract method of contract accounting as required under the
provisions of SOP 97-2, "Software Revenue Recognition," and SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts."
Following the release of Version 4.0 in July 1999, we were able to generate
dependable estimates of the costs necessary to complete product implementations.
Consequently, we accounted for our software licenses and implementation revenues
using the percentage-of-completion method of contract accounting. Since then we
have released several new versions of our software culminating in our most
recent release of version 5.6, which further simplified the implementation
process. As a result, implementations of our software have been streamlined and
are no longer deemed essential to the functionality of the software. We have
also formed relationships with several implementation partners who have
performed a significant number of implementations over the last year. In
addition, an increasing trend of software sales without accompanying services
have allowed us to further develop vendor specific objective evidence for the
fair value of our software licenses. Therefore, in the third quarter of 2001,
we began recognizing license revenue on shipment and continue to recognize
implementation revenue as services are performed.
Payments received in advance of revenue recognition are recorded as
deferred revenue. All of our customers enter into one-year maintenance and
support contracts when they purchase their initial Extensity applications and
have the option to purchase additional contracts after completion of the initial
contract period. Although we do not grant any rights to our customers to return
products, we do provide warranties that our products will function according to
written documentation. We defer amounts billed for maintenance and recognize
such amounts ratably over the maintenance period
We promote and sell our software products through our direct sales force
and through indirect channels, including Elite Information Group and Emplaza,
S.A., a joint venture between Terra Networks and Meta4. We also have marketing
referral arrangements in place with Cisco Systems, IBM, US Bank,
Amadeus/eTravel, Rosenbluth Travel, WebEx, Digital Think, Visa, GetThere.com,
and Pro Act Technologies.
In the second quarter of 2001, JD Edwards, a reseller of Extensity's products,
and the Company jointly terminated their relationship. This event resulted in
the Company accelerating recognition of revenue of approximately $1.1 million in
prepaid royalties that would have been recognized in the third and fourth
quarters of 2001.
In February 2001, we opened a sales office in Sydney, Australia; however,
we closed the Sydney office in July of 2001 as part of our restructuring plan.
We continue to support our European operations, however; as part of our
restructuring plan implemented in July 2001we significantly reduced our
resources in this geography to match the current business environment. For the
nine months ended September 30, 2001, revenues derived from our international
operations represented 22% the total revenues.
Results of Operations
The following table sets forth certain statement of operations data in
absolute dollars for the periods indicated. The data has been derived from the
condensed consolidated financial statements contained in this report. The
operating results discussed below do not include the amortization of non-cash
stock based compensation. These amounts are discussed separately within this
discussion.
Summary of Condensed Consolidated Financial Data
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues:
License $ 4,886 $ 4,021 $16,559 $ 9,280
Service and maintenance 3,174 3,005 10,434 6,802
Hosted 48 -- 48 --
------- ------- ------- -------
Total revenues $ 8,108 $ 7,026 $27,041 $16,082
======= ======= ======= =======
Cost of revenues:(*)
License $ 384 $ 267 $ 1,092 $ 482
Service and maintenance 2,901 3,758 10,360 10,204
Hosted 211 -- 211 --
------- ------- ------- -------
Total cost of revenues $ 3,496 $ 4,025 $11,663 $10,686
======= ======= ======= =======
Operating expenses:(*)
Sales and marketing $ 4,694 $ 7,018 $19,539 $19,062
Research and development 2,244 3,431 9,913 9,422
General and administrative 1,821 1,392 5,340 3,714
Restructuring, impairment loss and other non-recurring charges 5,797 -- 6,174 --
In-process research and development -- 318 -- 318
------- ------- ------- -------
Total operating expenses $14,556 $12,159 $40,966 $32,516
======= ======= ======= =======
(*) Amounts exclude the amortization of non-cash stock based
compensation as follows:
Cost of revenues:
Service and maintenance $ -- $ 154 $ 59 $ 578
Operating expenses:
Sales and marketing -- 326 112 1,227
Research and development -- 202 68 759
General and administrative -- 279 109 1,048
------- ------- ------- -------
$ -- $ 961 $ 348 $ 3,612
======= ======= ======= =======
Revenues
Total revenues increased to $8.1 million for the three months ended September
30, 2001 from $7.0 million for the three months ended September 30, 2000, an
increase of 15%. Total revenues increased to $27.0 million for the nine months
ended September 30, 2001 from $16.1 million for the nine months ended September
30, 2000, an increase of 68%. For the three and nine months ended September 30,
2001, there were no customers who accounted for 10% or more of total revenues.
For the three months ended September 30, 2000, sales to one customer accounted
for 10% of total revenues. For the nine months ended September 30, 2000, sales
to one customer accounted for 14% of total revenues.
License Revenues. Our license revenues increased to $4.9 million for the
three months ended September 30, 2001 from $4.0 million for the three months
ended September 30, 2000, an increase of 22%. Our license revenues
increased to $16.6 million for the nine months ended September 30, 2001 from
$9.3 million for the nine months ended September 30, 2000, an increase of 78%.
In the nine months ended September 30, 2001, $1.9 million of license revenues
were recognized through the Company's relationship with a reseller. The Company
and the reseller jointly decided to terminate their relationship. The increase
in license revenue for the nine months ended September 30, 2001 was attributable
to an increase in revenue recognized on shipment, an increase in the average
size of the sales contracts entered into by our customers, acceleration of
revenue recognition resulting from the termination of the reseller relationship,
and an increase in the revenue attributable to our indirect sales channels.
Service and Maintenance Revenues. Our service and maintenance revenues
increased to $3.2 million for the three months ended September 30, 2001 from
$3.0 million for the three months ended September 30, 2000, an increase of 6%.
Our service and maintenance revenues increased to $10.4 million for the nine
months ended September 30, 2001 from $6.8 million for the nine months ended
September 30, 2000, an increase of 53%. This increase was attributable to our
growing customer base, an increase in professional services revenues recognized
on a time and materials basis, an increase in revenues recognized from work
performed on partner integration, and to a lesser extent, an increase in the
average size of the sales contracts entered into by our customers.
Hosted Revenues. Our hosted revenues were $48,000 for the three months
ended September 30, 2001. This is the first period the Company has recognized
revenue from this offering. The Company does not believe these revenues will be
a significant percentage of total revenues in the near term. As discussed in
Note 6 of the Notes to the Financial Statements, we incurred an impairment
charge associated with our hosted offering.
Cost of Revenues
Total cost of revenues decreased to $3.5 million for the three months ended
September 30, 2001 from $4.0 million for the three months ended September 30,
2000, a decrease of 13%. Total cost of revenues increased to $11.7 million for
the nine months ended September 30, 2001 from $10.7 million for the nine months
ended September 30, 2000, an increase of 9%.
Cost of License Revenues. Cost of license revenues consists primarily of
third-party license and support fees and, to a lesser extent, costs of
duplicating media and documentation and shipping. This cost increased to
$384,000 for the three months ended September 30, 2001 from $267,000 for the
three months ended September 30, 2000, due primarily to increased sales
activity. The cost increased to $1.1 million for the nine months ended September
30, 2001 from $482,000 for the nine months ended September 30, 2000 due
primarily to increased sales activity. As a percentage of license revenues, cost
of license revenues increased to 8% for the three months ended September 30,
2001 from 7% for the three months ended September 30, 2000. As a percentage of
license revenues, cost of license revenues increased to 7% for the nine months
ended September 30, 2001 from 5% for the nine months ended September 30, 2000.
Cost of revenues as a percentage of license revenue may increase over the
current level in the future if we incorporate additional third-party products
into our offerings.
Cost of Service and Maintenance Revenues. Cost of service and maintenance
revenues consists of compensation and related overhead costs for personnel
engaged in consulting, training, maintenance and support services for our
customers as well as costs for third parties contracted to provide such services
to our customers. This cost decreased to $2.9 million for the three months ended
September 30, 2001 from $3.8 million for the three months ended September 30,
2000, a decrease of 23%. This cost increased to $10.4 million for the nine
months ended September 30, 2001 from $10.2 million for the nine months ended
September 30, 2000, an increase of 2%. As a percentage of service revenues, cost
of service revenues decreased to 91% for the three months ended September 30,
2001 from 125% for the three months ended September 30, 2000. As a percentage of
service revenues, cost of service revenues decreased to 99% for the nine months
ended September 30, 2001 from 150% for the nine months ended September 30, 2000.
The decrease for the three months ended September 30, 2001 was attributable to
lower costs for third party consultants offset in part by higher payroll costs
as the Company replaced third party consultants with permanent employees. We are
seeking to further reduce our cost of service revenues as a percentage of total
revenue and are also seeking to engage third parties to provide a substantial
portion of services related to our applications.
Cost of Hosted Revenues. Cost of hosted revenues consists primarily of
compensation and related overhead costs for personnel engaged in supporting the
hosted customer base, server costs, and telecommunications charges.
For the three months ended September 30, 2001, cost of hosted revenues was
$211,000. The Company does not expect these costs to significantly increase in
the near term.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, including
commissions and marketing program costs. Sales and marketing expenses decreased
to $4.7 million for the three months ended September 30, 2001 from $7.0 million
for the three months ended September 30, 2000, a decrease of 33%. Sales and
marketing expenses increased to $19.5 million for the nine months ended
September 30, 2001 from $19.1 million for the nine months ended September 30,
2000, an increase of 2%. As a percentage of total revenues, sales and marketing
expenses decreased to 58% for the three months ended September 30, 2001 from
100% for the three months ended September 30, 2000. As a percentage of total
revenues, sales and marketing expenses decreased to 72% for the nine months
ended September 30, 2001 from 119% for the nine months ended September 30, 2000.
The decrease in sales and marketing expenses for the three months ended
September 30, 2001 was attributed to reduced compensation costs and lower
program costs associated with our restructuring plan. We expect sales and
marketing expenses, excluding commission charges, to be lower in the fourth
quarter of 2001 as we realize a full quarter's impact of the restructuring plan.
Commission charges will vary depending upon the sales activity. Sales and
marketing expenses may increase in the long term if we expand our domestic and
international sales force and increase our marketing efforts.
Research and Development. Research and development expenses consist
primarily of compensation and related personnel costs, and fees associated with
contractors. Research and development expenses decreased to $2.2 million for the
three months ended September 30, 2001 from $3.4 million for the three months
ended September 30, 2000, a decrease of 35%. Research and development costs
increased to $9.9 million for the nine months ended September 30, 2001 from $9.4
million for the nine months ended September 30, 2000, an increase of 5%. As a
percentage of total revenues, research and development expenses decreased to 28%
for the three months ended September 30, 2001 from 48% for the three months
ended September 30, 2000. As a percentage of total revenues, research and
development expenses decreased to 37% for the nine months ended September 30,
2001 from 59% for the nine months ended September 30, 2000. The decrease in
research and development cost for the three months ended September 30, 2001 was
attributable to reduced compensation costs associated with our restructuring
plan. The increase in costs between the nine months ended September 30, 2001 and
September 30, 2000 resulted from our continuing efforts to add enhancements to
our existing software applications and to develop software applications that
incorporate new functionality into our integrated suite. We expect research and
development expenses to be lower in the fourth quarter of 2001 as we realize a
full quarter's impact of the restructuring plan. Research and development
expenses may increase in the long term if we make additional investments in our
technology and products.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for our executive, finance and
administrative personnel and other related expenses. General and administrative
expenses, excluding restructuring, impairment loss and other non-recurring
charges, increased to $1.8 million for the three months ended September 30, 2001
from $1.4 million for the three months ended September 30, 2000, an increase of
31%. General and administrative expenses, excluding restructuring, impairment
loss and other non-recurring charges, increased to $5.3 million for the nine
months ended September 30, 2001 from $3.7 million for the nine months ended
September 30, 2000, an increase of 44%. As a percentage of total revenues,
general and administrative expenses, excluding restructuring, impairment loss
and other non-recurring charges, increased to 22% for the three months ended
September 30, 2001 from 20% for the three months ended September 30, 2000. As a
percentage of total revenues, general and administrative expenses, excluding
restructuring, impairment and other non-recurring charges, decreased to 20% for
the nine months ended September 30, 2001 from 23% for the nine months ended
September 30, 2000. The increase in general and administrative expenses in the
three-month period ended September 30, 2001 and the nine month period ended
September 30, 2001 was primarily attributable to hiring additional human
resources and internal information technology personnel. We expect general and
administrative expenses to be lower in the fourth quarter of 2001 as we realize
a full quarter's impact of the restructuring plan. General and administrative
expenses may increase in the long term if we expand our operations.
Restructuring, Impairment Loss and Other Non-Recurring Charges. For the three
months ended September 30, 2001, restructuring, impairment loss and other
non-recurring charges were $5.8 million. Approximately, $4.5 of
these expenses was incurred in connection with our restructuring plan effective
July 2001. Additionally, $1.3 million was incurred in connection with the
write-down of assets associated with our hosted offering. For the nine months
ended September 30, 2001, restructuring, impairment loss and other non-recurring
charges were $6.2 million comprised of the $4.5million in restructuring, $1.3
million write-down of assets and $377,000 of other non-recurring general and
administrative expenses. The $377,000 of other non-recurring general and
administrative expenses was incurred in connection with exploring potential
merger and acquisition transactions. The entire charge was expensed in the three
months ended March 31, 2001 as these discussions were terminated.
Amortization of Non-Cash Stock Based Compensation
Prior to our IPO, we granted certain stock options to our officers and
employees at prices deemed to be below the fair value of the underlying stock.
The cumulative difference between the fair value of the underlying stock at the
date the options were granted and the exercise price of the granted options was
$12.1 million as of the IPO date. This amount is being amortized, using the
accelerated method of FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable or Award Plans, over the four-year
vesting period of the granted options. Accordingly, our results of operations
include and will continue to include deferred compensation expense at least
through 2003. No expense was recognized for the three months ended September 30,
2001, as employee terminations resulted in stock cancellations that offset the
current period amortization expense. For the three months ended September 30,
2000, we recognized $961,000. We recognized $348,000 for the nine months ended
September 30, 2001 and $3.6 million for the nine months ended September 30,
2000.
Interest Income, Net
Interest income, net was $565,000 for the three months ended September 30,
2001 and $1.4 million for the three months ended September 30, 2000. Interest
income, net was $2.3 million for the nine months ended September 30, 2001 and
$3.8 million for the nine months ended September 30, 2000. Interest income is
attributed to interest earned on the proceeds from the Company's IPO. The
decrease in interest income is attributed to lower interest rates and lower
cash, cash equivalent and short-term investments balances. Interest income will
fluctuate depending upon the overall interest rate environment and our cash,
cash equivalent and short-term investments balances.
Liquidity and Capital Resources
Since inception, we have financed our operations and funded our capital
expenditures through funds raised from our initial public offering completed in
January 2000 and the private sale of equity securities, supplemented by loan
facilities and equipment leases. Aggregate net proceeds from private equity
financings totaled $42.3 million and proceeds from the Company's IPO were $83.3
million, net of offering costs of approximately $2.2 million. As of September
30, 2001 we had $51.1 million in cash, cash equivalents and short-term
investments and $45.3 million in working capital.
Net cash used in operating activities was $27.5 million for the nine months
ended September 30, 2001 and $17.1 million for the nine months ended September
30, 2000. For the nine months ended September 30, 2001, cash used in operating
activities was primarily attributable to a net loss of $23.6 million, adjusted
for a non-cash charge associated with the write-off of computer equipment and
software of $2.9 million, depreciation and amortization of $1.9 million, a
decrease in deferred revenue of $10.1 million, a decrease in accounts payable of
$2.5 million, and a decrease in accrued liabilities of $845,000 offset by a
decrease in accounts receivable of $2.3 million and an increase in other
liabilities of $1.4 million. For the nine months ended September 30, 2000, cash
used in operating activities was primarily attributed to a net loss of $26.9
million, adjusted for the amortization of deferred stock compensation of $3.6
million, depreciation and amortization of $1.2 million, increase in accounts
payable of $2.5 million, increase in accrued liabilities of $3.4 million, and an
increase in deferred revenue of $4.5 million offset by an increase in accounts
receivable of $4.0 million, an increase in prepaid and other current assets of
$1.0 million, and an increase in restricted cash of $943,000.
Net cash provided by investing activities was $5.6 million for the nine
months ended September 30, 2001 and net cash used in investing activities was
$35.3 million for the nine months ended September 30, 2000. For the nine months
ended September 30, 2001, investing activities consisted primarily of a decrease
in short-term investments of $8.0 million offset by capital expenditures of $2.4
million. For the nine months ended September 30, 2000,
investing activities consisted primarily of an increase in short-term
investments of $31.2 million and capital expenditures of $4.1 million.
Net cash used in financing activities was $50,000 for the nine months ended
September 30, 2001, due to payments on notes payable and capital lease
obligations of approximately $1.1 million, offset by proceeds from employee
stock plans of approximately $1.0 million. Net cash provided by financing
activities was $83.0 million for the nine months ended September 30, 2000,
primarily due to the net proceeds of $83.3 million from the Company's IPO.
Presently, we anticipate that our existing capital resources will meet our
operating and investing needs for at least the next 12 months. After that time,
we cannot be certain that additional funding will be available on acceptable
terms or at all. While we do not presently anticipate a need for additional
capital, if we do require additional capital resources to grow our business,
execute our operating plans, or acquire complementary technologies or businesses
at any time in the future, we may seek to sell additional equity or debt
securities or secure additional lines of credit, which may result in additional
dilution to our stockholders.
RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the risks and other information contained in the Company's annual filing on Form
10-K (File No.000-28897) and its periodic reports filed pursuant to the Exchange
Act in evaluating our business. The market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related To Our Business
Our limited operating history and the fact that we operate in a new industry
make our business prospects difficult to evaluate.
We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. An investor in our common stock must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for
Internet-based software applications. Risks and difficulties include our ability
to:
- expand our base of customers with fully installed and deployed systems
that can serve as reference accounts for our ongoing sales efforts;
- expand our pipeline of sales prospects in order to promote greater
predictability in our period-to-period sales levels;
- continue to offer new products that complement our existing product
line, in order to make our suite of applications more attractive to
customers;
- continue to develop and upgrade our technology to add additional
features and functionality;
- continue to attract and retain qualified personnel;
- expand direct sales channels and indirect channels such as
relationships with OEM customers and distributors;
- increase awareness of our brand; and
- maintain our current and develop new third-party relationships,
including but not limited to third-party implementers.
The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.
We have a history of losses and negative cash flow and expect this to continue
for the last quarter of the current fiscal year and into the next fiscal year.
Our business is new; we have offered products for a relatively short period
of time; and our base of customers and prospective customers is still relatively
small. We have spent significant funds to date to develop our current products
and to develop our sales and market resources. We have incurred significant
operating losses and have not achieved profitability. As of September 30, 2001,
we had an accumulated deficit of $98.1 million. We expect to continue to invest
in research and development to enhance current products and develop future
products and support our current sales and marketing efforts that promote our
company and our products in the marketplace. As a result, we will need to
increase our revenues significantly to achieve profitability. In addition,
because we expect to continue to invest in our business ahead of anticipated
future revenues, we expect that we will continue to incur operating losses
through the last quarter of the current fiscal year and into the next fiscal
year.
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. We
expect to continue to make expenditures in all areas of our business,
particularly in our sales and marketing operations, in order to promote future
revenue growth. Because the expenses associated with these activities are
relatively fixed in the short-term, we will be unable to adjust spending quickly
enough in any particular quarter to offset any unexpected shortfall in revenue.
As a result, we expect our quarterly operating results to fluctuate. Our
financial results may, as a consequence of quarterly revenue fluctuations, fall
short of the expectations of public market analysts or investors. If this
occurs, the price of our common stock may drop.
We also seek to develop and maintain a significant pipeline of potential
sales prospects, but it is difficult to predict when individual customer orders
will be closed. Our base of customers and the number of additional customer
licenses we enter into each quarter are still relatively small. Accordingly, the
loss or deferral of a small number of anticipated large customer orders in any
quarter could result in a significant shortfall in revenues for that quarter and
future quarters, which could result in a drop in the price of our stock.
Other important factors that could cause our quarterly results and stock
price to fluctuate materially include:
- our ability to grow our customer base and our base of referencing
customers, in light of our relatively limited number of customers to
date;
- our ability to successfully develop alternative sales channels for our
products, such as sales through OEM customers or distributors;
- our ability to expand our implementation and consulting resources
through third-party relationships, in light of the fact that we have
limited third-party implementation and consulting relationships
currently in place; and
- technical difficulties or "bugs" affecting the operation of our
software.
Due to our limited operating history, the early stage of our market and the
factors discussed above, you should not rely on quarter-to-quarter comparisons
of our results of operations as indicators of our future performance.
We face intense competition, which could affect our ability to increase revenue,
maintain our margins and increase market share.
The market for our internet based employee relationship management software
applications is intensely competitive and we expect competition to increase in
the future. Competitors vary in size and in the scope and breadth of the
products and services they offer. Companies offering one or more products
directly competitive with our products include Ariba, Captura Software, Concur
Technologies, IBM, PeopleSoft Corporation and Oracle Corporation. As a result of
the large market opportunity for employee relationship management solutions we
also expect competition from other established and emerging companies.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. Increased
competition may result in price reductions, reduced margins and loss of market
share, any one of which could seriously harm our business.
If we do not provide software applications and related services that meet the
changing demands of our customers, the market for our products will not grow or
may decline, and our product sales will suffer.
To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend additional funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.
Our employee relationship management software products and related services
have accounted for substantially all of our revenues to date. We anticipate that
revenues from these products and related services will continue to constitute
substantially all of our revenues for the foreseeable future. Consequently, our
future financial performance will depend, in significant part, upon the
successful development, introduction and customer acceptance of enhanced
versions of our employee relationship management software applications and any
new products or services that we may develop or acquire. We cannot assure you
that we will be successful in enhancing, upgrading or continuing to effectively
market our employee relationship management software applications or that any
new products or services that we may develop or acquire will achieve market
acceptance.
Evolving technological developments and emerging industry standards will require
us to enhance the functionality of our employee relationship management software
applications, and any inability to enhance functionality could cause our sales
to decline.
Because the market for our products is emerging and subject to rapid
technological change and evolving industry standards, the life cycles of our
products are difficult to predict. Competitors may introduce new products or
enhancements to existing products employing new technologies, which could render
our existing products and services obsolete and unmarketable. For example, our
currently available software applications are written entirely in the Java
computer language. While we believe that this provides our solution with
significant advantages in terms of functionality and flexibility, the market for
Java-based software is still relatively new and it is not clear whether
Java-based systems will continue to maintain commercial acceptance.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance. Our results of operations would be seriously harmed if we are
unable to develop, release and market new software product enhancements on a
timely and cost-effective basis, or if new products or enhancements do not
achieve market acceptance or fail to respond to evolving industry or technology
standards.
In developing new products and services, we may also fail to develop and
market products that respond to technological changes or evolving industry
standards in a timely or cost-effective manner, or experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products and services.
Our revenues have been derived from a relatively small number of customers, and
the loss of a small number of major customers or potential customers could
adversely impact our revenues or operating results.
We licensed our first employee relationship management software application
in March 1998 and have fully implemented our applications for only a limited
number of customers to date due to the time required to implement. Moreover, as
of September 30, 2001, we had not completed an implementation of our Extensity
Purchase Reqs application for any customer. We expect that we will continue to
derive a significant portion of our revenues from a
relatively small number of customers in the future. Accordingly, the loss of a
small number of major customers could materially and adversely affect our
business, and the deferral or loss of anticipated orders from a small number of
prospective customers could materially and adversely impact our revenues and
operating results in any period.
If we fail to maintain positive margins on service revenues in the foreseeable
future, our results of operations could suffer.
For the three and nine months ended September 30, 2001, our service
margins were positive. While we anticipate that our margins will continue to be
positive in the future, we cannot guarantee that they will remain positive.
Failure to maintain positive margins on service revenues could cause our
business to suffer. For more information related to our costs associated with
our service revenues, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We have limited experience with large-scale implementations, which are important
to our future success.
We have limited experience in implementing our applications on a large
scale. As of September 30, 2001, our largest implementation included
approximately 18,000 employee users. We believe that the ability of large
customers to roll-out our products across large numbers of users is critical to
our future success. If our customers cannot successfully deploy our applications
on a large scale, or if they determine for any reason that our products cannot
accommodate large-scale deployments, our business could be harmed.
If we fail to expand our relationships with third parties that can provide
implementation and consulting services to our customers, we may be unable to
grow our revenues and our business could be harmed.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we must continue to establish
relationships with third parties that can provide implementation and consulting
services to our customers. Third-party implementation and consulting firms can
also be influential in the choice of employee relationship management software
applications by new customers. To date, we have established relationships with a
few third-party implementation and consulting firms. In general, however, if we
are unable to establish and maintain effective, long-term relationships with
implementation and consulting providers, or if these providers do not meet the
needs or expectations of our customers, we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third
parties. If sufficient resources are unavailable, we will be required to provide
these services internally, which could limit our ability to expand our base of
customers. A number of our competitors have significantly more established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. Even if we are successful in developing additional relationships with
third-party implementation and consulting providers, we will be subject to
significant risk, as we cannot control the level and quality of service provided
by third-party implementation and consulting partners.
Our expectations of future growth depend on our ability to expand
internationally, and factors specific to our international expansion may prevent
us from achieving our anticipated growth.
Over time, we intend to expand our international operations to achieve our
anticipated growth, but we may face significant challenges to our international
expansion. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. To achieve broad acceptance in international markets,
our products must be localized to handle a variety of factors specific to each
international market, such as tax laws and local regulations. The incorporation
of these factors into our products is a complex process and often requires
assistance from third parties. We may not adequately address all of the factors
necessary to achieve broad acceptance in our target international markets.
Further, to achieve broad usage by employees across international organizations,
our products must be localized to handle native languages and cultures in each
international market. Localizing our products is also a complex process and we
intend to continue working with third parties to develop localized products. To
date, we have localized our product for the
markets where English language is the native language and completed translations
for the German, French, Italian and Spanish languages.
We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom and established a relationship with an international
reseller. In 2000, we expanded our European Operations through opening a second
office in Frankfurt, Germany. As of September 30, 2001, we had a total of 15
employees in our international operations. For the nine months ended September
30, 2001, we derived 22% of our revenues from our international operations. To
succeed internationally, we must react quickly to the business environment in
which we operate overseas. Thus we must effectively monitor the size of our
international workforce and make adjustments as necessary. During periods of
growth we must hire and train experienced international personnel as well as
recruit and retain qualified domestic personnel to staff and manage our
international operations. However, we may experience difficulties in recruiting
and training additional international staff. We must also be able to enter into
strategic relationships with companies in international markets. If we are not
able to maintain successful strategic relationships internationally or recruit
additional companies to enter into strategic relationships, our future growth
could be limited. We also face other risks inherent in conducting business
internationally, such as:
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates; and
- trade barriers.
Any of these factors could seriously harm our international operations and,
consequently, our business.
Our sales cycles are long and unpredictable, which makes period-to-period
revenues difficult to predict.
Because the market for our employee relationship management software
products and related services is new, we experience long and unpredictable sales
cycles. The sales cycle for our employee relationship management software
applications typically ranges from two to nine months. In the early stages of
this market, our customers have frequently viewed the purchase of our products
as part of a long-term strategic decision regarding the management of their
workforce-related operations and expenditures. This decision process has
sometimes resulted in customers taking a long period of time to assess
alternative solutions by our competitors or deferring a purchase decision until
the market evolves. Sales cycles continue to be long and the timing of purchase
decisions by individual customers remain at times uncertain. We must continue to
educate potential customers on the use and benefits of our products and
services, as well as the integration of our products and services with
additional software applications utilized by the individual customers. Because
the sales cycle is long and the time of individual orders is uncertain, our
period-to-period revenues are difficult to predict.
We may be unable to attract and retain highly skilled employees that are
necessary for the success of our business plan.
Our ability to execute our business plan and be successful also depends
on our continued ability to attract and retain highly skilled employees. We
depend on the services of senior management and other personnel, particularly
Robert A. Spinner, our Chief Executive Officer. Over time, we will need to hire
additional personnel in all operational areas. Competition for personnel in our
industry is intense. We have in the past experienced, and we expect to continue
to experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting or
retaining personnel, our business could be adversely affected.
Software defects could lead to loss of revenue or delay the market acceptance of
our applications.
Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
the release, customer dissatisfaction and lower revenues and service margins
during the period required to correct these errors. We may in the future
discover errors, and additional scalability limitations, in new releases or new
products after the commencement of commercial shipments. Any of these errors or
defects could cause our business to be materially harmed.
We may become increasingly dependant on third-party software incorporated in our
products and, if so, impaired relations with these third parties, errors in
third-party software or inability to enhance the software over time could harm
our business.
We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from PUMATECH and synchronization software from AETHER Systems.
We may incorporate additional third-party software into our products as we
expand our product line and broaden the content and services accessible through
our gateway. The operation of our products would be impaired if errors occur in
the third-party software that we license. It may be more difficult for us to
correct any errors in third-party software because the software is not within
our control. Accordingly, our business would be adversely affected in the event
of any errors in this software. Furthermore, it may be difficult for us to
replace any third-party software if a vendor seeks to terminate our license to
the software.
Our success depends in part upon our ability to protect our intellectual
property, we may not be able to do so adequately.
Our success depends in large part upon our proprietary technology. We rely
on a combination of copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We license rather than
sell our solutions and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets through a number of means,
including requiring those persons with access to our proprietary information to
execute nondisclosure agreements with us and restricting access to our source
code. We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products, or design around our proprietary intellectual property.
Our hosted product offering may fail.
We offer our suite of software products under an Internet-based hosted
model to complement our traditional licensing of these products. We offer our
hosted solutions on a subscription basis to companies seeking to outsource
certain employee relationship management functions. This business model is
unproven and represents a significant departure from the strategies we and other
enterprise software vendors have traditionally employed. We have limited
experience selling products or services under a hosted model, and our efforts to
develop the hosted business divert our financial resources and management
attention away from other aspects of our business. In connection with our hosted
business, we have engaged third-party service providers to perform many of the
necessary services as independent contractors, and they may fail to perform
those services adequately. If any service provider delivers inadequate support
or service to our customers, our reputation could be harmed. If our strategy of
offering products to customers over the Internet proves successful, some of
those Internet customers may be ones that otherwise might
have purchased our software and services through our traditional licensing
arrangements, which is likely to reduce the amount of revenue recognized on
shipment.
Security and other concerns may discourage customers from purchasing under our
hosted model.
If customers determine that our hosted model is not scaleable, does not
provide adequate security for the dissemination of information over the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason customers fail to accept our hosted products for use on the Internet or
on a subscription basis, our business will be harmed. As an hosted provider, we
expect to receive confidential information including credit card, travel
booking, employee, purchasing, supplier, and other financial and accounting
data, through the Internet and there can be no assurance that this information
will not be subject to computer break-ins, theft, and other improper activity
that could jeopardize the security of information for which we are responsible.
Any such lapse in security could expose us to litigation, loss of customers, or
otherwise harm our business. In addition, any person who is able to circumvent
our security measures could misappropriate proprietary or confidential customer
information or cause interruptions in our operations. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Additionally, in the past, computer viruses and
software programs that disable or impair computers have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced into
our systems or those of our customers or suppliers, which could disrupt our
software solutions or make them inaccessible to customers or suppliers. Further,
a well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information. Our failure to prevent security breaches, or well-publicized
security breaches affecting the Internet in general, could significantly harm
our business, operating results, and financial condition.
We may face costly damages or litigation costs if a third party claims that we
infringe its intellectual property.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.
Any future acquisitions of companies or technologies may result in distraction
of our management and disruptions to our business.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies. We cannot make assurances that we will be able to identify future
suitable acquisition or investment candidates, or if we do identify suitable
candidates, that we will be able to make such acquisitions or investments on
commercially acceptable terms or at all. If we acquire or invest in another
company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
We have anti-takeover provisions in our charter and in our contracts that could
delay or prevent an acquisition of our company, even if such an acquisition
would be beneficial to our stockholders.
Provisions of our certificate of incorporation, our bylaws, Delaware law
and the employment agreements of some of our key officers could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.
Our business may face additional risks and uncertainties not presently known to
us, which would cause our business to suffer.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Quarterly Report, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.
RISKS RELATED TO OUR INDUSTRY
Our success will depend upon the growth and acceptance of the market we address
and our ability to meet the needs of the emerging market for employee
relationship management software applications.
The market for our employee relationship management software applications
and services is at an early stage of development. Our success will depend upon
the continued development of this market and the increasing acceptance by
customers of the benefits to be provided by employee relationship management
applications and services. In addition, as the market evolves, it is unclear
whether the market will accept our suite of applications as a preferred solution
for employee relationship management needs. Accordingly, our products and
services may not achieve significant market acceptance or realize significant
revenue growth. Unless a critical mass of organizations and their suppliers use
our solutions and recommend them to new customers, our solutions may not achieve
widespread market acceptance, which may cause our business to suffer.
Customers may not accept the Internet as a means to access enterprise
applications, and this would likely cause our business model to be unsuccessful.
To date, enterprises have generally managed operational functions through
internal computer or manual systems rather than over the Internet. Our business
model assumes that enterprises and their employees will increasingly adopt the
Internet or corporate intranets as a means of managing important business
functions. This business model is not yet proven, and if we are unable to
successfully implement our business model, our business will be materially
adversely affected.
Market prices of technology companies have been highly volatile, and the market
for our stock may continue to be volatile as well.
The stock market has experienced significant price and trading volume
fluctuations especially this past year, and the market prices of technology
companies generally, and Internet-related software companies particularly, have
been extremely volatile. Investors may not be able to resell their shares at or
above the price they paid for the stock. In the past, following periods of
volatility in the market price of a public company's securities, securities
class action litigation has often been instituted against the company. Such
litigation could result in substantial costs and diversion of management's
attention and resources
Increasing government regulation could limit the market for, or impose sales and
other taxes on the sale of, our products and services.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
taxation of goods and services provided over the Internet, and content and
quality of products and services. It is possible that legislation could expose
companies involved in electronic commerce to liability, which could limit the
growth of electronic commerce generally. Legislation could dampen the growth in
Internet usage and decrease its acceptance as a communications and commercial
medium. If enacted, these laws, rules or regulations could limit the market for
our products and services.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We develop products in the United States and market our products in North
America and, to a lesser extent, in Europe and the rest of the world. As a
result, our financial results could be affected by factors such as changes in
foreign currency rates or weak economic conditions in foreign markets. Because
the majority of our revenues are currently denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets.
INTEREST RATE RISK
We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of September 30, 2001.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not involved in any legal proceedings that are material to its
business or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
a. Not applicable
b. Not applicable
c. Not applicable
d. Use of proceeds from sale of Registered Securities.
On January 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1/A. Pursuant to this Registration Statement, the Company
completed an initial public offering of 4,600,000 shares of its common stock
(including 600,000 shares sold pursuant to the exercise of the Underwriters'
over-allotment option) at an initial public offering price of $20.00 per share
("the Offering"). Proceeds to the Company, after deduction of the underwriters'
discount and commission, from the Offering totaled approximately $83.3 million,
net of offering costs of approximately $2.2 million. To date we have used all of
the proceeds to fund working capital.
Upon completion of the Offering, the Company's preferred stock was converted
into 14,594,549 shares of common stock. Upon conversion of the preferred stock,
all rights to accrued and unpaid dividends were terminated.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters To a Vote of Security Holders
None
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 13, 2001 EXTENSITY, INC.
By /s/ Kenneth R. Hahn
Chief Financial Officer
(Principal Financial
and Accounting Officer)