Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2003

OR

[  ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from        to        

Commission file number: 0-26811

NexPrise, Inc.

5950 La Place Court, Suite 200
Carlsbad, CA 92008
760-804-1333
(Address, including zip code, and telephone
number, including area code, of Registrant’s principal
executive offices)

     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 [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No [X]

     On June 30, 2003, 3,226,471 shares of the registrant’s common stock, $.0002 par value per share, were issued and outstanding.

Table of Contents

NEXPRISE, INC.
FORM 10-Q

TABLE OF CONTENTS

2

Table of Contents

NEXPRISE, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

(1)

Derived from December 31, 2002 audited consolidated financial statements. See accompanying notes to consolidated financial statements.

3

Table of Contents

NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

See accompanying notes to consolidated financial statements

4

Table of Contents

NEXPRISE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to consolidated financial statements

5

Table of Contents

NEXPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note 1. Description of Business

     NexPrise, Inc. (the “Company” or “NexPrise” or “we”), formerly known as Ventro Corporation and Chemdex Corporation, is a seller of business process applications and provides solutions and services that enable discrete manufacturing companies to address their specific business challenges. These solutions complement and expand on currently installed enterprise systems and allow for the continuous process improvements required to meet customers’ changing business demands.

     As of June 30, 2003, the Company had working capital of approximately $5.8 million and stockholders’ equity of approximately $2.9 million. During the three months ended June 30, 2003, the Company used cash and cash equivalents in operating activities of approximately $1.2 million, an increase of approximately $500,000 from the $700,000 used in the three months ended March 31, 2003. The increase in cash used in operating activities in the three months ended June 30, 2003 was primarily due to a non-trade receivable of approximately $500,000 collected in the three months ended March 31, 2003 that was not repeated. Management believes it has sufficient working capital to support the Company’s planned activities through 2003 and beyond.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. While the quarterly financial information is unaudited, the financial statements included in this Form 10-Q reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The consolidated balance sheet as of December 31, 2002 has been derived from the audited consolidated balance sheet as of that date. The information included in this report should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2002.

Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

     Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.

Revenue Recognition

     Revenue is made up primarily of subscriptions of bundled term licenses, post contract support and, in most cases, hosting services. The Company recognizes such revenue using the “subscription” method, whereby the initial and renewal amounts are recognized ratably over the period of the license during which the services are expected to be provided. In instances where maintenance is bundled with license of software products, such maintenance terms are typically one year. Revenue for training or consulting services that are not bundled with a subscription is recognized based on achievement of billable milestones as written in the contract or upon contract completion and currently makes up less than 10% of overall revenue. Perpetual license revenue is recognized using the residual method described in Statement of Position (“SOP”) No. 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE of the fair value of maintenance for license agreements with and without stated renewal rates is based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. VSOE for training or consulting is based upon separate

6

Table of Contents

sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or upon completion of services. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. Our perpetual arrangements may include initial maintenance extending over a period of time with no renewal rate, which requires perpetual license revenue to be taken ratably over the contract period.

     NexPrise had not yet established VSOE for maintenance prior to March 31, 2003, and therefore is recognizing the revenue from license agreements entered into prior to March 31, 2003 ratably over the maintenance period. NexPrise established VSOE in the three months ended June 30, 2003. Approximately 13% of the revenue recognized for the three months ended June 30, 2003 consisted of perpetual license revenue that was recognized when the software was delivered and not ratably over the contract. Approximately 8% of the revenue recognized for the three months ended June 30, 2003 consisted of consulting and training. The remaining 79% of the revenue recognized for the three months ended June 30, 2003 consisted of revenue being recognized ratably over the contract term and is made up of bundled subscriptions and perpetual licenses with maintenance sold prior to the establishment of VSOE for maintenance.

     Our revenue recognition policy is in accordance with SOP No. 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin (“SAB”) 101. For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

Net Income (Loss) Per Share

     Net income (loss) per share is presented in accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, which requires dual presentation of basic earnings per share (“EPS”) and diluted EPS.

     Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period.

Stock-Based Compensation

     In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS 148 are effective for the Company’s financials statements issued for 2003.

     The Company has elected to follow Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, in accounting for its employee stock options. No compensation expense is recognized for share purchase rights granted under the Company’s employee stock options and employee stock purchase plan. Had compensation cost for the Company’s employee stock options and employee stock purchase plan been determined based on fair value at the grant date consistent with SFAS 123, the Company’s net loss and earnings loss per share would have been reduced to the pro forma amounts indicated below:

7

Table of Contents

Concentration of Credit Risk and Significant Customers

     The Company’s customer base consists of businesses located primarily in North America. The Company maintains allowances for potential credit losses and historically, such losses have been within management’s expectations. Revenue and accounts receivable by customers comprising more than 10% of total amounts are as follows:

Long Lived Assets

     The Company reviews property, plant and equipment, goodwill and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any), are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Effective January 1, 2002, in conjunction with the implementation of SFAS No. 142, goodwill is no longer amortized and potential impairment of goodwill and purchased intangible assets with indefinite useful lives is evaluated using the specific guidance provided by SFAS No. 142. This impairment analysis is performed at least annually. Also effective January 1, 2002, potential impairment of long-lived assets other than goodwill and purchased intangible assets with indefinite useful lives is evaluated using the guidance provided by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Note 3. Comprehensive Loss

     SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net loss and “Other Comprehensive Income.” Other Comprehensive Income refers to revenues, expenses, gains and losses that are not included in net income (loss) but rather are recorded directly in stockholders’ equity. The components of comprehensive loss for the three and six months ended June 30, 2003 and 2002 were as follows (in thousands):

8

Table of Contents

Note 4. Goodwill and Purchased Intangibles

     SFAS 142, Goodwill and Other Intangible Assets, requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of our recorded intangible assets is impaired. This analysis requires management to make a series of critical assumptions to (1) evaluate whether any impairment exists, and (2) measure the amount of impairment.

     Subsequent to the adoption of SFAS 142, identifiable intangible assets with definite lives will continue to be amortized over their useful lives and will be reviewed for impairment in accordance with SFAS 144 when impairment indicators exist. These assets are shown as intangible assets on the face of the balance sheet and are as follows (in thousands):

     NexPrise will continue to amortize the intangible asset balance of approximately $7.7 million over the remaining useful lives of the intangible assets. NexPrise purchased technology is amortized based on forecasted revenue over 5 years. InfoPrise purchased technology is amortized based on forecasted revenue over 3 years. The NexPrise and InfoPrise purchased technology assets will be fully amortized in the three months ended December 31, 2005 under the current amortization schedule. The NexPrise trade name and non-compete intangible assets are amortized using a straight line method over 2 and 3 year periods, respectively. The trade name asset will be fully amortized in the three months ended September 30, 2003 under the current amortization schedule. The non-compete asset will be fully amortized in the three months ended September 30, 2004 under the current amortization schedule. The amortization of purchased intangible assets was approximately $745,000 and $1.5 million in the three and six months ended June 30, 2003 and $2.3 million in fiscal 2002, which included $399,000 of in-process research and development. Estimated intangible amortization expense for the years ended December 31, 2003 and 2004 are $2.6 million and $2.9 million, respectively.

Note 5. Business Combinations

     In February 2002 NexPrise acquired privately held InfoPrise, Inc. (“InfoPrise”), a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, which was accounted for using the purchase method, NexPrise agreed to issue unsecured convertible promissory notes with a face value of $3,040,000 due 2007. The notes bear interest at a rate of 6% and are convertible into the Company’s common stock at $18.75 per share. The Company also issued 139,790 shares of NexPrise common stock and assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,666 shares of NexPrise common stock. An independent valuation study was commissioned to value the intangible assets associated with the InfoPrise purchase and facilitate the purchase accounting.

9

Table of Contents

     The following table summarizes the forms of consideration and their fair values (in thousands):

     A summary of the InfoPrise purchase transaction is shown below (in thousands):

     The following unaudited pro forma information shows the results of operations of the Company for the six months ended June 30, 2002 as if the business combinations with NexPrise and InfoPrise had occurred at the beginning of the period. In process research and development charges of $399,000 are included for the six months ended June 30, 2002. This data is not indicative of the results of operations that would have arisen if the business combinations had occurred at the beginning of the respective periods and is not intended to be indicative of future results of operations (in thousands except per share data).

Note 6. Balance Sheet Details

Other Current Assets

     Other current assets of $331,000 and $841,000 as of June 30, 2003 and December 31, 2002, respectively, are comprised primarily of prepaid royalties, current deposits and other receivables.

Other Long-term Assets

     Other long-term assets are comprised of the following (in thousands):

10

Table of Contents

Note 7. Equity Investments

     The following table outlines the Company’s equity investments in its marketplace companies as of June 30, 2002 and 2003 (in thousands, except percentage data):

     In March 2003, Ketera (fka MarketMile) secured an additional round of funding that NexPrise did not participate in. As a result, NexPrise’s ownership percentage of Ketera has decreased to 0.5%.

     The investment loss in the three months ended June 30, 2003, reflects a write-down of approximately $113,000 for impairment deemed to be other than temporary of an investment accounted for using the cost method. The investment losses of approximately $1.1 million and $2.5 million in the three and six months ended June 30, 2002, respectively, consist of equity losses in the marketplace companies in which we had a significant ownership percentage and approximately $186,000 of write-downs taken in the three months ended March 31, 2002, for impairment deemed to be other than temporary of an investment accounted for using the cost method.

Note 8. Convertible Notes

     In February 2002 NexPrise issued unsecured, convertible promissory notes due in 2007 with a face value of $3,040,000, a common stock conversion price of $18.75 and interest rate of 6% in connection with the acquisition of InfoPrise. As of June 30, 2003, no amount of the notes had been converted into NexPrise common stock. In April 2000, NexPrise issued $250 million of convertible subordinated notes due in 2007, bearing annual interest at 6% and convertible at the option of the holder into the Company’s common stock at a price of $1,361.70 per share. The Company subsequently repurchased $241.2 million of these notes during 2001. Approximately $8.8 million of the convertible subordinated notes remained outstanding as of June 30, 2003 and December 31, 2002.

Note 9. Contingencies

     In 2001, several class action lawsuits, including one derivative suit, were filed and served on the Company alleging that the Company and certain individuals made false and misleading statements concerning our business model and earnings for fiscal 2000. The Company is also a defendant in the initial public offering class action suits filed against issuers and the investment banks alleging that the offering documents were false and misleading. Although we believe that we have meritorious defenses to the actions and intend to defend the suits vigorously, we cannot predict with certainty the outcome of these lawsuits. Our defense against such lawsuits will be costly and will require a significant commitment of time and resources by our senior management. Although the Company has insurance to cover these claims, the recovery of all future costs is not assured. The Company has also been served with a stockholder derivative action but is named solely as a nominal defendant against whom no recovery is sought.

     A subtenant has attempted to renegotiate its sublease agreement with us. We have drawn upon the subtenant’s security deposit to cover our expenses to date. If we are unable to successfully resolve this situation our sublease income may not be enough to pay what we may be liable for in ongoing lease payments. The Company has accrued for expected additional costs as a result of the potential loss of this sublease income.

     The Company is a party to various claims in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Discontinued Marketplace Companies Formerly Known as Promedix and Chemdex

11

Table of Contents

     Contracts with Promedix and Chemdex customers and suppliers contained, in some cases, cancellation notification periods longer than the Company provided. In some cases, shorter notification periods caused inconvenience to customers and suppliers, and the Company has been notified by several suppliers that discontinuing the marketplace represents a breach of Promedix contractual obligations. Additionally, two customers of Chemdex have informed the Company that they did not receive notice of the termination of their contracts within the contractually required time period. However, as of June 30, 2003, no customer or supplier of Promedix or Chemdex had filed a formal complaint with the Company.

Government Regulations

     In addition to regulations applicable to businesses generally, the Company is or may be subject to direct regulation by governmental agencies which includes numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, medical and in vitro devices, nuclear chemical businesses and environmental spills, as well as U.S. import and export controls and import controls of other countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit future regulatory and product liability risks, until all statutes of limitation have expired, certain legal risks will remain.

     The Company relied on its suppliers to comply with applicable local, state and federal laws regarding the labeling and the dissemination of information on any products sold that may be hazardous or present a health threat to the user. If these suppliers have failed, or we have failed, to maintain the requisite records irrespective of the actions of the suppliers, or if either of us had failed to adequately comply with labeling and information dispensing requirements of local, state or federal laws, then the Company may be held legally responsible, since Company held title to these products, and could be subject to governmental penalties or fines, as well as private lawsuits to enforce these laws.

     Finally, the Company has relied upon its suppliers to obtain appropriate approvals for products regulated by the FDA and to comply with the requirements relating to those approvals and products. The failure of suppliers to obtain or comply with those approvals, or the failure of the product advertising or labeling to be consistent with the FDA approval for the products, or other failures by the products themselves, or our failure to keep regulatory records required by the FDA, such as complaint files, could result in costly product recalls, significant fines and judgments, civil and criminal liabilities and negative publicity.

     In February 2001, the Company received a subpoena from the U.S. Department of Justice, Drug Enforcement Administration, for certain billing, invoice, and shipping records concerning sales to an unaffiliated purchaser. Other than the foregoing, the Company is unaware of any current investigations, inquiries, citations, fines or allegations of violations or non-compliance relating to regulatory requirements pending by government agencies or by third parties against us. It is possible, however, that there may be such investigations or allegations that the Company is not aware of or future investigations or allegations. The risk that any noncompliance may be discovered in the future is currently unknown. Although any potential impact on the Company for noncompliance cannot currently be established, it could result in significant civil or criminal penalties, including monetary fines and injunctions, for noncompliance and negative publicity, and seriously harm our business, revenues, results of operations and financial condition.

Indemnification

     The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an “SLSA”). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, trade secret, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain product usage limitations and geography-based scope limitations and a right to replace an infringing product or modify it to make it non-infringing. If the Company cannot address the infringement by replacing the product or services, or modifying the product or services, the Company is allowed to cancel the license or services and return the fees paid by the customer. The Company requires its employees to sign a proprietary information and inventions assignment agreement, which assigns the rights in its employees’ development work to the Company.

     To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of June 30, 2003. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. There can be no assurance that potential future payments will not have a material adverse effect on the Company’s business, results of operations or financial condition.

12

Table of Contents

Note 10. Accrued Expenses

     Accrued expenses were comprised of the following as of June 30, 2003 and December 31, 2002 (in thousands):

Note 11. Deferred Stock-Based Compensation

     In connection with the acquisition of InfoPrise completed in February 2002, the Company assumed the outstanding options granted under the InfoPrise stock option plans. The Company recorded deferred compensation of $132,293 for the difference between the exercise price of the unvested options assumed and the fair value of the common stock underlying those options as of the date the acquisition was consummated. That charge is being amortized over the remaining vesting period of the options. Additionally, the Company recorded deferred compensation of $184,178 with respect to the issuance of restricted common stock. That charge is being amortized over the remaining vesting period of the stock.

     The Company recognized $169,000 and $187,000 in stock compensation expense for the six months ended June 30, 2003 and 2002, respectively.

Note 12. Settlement, Restructuring and Discontinued Operations

     During the year ended December 31, 2001, the Company took actions to improve efficiencies and reduce operating costs, including employee and contractor terminations, consolidation of facilities, settlements of various disputes and termination of leases. The net of these charges was reported as a component of loss from continuing operations.

     The Company paid approximately $12,000 in severance payments during the quarter ended March 31, 2003. In the quarter ending June 30, 2003, the Company reversed an accrual related to the Company’s cancellation of a contract as part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years have passed since the related activity ceased and no actual charges have been, or are now expected to be, paid. At June 30, 2003, and December 31, 2002, the Company had restructuring accruals and reserves of $0 and $505,000, respectively. An analysis of activity is as follows (in thousands):

     During the three months ended June 30, 2003 the Company reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years have passed since the related activities ceased and no actual charges have, or are now expected to be, paid.

Note 13. Recent Accounting Pronouncements

     In July 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and losses on debt extinguishment such that most debt extinguishment gains and losses will no longer be classified as extraordinary. FASB 145 also

13

Table of Contents

amends SFAS 13 with respect to sale-leaseback transactions. We adopted SFAS 145 on January 1, 2003 and have reported a gain on the extinguishment of debt in the three months ended June 30, 2003 as other income in the results of operations.

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses significant issues relating to the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that the initial liability for costs associated with exit and disposal activities be measured at fair value and prohibits the recognition of a liability based solely on an entity’s commitment to a plan. The provisions of SFAS 146 are effective for exit and disposal activities initiated after December 31, 2002. Retroactive application of SFAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS 146 should continue to be accounted for in accordance with EITF 94-3 or other applicable pre-existing guidance. The Company does not believe that the adoption of SFAS 146 will have a material impact on its financial position or results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity’s product warranty liabilities. NexPrise will apply the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002. The disclosure provisions of FIN 45 were effective for financial statements beginning with the first quarter of calendar year 2003. The Company does not believe that the adoption of FIN 45 will have a material impact on the consolidated financial position and results of operations.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. NexPrise is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The Company does not have any ownership in any variable interest entities as of June 30, 2003. The Company will apply the consolidation requirements of FIN 46 in future periods should interest in a variable interest entity be acquired.

     In April 2003, the FASB issued SFAS 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends Statement 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, in connection with other Board projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The adoption of this Statement is not expected to have a significant impact on the Company’s consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS 150 will have a material impact on the Company’s consolidated financial statements.

14

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following Management’s Discussion and Analysis of Results of Operations and Financial Condition contains forward-looking statements. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those stated herein. Although management of NexPrise believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, performance, or achievements. For further information, refer to Management’s Discussion and Analysis and the Risk Factors section of NexPrise’s Annual Report on Form 10-K and the section entitled “Risk Factors” in this Form 10-Q.

Overview

     We are a seller of business process applications and collaborative solutions for program management and quote management. Our revenue primarily consists of subscriptions of bundled licenses, post contract support and, in most cases, hosting services and also includes perpetual licenses.

     In 2001, we significantly restructured our operations and focused on a new business direction. We exited the business of building and servicing business-to-business marketplaces and entered the business of providing collaborative and business process automation software solutions. In August 2001, while doing business under the name Ventro Corporation, we acquired privately-held NexPrise, Inc., a company with an advanced collaborative software solution and an established customer base located in Santa Clara, California. Later in the year we reorganized our management team and Board of Directors and took measures to reduce commitments and operating expenses and conserve cash. In 2001, the Company incurred a net charge of $16.5 million in connection with restructurings and settlements. In January 2002, we changed our name to NexPrise, Inc.

     On February 4, 2002, we acquired privately-held InfoPrise, a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, we issued to InfoPrise’s stockholders an aggregate of 139,790 shares of NexPrise common stock together with unsecured 6% promissory notes convertible into the Company’s common stock, due in 2007, with a face value of $3,040,000 and a per share common stock conversion price of $18.75. We also assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,000 shares of common stock if all of the assumed options are exercised. As of June 30, 2003, 1,820 of these options had been exercised. All operating results presented for periods following the above date are derived from the combined operations of NexPrise and InfoPrise. We expect to incur operating losses on a quarterly basis for at least the next 12 months as we continue to develop and enhance our technology and service offerings and build our customer base.

Critical Accounting Policies

     Use of Estimates. Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements

     Revenue Recognition. Revenue is made up primarily of subscriptions of bundled term licenses, post contract support and, in most cases, hosting services. The Company recognizes such revenue using the “subscription” method, whereby the initial and renewal amounts are recognized ratably over the period of the license during which the services are expected to be provided. In instances where maintenance is bundled with license of software products, such maintenance terms are typically one year. Revenue for training or consulting services that are not bundled with a subscription is recognized based on achievement of billable milestones as written in the contract or upon contract completion and currently makes up less than 10% of overall revenue. Perpetual license revenue is recognized using the residual method described in Statement of Position (“SOP”) No. 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE of the fair value of maintenance for license agreements with and without stated renewal rates is

15

Table of Contents

based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. VSOE for training or consulting is based upon separate sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or upon completion of services. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. Our perpetual arrangements may include initial maintenance extending over a period of time with no renewal rate, which requires perpetual license revenue to be taken ratably over the contract period.

     Until VSOE was established for maintenance in the three months ended June 30, 2003, perpetual license revenue was taken ratably over the term of the maintenance period. In the three months ended June 30, 2003, we established VSOE for maintenance. Approximately 13% of the reported revenue for that period is made up of perpetual licenses recognized upon delivery of the software. Our revenue recognition policy is in accordance with Statement of Position No. 97-2 (“SOP 97-2”), Software Revenue Recognition, as amended, and Staff Accounting Bulletin 101. For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

     Consolidations. The various interests that we have acquired in companies are accounted for under three broad methods: consolidation, the equity method and the cost method. The applicable accounting method is generally determined based on our voting interest in a company.

     Companies that NexPrise directly or indirectly controls are accounted for under the consolidation method of accounting. Under this method, a company’s accounts are reflected within NexPrise’s Consolidated Financial Statements. All significant inter-company accounts and transactions are eliminated.

     Entities where NexPrise can exercise significant influence, but not control, are accounted for under the equity method of accounting. Whether or not NexPrise exercises significant influence with respect to a company depends on an evaluation of several factors including, among others, representation on the company’s board of directors and ownership level, generally 20% to 50% interest in the voting securities of the company including voting rights associated with NexPrise holdings in common, preferred and other convertible instruments in the company. Under the equity method of accounting, our share of the earnings or losses of these companies are included in the equity income (loss) section of our Consolidated Statements of Operations.

     Companies not consolidated or accounted for under the equity method are accounted for under the cost method of accounting. Under this method, NexPrise’s share of the earnings or losses of these companies is not included in its Consolidated Statements of Operations. The Company periodically evaluates the carrying value of its investments for impairment.

     The fair value of the remaining long-term investment is dependent on the performance of the entity in which the Company has invested, as well as volatility inherent in the external markets for this investment. In assessing potential impairment for this investment the Company considers these factors as well as forecasted financial performance of its investee. If these forecasts are not met the Company may have to record additional impairment charges not previously recognized.

     Long Lived Assets. The Company reviews property, plant and equipment, goodwill and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. During 2003 we will continue to evaluate our intangible assets for impairment as events and circumstances warrant. Among other circumstances, a material deterioration in the future cash flows expected from these assets due to lower than planned revenue or a decline in the Company’s market capitalization could be indicators of impairment and lead to write-offs.

     Legal. The Company is involved in certain claims and litigation related to its operations, including ordinary, routine litigation incidental to its business. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the Company’s consolidated financial position, liquidity, results of operations or properties. In reviewing these claims and litigation, management assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is

16

Table of Contents

made after analysis of each matter, which includes discussion with counsel retained in such matter. The required accruals may change in the future due to new developments in a matter or changes in strategies to resolve that matter, including changes in litigation defense and settlement strategies. If a change in circumstances resulted in a materially adverse outcome or judgment against NexPrise, NexPrise could be required to expend cash intended to fund operations in defense of the Company and might then have an insufficient amount of cash to meet other obligations.

Results of Operations

     Revenues. NexPrise reported $1,002,000 and $1,723,000 of revenue for the three and six months ended June 30, 2003, an increase of 53% over the $653,000 reported for the three months ended June 30, 2002 and 30% over the $1,327,000 reported for the six months ended June 30, 2002. The increase was driven by products and services sold to new customers as well as increased capacity sold to existing customers. The revenue is made up primarily of bundled subscriptions and maintenance and licenses for the Company’s collaborative commerce and business process automation solutions generated subsequent to our August 8, 2001 acquisition of privately-held NexPrise, Inc. and our February 2002 acquisition of privately-held InfoPrise, Inc. Approximately 79% of the revenue recognized for the three months ended June 30, 2003 consisted of revenue being recognized ratably over the contract term and is made up of bundled subscriptions and perpetual licenses, with maintenance, sold prior to the establishment of VSOE for maintenance. Approximately 13% of the revenue recognized for the three months ended June 30, 2003 consisted of perpetual license revenue recognized when the software was delivered and not ratably over the contract. Approximately 8% of the revenue recognized for the three months ended June 30, 2003 consisted of consulting and training. Revenue for the three and six months ended June 30, 2002 was substantially all bundled subscriptions to term licenses with maintenance and, in most cases, included hosting.

     Cost of Product Licenses and Services. The cost of product licenses and services was $305,000 and $586,000 in the three and six months ended June 30, 2003, a decrease of 28% and 21% from the $424,000 reported in the three months ended June 30, 2002 and $741,000 reported in the six months ended June 30, 2002. These costs consisted primarily of outsourced hosting services for our customers, personnel and other expenses associated with providing maintenance and technical support services and royalties payable to third parties whose software is incorporated in the NexPrise solution. The decrease was primarily due to lower hosting, maintenance and technical support services expenses realized when the Company rationalized its hosting environment in the second half of 2002.

     Cost of Amortization of Purchased Technology. Amortization of the developed technology intangible assets acquired in the purchases of NexPrise in August 2001 and InfoPrise in February 2002 was $491,000 and $982,000 in the three and six months ended June 30, 2003, an increase of 122% for each period. These assets are being amortized based on forecast revenue and will be fully amortized in 2005.

     Research and Development. Research and development (“R&D”) expenses consist primarily of personnel and other expenses associated with developing, updating, and enhancing software. R&D expenses were approximately $556,000 and $1.4 million during the three and six months ended June 30, 2003, a decrease of 64% from the $1.6 million reported for the three months ended June 30, 2002, and 59% from the $3.4 million reported for the six months ended June 30, 2002. The decrease resulted from a $191,000 reversal of an estimated liability originally accrued in 2001 and reductions in workforce. The accrual reversal was made on the basis that, consistent with Company policy, two years had passed since that estimated liability had been accrued and no actual charges related to that liability had been, or are now expected to be, paid. To date, all software development costs have been expensed in the period incurred. We believe that continued investments in research and development are required to remain competitive.

     In Process Research and Development. The Company expensed $399,000 of acquired in-process research and development for the six months ended June 30, 2002. No such expenses were incurred during any of the other reported periods. The in-process research and development was acquired as a result of the purchase of InfoPrise in February 2002. The Company determined the amount of in process research and development through an independent valuation performed in connection with the allocation of the InfoPrise purchase price.

     Sales and Marketing. Sales and marketing expenses consist primarily of payroll and related expenses for personnel engaged in enterprise sales activities and enterprise account management, as well as travel and promotional expenses. Sales and marketing expenses were approximately $954,000 and $1.9 million during the three and six months ended June 30, 2003, a decrease of 40% from the $1.6 million reported for the three months ended June 30, 2002 and 41% from the $3.3 million reported for the six months ended June 30, 2002. The decrease was driven by reductions in workforce and reduced spending on marketing programs. The Company expects sales and marketing expenses in future quarters to increase as investments are made in the personnel and programs needed to acquire new customers.

     General and Administrative. General and administrative expenses consist primarily of salaries, fees for professional services and facilities expenses. General and administrative expenses were approximately $917,000 and $1.6 million for the three and six months

17

Table of Contents

ended June 30, 2003, a decrease of 37% from the $1.5 million reported for the three months ended June 30, 2002 and of 49% from the $3.2 million reported for the six months ended June 30, 2002. The decrease was driven by reductions in infrastructure costs and reductions in workforce.

     Restructuring & Settlement. In the three months ended June 30, 2003, the Company reversed a restructuring and settlement accrual related to the Company’s cancellation of a contract as part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years have passed since the related activity ceased and no actual charges have been, or are now expected to be, paid. The reversal resulted in a credit of $493,000 being reported on the restructuring line of the statement of operations.

     Interest Expense. Interest expense was $189,000 and $378,000 in the three and six months ended June 30, 2003, a decrease of 1.6% from the $192,000 reported for the three months ended June 30, 2002 and an increase of 2% from the $369,000 reported in the six months ended June 30, 2002. Interest expense consists primarily of interest related to convertible subordinated notes issued in April 2000, the convertible promissory note issued in association with the purchase of InfoPrise in February 2002 and, to a lesser extent, financed equipment and other financing arrangements. With respect to the subordinated notes, approximately $265,000 is payable semi-annually in arrears on April 1 and October 1 of each year for interest on the notes that remain outstanding at June 30, 2003. In addition, the remaining deferred offering costs of approximately $175,000 related to the subordinated notes are being amortized as interest expense ratably over the term of the subordinated notes. With respect to the InfoPrise convertible promissory note, approximately $73,000 is payable annually on each anniversary of the issuance of the promissory note, with the balance of interest owed due at maturity. See Note 8 for further details on the outstanding notes.

     Interest Income and Other, Net. Interest income and other, net, was $128,000 and $161,000 in the three and six months ended June 30, 2003, an increase of $54,000 from the $74,000 reported for the three months ended June 30, 2002 and of $67,000 from the $94,000 reported for the six months ended June 30, 2002. Interest income and other, net, has been derived primarily from earnings on investments in cash equivalents and short-term investments. The increase in the three months ended June 30, 2003 is due to the reversal of estimated taxes associated with the gain from retirement of bonds in 2001. All tax returns have been filed and no liability was incurred. The increase in the six months ended June 30, 2003 is due to the aforementioned reversal and the fact that a $72,000 foreign exchange loss was incurred in 2002 that was not incurred in 2003.

     Investment Losses. Investment loss for the three and six months ended June 30, 2003 was $113,000, a 90% decrease from the $1.1 million reported for the three months ended June 30, 2002 and 95% decrease from the $2.5 million reported for the six months ended June 30, 2002. The 2003 loss is a write-down for impairment deemed to be other than temporary of an investment accounted for using the cost method. The investment loss of $1.1 million reported in the three months ended June 30, 2002 reflects equity losses in the marketplace companies in which we had a significant ownership percentage. The investment loss of $2.5 million reported for the six months ended June 30, 2002 reflects equity losses of $2.3 in the marketplace companies in which we had a significant ownership percentage in and a $186,000 write-down for impairment deemed to be other than temporary of an investment accounted for using the cost method. The book value of the remaining investment was approximately $500,000 as of June 30, 2003. The remaining investment is accounted for using the cost method.

     Loss from continuing operations. As a result of the changes described above, the net loss from continuing operations was approximately $1.6 million and $4.2 million for the three and six months ended June 30, 2003, a decrease of 73.2% from the $6.0 million net loss reported for the three months ended June 30, 2002 and of 67% from the $12.8 million reported for the six months ended June 30, 2002.

     Gain from discontinued operations. In the quarter ended June 30, 2003, the Company reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years have passed since the related activities ceased and no actual charges have, or are now expected to be, paid.

Liquidity and Capital Resources

     As of June 30, 2003 NexPrise had approximately $8.3 million of cash, cash equivalents, short-term investments and restricted cash; working capital was approximately $5.8 million.

     Net cash used in operating activities was approximately $1.9 million for the six months ended June 30, 2003 compared to $9.5 million of net cash used in operating activities for the six months ended June 30, 2002. Net cash used in operating activities for the six months ended June 30, 2003 is primarily attributable to the net loss for the period less non-cash expenses. Non-cash items primarily consisted of depreciation and amortization of $1.7 million. The cash flows used in operating activities were partially offset by decreases in accounts receivable, prepaid expenses and other current assets.

18

Table of Contents

     Net cash used in investing activities totaled $31,000 for the six months ended June 30, 2003, compared to net cash used in investing activities of $2.5 million for the six months ended June 30, 2002. During the six months ended June 30, 2002, the Company had net sales and maturities of approximately $4.0 million of short-term investments, received cash of approximately $1.0 million as part of the acquisition of InfoPrise and a decrease in restricted cash of $520,000.

     Net cash used in financing activities was $100,000 for the six months ended June 30, 2002 and resulted primarily from the principal payments on our capital lease obligations. This lease was paid in full as of June 30, 2002.

     Management believes the Company has adequate cash to sustain operations at least through 2003 and is managing its business to achieve positive cash flow utilizing existing assets. During 2002 the Company continued to reduce ongoing operating expenses by renegotiating its lease commitments, reducing purchases of other services and making workforce reductions. It is management’s belief that the adjustments to spending that have been made, combined with receipts expected from customer contracts currently in place and new customer contracts expected to be signed in 2003 and thereafter will provide the additional resources required to achieve positive cash flow. We are committed to the successful execution of our operating plan and will take further action as necessary to align our operations and reduce expenses.

     Although we expect our existing cash, cash equivalent and investment balances together with our anticipated cash flows from operations to be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months, higher than anticipated expenses or lower than anticipated receipts may result in lower cash, cash equivalents and investments balances than presently anticipated and we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Contractual Obligations

     The following table summarizes the company’s contractual obligations and commercial commitments as of June 30, 2003 (in thousands):