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 March 31, 2004
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 0-28968
APTIMUS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1809146
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
95 South Jackson Street, Suite 300
Seattle, Washington 98104
(Address of principal executive offices and zip code)
(206) 441-9100
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's Common Stock outstanding as of
April 15, 2004 was 5,628,023.
APTIMUS, INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2003
Page
----
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of March 31, 2004 and December 31, 2003........1
Statements of Operations for the three months ended
March 31, 2004 and 2003..........................................2
Condensed Statements of Cash Flows for the three months ended
March 31, 2004 and 2003..........................................3
Notes to Financial Statements....................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......14
ITEM 4. CONTROLS AND PROCEDURES ........................................14
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..............................................15
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES..................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15
ITEM 5. OTHER INFORMATION...............................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................15
SIGNATURES.........................................................................17
-i-
PART I - FINANCIAL INFORMATION
ITEM 1...FINANCIAL STATEMENTS
APTIMUS, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
2004 2003
---------------- -----------------
ASSETS
Cash and cash equivalents $ 1,758 $ 2,368
Accounts receivable, net 1,416 919
Prepaid expenses and other assets 126 166
---------------- -----------------
Total current assets 3,300 3,453
Fixed assets, net 475 408
Intangible assets, net 30 30
Long-term investments 40 40
Deposits 39 44
---------------- -----------------
$ 3,884 $ 3,975
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 595 $ 636
Accrued and other liabilities 290 259
Current portion of capital lease obligations 73 101
---------------- -----------------
Total current liabilities 958 996
Convertible notes payable, net of unamortized discount 267
---------------- -----------------
Total Liabilities 958 1,263
Commitments and contingent liabilities (note 7)
Shareholders' equity
Common stock, no par value; 100,000 shares authorized, 5,213 and
5,628 issued and outstanding at December 31, 2003 and March 31,
2004, respectively 63,412 63,098
Additional paid-in capital 2,644 2,679
Accumulated deficit (63,130) (63,065)
---------------- -----------------
Total shareholders' equity 2,926 2,712
---------------- -----------------
$ 3,884 $ 3,975
================ =================
The accompanying notes are an integral part of these financial statements.
-1-
APTIMUS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended March 31,
----------- - --------------
2004 2003
------------- ------------
Revenues $ 1,806 $ 911
Operating expenses
Sales and marketing 437 348
Connectivity and network costs 176 279
Publisher fees 679 220
Research and development 152 133
General and administrative 339 350
Depreciation and amortization 66 125
Loss (gain) on disposal of long-term assets -- 58
------------- ------------
Total operating expenses 1,849 1,513
Operating loss (43) (602)
Interest expense (27) (3)
Interest income 5 1
------------- ------------
Net loss $ (65) $ (604)
============= ============
Basic and diluted net loss per share $ (0.01) $ (0.14)
============= ============
Weighted-average shares used in computing basic 5,237 4,221
and diluted net loss per share
The accompanying notes are an integral part of these financial statements.
-2-
APTIMUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (65) $ (604)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 66 125
Bad debt expense 11 15
Amortization of deferred compensation -- 1
(Gain) loss on disposal of long-term assets -- 58
Amortization of discount on notes payable 3 --
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable (508) 13
Prepaid expenses and other assets 45 61
Accounts payable (41) 86
Accrued and other liabilities 31 34
------------ ------------
Net cash used in operating activities (458) (211)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (128) (20)
Proceeds from disposal of assets -- 8
Payments for intangible assets (5) (15)
Sale of short-term investments -- 51
------------ ------------
Net cash provided by (used in) investing activities (133) 24
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases (28) (21)
Issuance of common stock, net of issuance stocks 9 --
------------ ------------
Net cash used in financing activities (19) (21)
------------ ------------
Net decrease in cash and cash equivalents (610) (208)
------------ ------------
Cash and cash equivalents at beginning of period 2,368 667
------------ ------------
Cash and cash equivalents at end of period $ 1,758 $ 459
------------ ------------
The accompanying notes are an integral part of these financial statements.
-3-
APTIMUS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with accounting principles generally accepted
in the United States America, have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
The unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed with the SEC on March 30, 2004. The
results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire year ending December 31, 2004.
2. REVENUE RECOGNITION
The Company currently derives revenue from providing lead generation and
customer acquisition programs through a network of website and email
distribution publishers.
Revenue earned for lead generation through the Aptimus network is based on a fee
per lead and is recognized when the lead information is delivered to the client.
Revenue earned for e-mail mailings can be based on a fee per lead, a percentage
of revenue earned from the mailing, or a cost per thousand e-mails delivered.
Revenue from e-mail mailings delivered on a cost per thousand basis is
recognized when the e-mail is delivered. Revenues from e-mail mailings sent on a
fee per lead or a percentage of revenue earned from the mailing basis are
recognized when amounts are determinable, generally when the customer receives
the leads.
Revenues generated through network publishers and opt-in email list owners are
recorded on a gross basis in accordance with Emerging Issues Task Force
consensus 99-19 (EITF 99-19). Fees paid to network publishers and opt-in email
list owners related to these revenues are shown as Publisher fees on the
Statement of Operations. Aptimus shares a portion of the amounts it bills its
advertiser clients with the third-party website owners or "publishers" and email
list owners on whose web properties and email lists Aptimus distributes the
advertisements. While this "revenue share" approach is Aptimus' primary payment
model, it will as an alternative occasionally pay website owners either a fixed
fee for each completed user transaction or a fee for each impression of an
advertisement served on the website. Email based campaigns that are sent to
Company owned lists do not have publisher fees associated with them.
The Company has evaluated the guidance provided by EITF 99-19 as it relates to
determining whether revenue should be recorded gross or net for the payments
made to network publishers and opt-in email list owners. The Company has
determined the recording of revenues gross is appropriate based upon the
following factors:
o Aptimus acts as a principal in these transactions;
o Aptimus and its customer are the only companies identified in the
signed contracts;
o Aptimus and its customer are the parties who determine pricing for the
services;
o Aptimus is solely responsible to the client for fulfillment of the
contract;
o Aptimus bears the risk of loss related to collections
o Aptimus determines how the offer will be presented across the network;
and
o Amounts earned are based on leads or emails delivered and are not
based on amounts paid to publishers.
In addition to lead generation revenues, the Company earns revenue from list
rental activities. List rental revenues are received from the rental of customer
names to third parties through the use of list brokers. Revenue from list rental
activities are recognized in the period the payment is received due to
uncertainty surrounding the net accepted number of names.
-4-
3. STOCK COMPENSATION
At March 31, 2004, the Company had two stock-based employee compensation plans,
which are more fully described in the Company's Annual Report on Form 10-K filed
with the SEC on March 30, 2004. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. The following table
illustrates the effect on net income and earning per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation
for the three months ended March 31:
2004 2003
--------- ---------
Net loss, as reported.................................................... $ (65) $ (604)
Add: Total stock-based employee compensation expense, included in the
determination of net income as reported, net of related tax effects... -- 1
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (21) (42)
--------- ---------
Pro forma net loss....................................................... $ (86) $ (645)
========= =========
Earnings per share:
Basic - as reported................................................... $ (0.01) $ (0.14)
========= =========
Basic - pro forma..................................................... $ (0.02) $ (0.15)
========= =========
Amounts included in the statement of operations for equity based compensation is
as follows, in thousands:
Three months ended March 31,
--------------------------------
2004 2003
--------------- -------------
General and administrative.............. $ -- $ 1
4. NET LOSS PER SHARE
Basic net loss per share represents net loss available to common shareholders
divided by the weighted average number of shares outstanding during the period.
Diluted net loss per share represents net loss available to common shareholders
divided by the weighted average number of shares outstanding, including the
potentially dilutive impact of common stock options and warrants. Common stock
options and warrants are converted using the treasury stock method. Basic and
diluted net loss per share is equal for all periods presented because the impact
of common stock equivalents is antidilutive.
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated and the common stock equivalent securities as of the end of
the period that are not included in the diluted net loss per share calculation
(in thousands):
Three Months Ended
March 31,
2004 2003
(Unaudited) (Unaudited)
Numerator:
Net loss $ (65) $ (604)
Denominator:
Weighted average shares used in computing net loss per 5,237 4,221
share
Potentially dilutive securities consist of the following:
Options to purchase common stock 1,486 1,785
Warrants to purchase common stock 183 --
----------- -----------
1,669 1,785
=========== ===========
-5-
5. CONVERTIBLE NOTE PAYABLE
In July 2003 the Company borrowed $305,000 pursuant to the terms of a
Convertible Promissory Note, which paid interest of 6% per annum, but, was
convertible to shares of common stock at the option of the holder at a fixed
price of $0.80 per share. The note had a 36-month term. Principal and accrued
interest was payable quarterly, commencing one year from the closing date. In
addition to the notes, the Company granted to the investors warrants to purchase
a total of 127,094 shares of common stock for $0.50 per share. The warrants have
a term of five years. On March 30, 2004 the Convertible Promissory Note was
converted into 381,250 shares of common stock.
6. COMMITMENTS AND CONTINGENCIES
The Company's office facilities are leased under operating leases that provide
for minimum rentals and require payment of property taxes and include escalation
clauses. In addition, the Company also leases certain equipment under agreements
treated for financial reporting purposes as capital leases.
Future minimum lease payments under the non-cancelable leases are as follows (in
thousands).
Capital Operating
Year ending December 31, Leases leases
------------------------ ------ ------
Nine months ending December 31, 2004............. $ 86 $ 155
Twelve months ending December 31, 2005........... -- 219
Twelve months ending December 31,2006............ -- 232
Twelve months ending December 31,2007............ -- 250
------ ------
Twelve months ending December 31,2008............ -- 100
------ ------
Twelve months ending December 31,2009............ -- 50
------ ------
Total minimum lease payments....................... 86 $1,006
------ ------
Less: Amount representing interest................. (13)
------
Present value of capital lease obligations......... 73
Less: Current portion.............................. (73)
------
Capital lease obligations, net of current portion.. $ --
------
Litigation
The Company may be subject to various claims and pending or threatened lawsuits
in the normal course of business. Management believes that the outcome of any
such lawsuits would not have a materially adverse effect on the Company's
financial position, results of operations or cash flows.
Change in Control Agreement
In December 2002, the Board of Directors approved a Change in Control Agreement.
Under the terms of this agreement, key members of management are to receive a
severance package ranging between eight and twelve months salary and accelerated
vesting of unvested options in the event of a change in control of the Company
resulting in the termination of the employee's employment.
Guarantees and Indemnifications
The following is a summary of our agreements that the Company has determined are
within the scope of Interpretation No. 45, or FIN 45, which are separately
grandfathered because the guarantees were in effect prior to December 31, 2002.
Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2003.
As permitted under Washington law and our by-laws and certificate of
incorporation, the Company has agreements whereby the Company indemnifies its
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at the Company's request in such capacity. The term
of the indemnification period
-6-
is the applicable statute of limitations for indemnifiable claims. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the Company has a
directors' and officers' insurance policy that may enable the Company to recover
a portion of any future amounts paid. Assuming the applicability of coverage and
the willingness of the insurer to assume coverage and subject to certain
retention, loss limits and other policy provisions, the Company believes the
estimated fair value of this indemnification obligation is not material.
However, no assurances can be given that the insurers will not attempt to
dispute the validity, applicability or amount of coverage, which attempts may
result in expensive and time-consuming litigation against the insurers.
The Company's standard advertising client and distribution publisher contracts
include standard cross indemnification language that requires, among other
things, the Company to indemnify the client or publisher, as the case may be,
for certain claims and damages asserted by third-parties that arise out of the
Company's breach of the contract. In the past, the Company has not been subject
to any claims for such losses and has thus not incurred any material costs in
defending or settling claims related to these indemnification obligations.
Accordingly, the Company believes the estimated fair value of these obligations
is not material.
Pursuant to these agreements, the Company may indemnify the other party for
certain losses suffered or incurred by the indemnified party in connection with
various types of third-party claims, which may include claims of intellectual
property infringement, breach of contract and intentional acts in the
performance of the contract. The term of these indemnification obligations is
generally limited to the term of the contract at issue. In addition, the Company
limits the maximum potential amount of future payments the Company could be
required to make under these indemnification obligations to the consideration
paid during a limited period of time under the applicable contract, but in some
infrequent cases the obligation may not be so limited. In addition, the
Company's standard policy is to disclaim most warranties, including any implied
or statutory warranties such as warranties of merchantability, fitness for a
particular purpose, quality and non-infringement, as well as any liability with
respect to incidental, indirect, consequential, special, exemplary, punitive or
similar damages. In some states, such disclaimers may not be enforceable. If
necessary, the Company would provide for the estimated cost of service
warranties based on specific warranty claims and claim history. The Company has
not been subject to any claims for such losses and has not incurred any costs in
defending or settling claims related to these indemnification obligations.
Accordingly, the Company believes the estimated fair value of these agreements
is not material.
7. SUBSEQUENT EVENTS
In April of 2004 the line-of-credit agreement with Comerica Bank was terminated.
In April of 2004 a long-term operating lease was signed with Sixth & Virginia
Properties for the rental of approximately 4,200 rentable square feet of office
space in Seattle, Washington. The table of commitments has been updated to
reflect the minimum rentals under this lease.
-7-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this filing constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements can often be identified by terminology such as may,
will, should, expect, plan, intend, expect, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Aptimus, Inc. ("Aptimus", "we", "us" or the "Company"), or
developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements include, without limitation, fluctuation of the Company's operating
results, the ability to compete successfully, the ability of the Company to
maintain current client and distribution publisher relationships and attract new
ones, and the sufficiency of remaining cash and short-term investments to fund
ongoing operations.
Although we believe the expectations reflected in our forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements or other future events. Moreover, neither we nor
anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Aptimus is a performance-based advertising network that distributes
advertisements for direct marketing advertisers across a network of third-party
websites and company-owned and licensed email lists. For advertisers, the
Aptimus Network offers a high volume, high quality, Internet-based distribution
channel to present their advertisements across a broad audience of users on
websites and email lists. Advertisers pay Aptimus only for the results that
Aptimus delivers. Aptimus' then shares a portion of the amounts it bills its
advertiser clients with the third-party website owners or "publishers" and email
list owners on whose web properties and email lists Aptimus distributes the
advertisements. While this "revenue share" approach is Aptimus' primary payment
model, it will as an alternative occasionally pay website owners either a fixed
fee for each completed user transaction or a fee for each impression of an
advertisement served on the website. Advertisers pay Aptimus for the following
actions:
(1) when a user opens an advertisement served by Aptimus with a "click" of
the cursor on the user's computer screen (a "cost per click" pricing
model);
(2) when a user opens an advertisement served by Aptimus, expresses his or
her interest in the advertisement by providing certain information
desired by the advertiser such as the user's name and email address,
and then submits that information to Aptimus or the advertiser
directly by "clicking" the submit button on the computer screen (a
"cost per lead" pricing model);
(3) when a user opens an advertisement and orders the advertised product
or service by providing the desired information such as a name, postal
address and payment, and then submits the order to Aptimus or the
advertiser directly by "clicking" the submit button on the computer
screen (a "cost per acquisition" pricing model);
(4) when an advertisement is displayed on a user's computer screen (a
"cost per impression" pricing model), and;
(5) any combination of the pricing models described in (1) - (4) above.
As a result, advertisers can refine their offers and payment models to achieve
their specific objectives. For website publishers and email list owners, the
Aptimus Network generates high revenues per impression while promoting
compelling offers from recognized brand advertisers in graphical formats that
complement the publishers' sites and add value
-8-
for their customers. At the core of the Aptimus Network is a proprietary,
patent-pending technology and direct marketing approach called Dynamic Revenue
Optimization(TM), which determines through computer-based logic on a real-time
basis the best advertisements for promotion on each individual website and in
each email sent. The technology is designed to prioritize advertisements by a
combination of their popularity with users and the lead or impression fee the
company is paid by the advertiser. New advertisements are randomly inserted in
the rotation of advertisements served by the company to insure their exposure
and potential in our system. The system also tests, in real time, multiple
versions of the same advertisement as well as multiple formats in which the ads
are displayed on a page, and the system then adjusts to insure the best versions
of advertisement and format are used. In this way, our technology system
generates higher user response for our advertisers and higher revenues for our
publishers and us than would be the case without use of our system. The
Company's primary offer presentation formats include cross-marketing promotions
at the point of registration or other transactional activity on websites, online
advertising programs, and email marketing campaigns.
We derive our revenues primarily from contracts for the delivery of clicks,
leads and orders from the Aptimus network of sites and opt-in email lists. We
receive revenue when we deliver either the required click-through, lead
information, or order information to an advertiser in connection with an offer
presented via our network. Pricing is based on a cost per click, lead,
impression or order basis and varies depending on the type of offer and type of
information collected. The services we deliver are primarily sold under
short-term agreements that are subject to cancellation. Revenues are recognized
in the period in which the click-through, lead, impression or order information
is delivered, provided we have no further performance obligation.
For the three months ended March 31, 2004 and 2003 our ten largest advertiser
clients accounted for 63.2% and 62.5% of our net revenues, respectively. During
the quarter ended March 31, 2004 Advertising.com accounted for 19.4% of our
revenues. During the quarter ended March 31, 2003 Blue Dolphin, Inc. accounted
for 14.7% of our revenues and Kraft Foods, Inc. through List Services, Inc.
accounted for 13.6% of our revenues. The percentage of revenue represented by
our ten largest clients when compared to the same quarter of 2003 has remained
relatively consistent. We expect our revenues to be composed of a similar mix of
large and small advertiser clients in the immediate future.
Our business has been operating at a loss and generating negative cash flows
from operations since inception. As of March 31, 2004, we had an accumulated
deficit of approximately $63.1 million. With the reductions in continuing
operating expenses that have been made and growth in revenues, we anticipate
achieving positive earnings and cash flows during the year ending December 31,
2004. However, there are still many challenges to achieving this goal and the
achievement is by no means assured.
On March 30, 2004, $305,000 in convertible notes payable issued to certain
investors were, by election of the holders, converted to 381,250 shares of
unregistered common stock pursuant to the terms of that certain Convertible Note
Purchase Agreement, dated as of July 1, 2003, by and between the company and
certain investors. On March 31, 2004, we filed a draft registration statement on
Form S-1 with the Securities and Exchange Commission (SEC) covering 776,690
shares of unregistered common stock issued in the December 2003 private
investment, 381,250 shares of unregistered common stock issued upon the
conversion of notes payable, and 182,729 shares of unregistered common stock
issuable pursuant to outstanding warrants. The draft registration statement is
currently under review by the SEC.
RESULTS OF OPERATIONS
Revenues
We currently derive our revenues primarily from network activities, which
include both lead generation activities through a network of publishers and
e-mail mailings. Clients generally pay us on a performance or results basis,
based on a cost per click, cost per lead, cost per acquisition, or percentage of
sales. Our revenues increased by $895,000, or 98%, to $1.8 million in the
quarter ended March 31, 2004 from $911,000 in the same quarter of 2003. We saw
sequential growth in all sides of our business, while our email marketing
revenues, which increased substantially from the fourth quarter of 2003, were
actually lower than in the first quarter of 2003. Our revenues came mostly from
our core base of continuity type clients, which seek new customers year-round
and generally have ongoing programs with Aptimus. Our revenues from campaign
type clients, whose programs are for limited time periods due to promotional,
-9-
budgetary or other reasons, grew from the fourth and first quarter of 2003, but
were still less than 5% of revenues in the first quarter of 2004.
Sales and Marketing
Sales and marketing expenses consist primarily of marketing and operational
personnel costs, bad debts, and outside sales costs. Sales and marketing
expenses increased by $89,000 to $437,000, or 24% of revenues, in the quarter
ended March 31, 2004 from $348,000, or 38% of revenues, in the same quarter of
2003. The increase in sales and marketing expenses was a result of hiring
additional employees, increases in sales commissions due to increased sales and
to pay reductions that were in effect in the first quarter of 2003. The amount
of wages reduced in the last quarter of 2002 and the first quarter of 2003 were
paid to employees in the first quarter of 2004. It is expected that sales and
marketing expenses will increase slightly in the remaining quarters of the year
due to increased sales commissions on higher revenues and the hiring of
additional employees.
Connectivity and Network Costs
Connectivity and network costs consist of expenses associated with the
maintenance and usage of our network as well as email delivery costs. Such costs
include email delivery costs, Internet connection charges, hosting facility
costs and personnel costs. Connectivity and network costs decreased by $103,000
to $176,000, or 10% of revenues, in the quarter ended March 31, 2003 from
$279,000, or 31% of revenues, in the same quarter of 2003. This decrease was
primarily the result of decreases in connectivity and email delivery costs,
which were offset by increases in labor costs, maintenance agreement costs and
address verification costs. As a percentage of the total change in this account
these factors accounted for 76%, 62%, (21%), (12%) and (7%), respectively. The
decrease in connectivity resulted from moving our network production environment
in-house. In the first six months of 2003 the network production environment was
hosted by EDS Corporation. Similarly the decrease in email delivery costs was a
result of moving the remaining email programs in-house. In 2003 a third party
performed the majority of the email delivery. The increase in labor related
costs is a result of pay reductions, which were in place in the first quarter of
2003. The amount of wages reduced in the last quarter of 2002 and the first
quarter of 2003 were paid to employees in the first quarter of 2004. The
increase maintenance is related to additional maintenance contracts on hardware
and software. Address verification costs are campaign related and vary from
month to month depending on the number of offers requiring this service.
Connectivity and network costs for the remaining quarters of 2004 are expected
to increase slightly compared to the first quarter of 2004 as a result of an
increase in backup capabilities and an increase in the amount of space rented at
hosting facilities.
Publisher fees
Publisher fees consist of fees owed to network distribution publishers and
opt-in email list owners based on revenue generating activities created in
conjunction with these publishers. Publisher fees increased by $459,000 to
$679,000, or 38% of revenues, in the quarter ended March 31, 2004 from $220,000,
or 24% of revenues, in the same quarter of 2003. Publisher fees have increased
primarily as a result of the increase in total revenue. Publisher fees have
increased on a percentage of revenue basis, as a result of the growth in network
revenues. The effective rate at which we share revenues for email based revenue
is lower than that of network based revenues as a result of our ownership of a
large portion of the names mailed to and that we deduct the cost of delivering
the emails before calculating the fees due publishers for email based revenues.
Publisher fees are expected to increase in the future as revenues increase.
Research and Development
Research and development expenses primarily consist of personnel costs related
to maintaining and enhancing the features, content and functionality of our Web
sites, network and related systems. Research and development expenses increased
by $19,000 to $152,000, or 8% of revenues, in the quarter ended March 31, 2004
from $133,000, or 15% of revenues, in the same quarter of 2003. This increase in
research and development expense was primarily due to increases in labor costs.
The increase in labor related costs is a result of pay reductions, which were in
place in the first quarter of 2003. The amount of wages reduced in the last
quarter of 2002 and the first quarter of 2003 were paid to employees in the
first quarter of 2004. Research and development expense for the remaining
quarters of 2004 are expected to be similar to the first quarter of 2004.
-10-
General and Administrative
General and administrative expenses primarily consist of management, financial
and administrative personnel expenses and related costs and professional service
fees. General and administrative expenses decreased by $10,000 to $339,000, or
19% of revenues, in the quarter ended March 31, 2004 from $349,000, or 38% of
revenues, in the same quarter of 2003. General and administrative expense will
be higher in the second quarter of 2004 as a result of repayment of pay
reductions to senior executives. The amount of wages reduced in the last quarter
of 2002 and the first quarter of 2003 will be paid to senior executives in the
second quarter of 2004. The increase expected as a result of this will be around
$50,000. Total general and administrative expenses for the third and fourth
quarter of 2004 are expected to be similar to the first quarter of 2004.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on leased and
owned computer equipment, software, office equipment and furniture and
amortization on intellectual property and purchased email lists. Depreciation
and amortization expenses decreased by $59,000 to $66,000, or 4% of revenues, in
the quarter ended March 31, 2004 compared to $125,000, or 14% of revenues, in
the same quarter of 2003. The continued decrease in depreciation and
amortization is a result of the many assets becoming fully depreciated.
Depreciation and amortization is expected to continue to increase slightly in
the second quarter of 2004 and then to be similar to the first quarter of 2004
in the third and fourth quarters of 2004.
Equity-Based Compensation
Equity-based compensation expenses consist of amortization of unearned
compensation recognized in connection with stock options and stock grants
granted to employees and directors at prices below the fair market value of our
common stock. Unearned compensation is recorded based on the intrinsic value
when we issue stock options to employees and directors at an exercise price
below the estimated fair market value of our common stock at the date of grant.
Unearned compensation is also recorded based on the fair value of the options
granted as calculated using the Black-Scholes option pricing model when options
or warrants are issued to advisors and other service providers. Unearned
compensation is amortized over the vesting period of the option or warrant.
Equity-based compensation expenses decreased by $1,000 to zero, in the quarter
ended March 31, 2004 compared to $1,000, or less than 1% of revenues, in the
same quarter of 2003. The decrease results from issuing stock option grants with
strike prices equal to the fair market value on the date of grant. All stock
option grants that had been issued with strike prices below fair market value
are fully vested. Any future equity-based compensation would result from grant
of options to third parties or new grants to employees with strike prices below
the fair value on the date of grant, of which there are none contemplated at
this time.
Loss (gain) on disposal of long-term assets
Loss (gain) on disposal of long-term assets consists of gains and losses on
disposals of assets and impairments on long-term investments. Some software and
computer hardware were retired in the first quarter, however the assets were
fully depreciated and no gain or loss was recorded.
Interest Expense
Interest expense in the current year results from capital equipment leases and
convertible notes payable. Interest expense totaled $27,000 in the quarter ended
March 31, 2004 and $3,000 in the same quarter of 2003. Interest expense is
expected to be decrease in the second quarter and third quarter and be zero in
the fourth quarter of 2004.
Interest Income
Interest income results from earnings on the Company's available cash reserves.
Interest income totaled $5,000 in the quarter ended March 31, 2004 and $1,000 in
the same quarter of 2003. The increase in interest income is primarily a result
of the proceeds from the sale of common stock in December 2003. Interest income
is expected to decrease slightly as cash is used in operations.
-11-
Income Taxes
No provision for federal income taxes has been recorded for any of the periods
presented due to the Company's current loss position.
LIQUIDITY AND CAPITAL RESOURCES
Since we began operating as an independent company in July 1997, we have
financed our operations primarily through the issuance of equity securities. Net
proceeds from the issuance of stock through March 31, 2004 totaled $67.1
million. As of March 31, 2004, we had approximately $1.8 million in cash and
cash equivalents, providing working capital of $2.3 million. No off-balance
sheet assets or liabilities existed at March 31, 2004.
Net cash used in operating activities was $458,000 and $211,000 in the three
months ended March 31, 2004 and 2003, respectively. Cash used in operation
during the three months ended March 31, 2004 and 2003 consisted of:
Three months ended March 31,
---------------------------------
2004 2003
--------------- --------------
Cash received from customers................ $ 1,298 $ 948
Cash paid to employees and vendors.......... (1,751) (1,157)
Interest received........................... 5 1
Interest paid............................... (10) (3)
--------------- --------------
Net cash used in operations................. $ (458) $ (211)
=============== ==============
Net cash provided by (used in) investing activities was $(133,000) and $24,000
in the three months ended March 31, 2004 and 2003, respectively. In the three
months ended March 31, 2004, $133,000 was used for the purchase of additional
software, equipment and intangible assets. In the three months ended March 31,
2003, $51,000 was received from the maturity of a certificate of deposit. In
addition to the maturity of the certificate of deposit, $8,000 was received from
the sale of long-term assets and $35,000 was used for the purchase of additional
equipment and intangible assets.
Net cash used in financing activities was $19,000 and $21,000 in the three
months ended March 31, 2004 and 2003, respectively. In the three months ended
March 31, 2004, net cash used in financing activities resulted from $28,000 in
principal payments made on capital leases offset by $9,000 in receipts for the
Company's common stock resulting from the exercise of stock options. In the
three months ended March 31, 2003, net cash used in financing activities
resulted from $21,000 in principal payments made on capital leases.
We believe our current cash and cash equivalents will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
foreseeable future. Financial results have been improving and we expect to be
EBITDA profitable in the quarter ending June 30, 2004 and thereafter. Assuming
operations continue as expected we expect to generate positive cash flows in the
near future. We do not currently anticipate a need for significant capital
expenditures. However, there are still many challenges to achieving this goal
and the achievement is by no means assured. Should our goal of achieving
positive cash flow not be met we may need to raise additional capital to meet
our long-term operating requirements.
Our cash requirements depend on several factors, including the level of
expenditures on advertising and brand awareness, the rate of market acceptance
of our services and the extent to which we use cash for acquisitions and
strategic investments. Unanticipated expenses, poor financial results or
unanticipated opportunities requiring financial commitments could give rise to
earlier financing requirements. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
our shareholders would be reduced, and these securities might have rights,
preferences or privileges senior to those of our common stock. Additional
financing may not be available on terms favorable to us, or at all. The
delisting from the Nasdaq SmallCap Market may make raising additional capital
more difficult. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations.
-12-
The following table summarizes the contractual obligations and commercial
commitments entered into by the Company.
Payments Due by Period
----------------------
Contractual Obligations Total 2004 2005 2006 2007 2008 2009
- ----------------------- ----- ---- ---- ---- ---- ---- ----
Capital lease obligations...... $ 86 $ 86 $ -- $ -- $ -- $ -- $ --
Operating leases............... 1,006 155 219 232 250 100 50
Total Contractual Cash
Obligations.................... $1,092 $ 241 $ 219 $ 232 $ 250 $ 100 $ 50
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the financial
statements included in Item 8 of the Annual Report on Form 10-K, filed with the
SEC on March 30, 2004. We believe those areas subject to the greatest level of
uncertainty are the allowance for doubtful accounts and depreciation of fixed
and intangible assets.
Allowance for Doubtful Accounts
The estimate of allowance for doubtful accounts is comprised of two parts, a
specific account analysis and a general reserve. Accounts where specific
information indicates a potential loss may exist are reviewed and a specific
reserve against amounts due is recorded. As additional information becomes
available such specific account reserves are updated. Additionally, a general
reserve is applied to the aging categories based on historical collection and
write-off experience. As trends in historical collection and write-offs change,
the percentages applied against the aging categories are updated. Except were
specific information indicates otherwise, the following rates were applied
against the total balance due from the client when they had an amount in the
applicable ageing category as of the date the reserve analysis was performed:
As of March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
Current 0% 0%
Past due 1-30 days 0% 0%
Past due 31-60 days 25% 25%
Past due 61-90 days 50% 50%
Past due greater than 90 days 100% 100%
Additional metrics related to the allowance for doubtful accounts are as follow:
As of March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
Reserve balance $72,000 $58,000
% Of overall AR reserved 5.1% 10.4%
Days sales outstanding 72 51
Over the past year both accounts receivable and the allowance have increased.
The allowance has been increased at a slower rate then accounts receivable,
which has resulted in a decrease in the overall percentage reserved. This trend
results from the recovery form the economic downturn that occurred in 2001. We
do not expect to see this trend continue but rather expect our overall reserve
balance will stabilize around 5-7% range as the economy stabilizes. Any increase
in the rates used to calculate the reserve would result in the recognition of
additional bad debts expense and reduce the net accounts receivable balance.
-13-
Depreciation of Fixed and Intangible Assets
Property and equipment are stated at cost less accumulated depreciation and are
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements are amortized on a straight-line method over their
estimated useful lives or the term of the related lease, whichever is shorter.
Equipment under capital leases, which all contain bargain purchase options, is
recorded at the present value of minimum lease payments and is amortized using
the straight-line method over the estimated useful lives of the related assets.
The estimated useful lives are as follows:
Office furniture and equipment Five years
Computer hardware and software Three years
Leasehold improvements Three to Five years
Intangible assets are stated at cost less accumulated amortization and are
amortized using the straight-line method over their estimated useful lives. The
estimated useful lives are as follows:
Email names Two years
Aptimus patents and trademarks Three years
The cost of normal maintenance and repairs are charged to expense as incurred
and expenditures for major improvements are capitalized. Gains or losses on the
disposition of assets in the normal course of business are reflected in
operating expenses as part of the results of operations at the time of disposal.
Changes in circumstances such as technological advances or changes to the
Company's business model can result in the actual useful lives differing from
the Company's estimates. In the event the Company determines that the useful
life of a capital asset should be shortened the Company would depreciate the net
book value in excess of the estimated salvage value, over its remaining useful
life thereby increasing depreciation expense. Long-lived assets, including fixed
assets and intangible assets other than goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. A review for impairment involves developing an
estimate of undiscounted cash flow and comparing this estimate to the carrying
value of the asset. The estimate of cash flow is based on, among other things,
certain assumptions about expected future operating performance. The Company's
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance.
RECENT ACCOUNTING PRONOUNCEMENTS
None
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Company's cash equivalents and capital lease obligations are at fixed
interest rates and therefore the fair value of these instruments is affected by
changes in market interest rates. As of March 31, 2004, however, the Company's
cash equivalents mature within one month. As of March 31, 2004, the Company
believes the reported amounts of cash equivalents and capital lease obligations
to be reasonable approximations of their fair values. As a result, the Company
believes that the market risk and interest risk arising from its holding of
financial instruments is minimal.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based upon that
-14-
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to us required to be included in the reports we file or
submit under the Exchange Act.
(b) Changes in Internal Controls
During the fiscal quarter ended March 31, 2004, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, we believe that the final outcome of
such matters will not have a material adverse effect on our business, financial
condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
(a) Changes in Securities
On March 31, 2004, we filed a draft registration statement on Form S-1 with the
Securities and Exchange Commission (SEC) covering 776,690 shares of unregistered
common stock issued in the December 2003 private investment, 381,250 shares of
unregistered common stock issued upon the conversion of notes payable, and
182,729 shares of unregistered common stock issuable pursuant to outstanding
warrants. The draft registration statement is currently under review by the SEC.
(b) Sales of Unregistered Securities
On March 30, 2004, $305,000 in convertible notes payable issued to certain
individuals were, by election of the holders, converted to 381,250 shares of
unregistered common stock pursuant to the terms of that certain Convertible Note
Purchase Agreement, dated as of July 1, 2003, by and between the company and
certain investors. The issuances described in this Section were made was
pursuant to Rule 506 of Regulation D as they were all accredited investors.
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) The following exhibits are filed as part of this report:
-15-
Exhibit
Number Description
3.1* Second Amended and Restated Articles of Incorporation of
registrant.
3.1.1(2) Articles of Amendment filed September 16, 2000.
3.1.2(6) Articles of Amendment filed March 29, 2002.
3.2* Amended and Restated Bylaws of registrant.
4.1* Specimen Stock Certificate.
4.2* Form of Common Stock Warrant.
4.3(3) Rights Agreement dated as of March 12, 2002 between
registrant and Mellon Investor Services LLC, as rights
agent.
10.1*(8) Form of Indemnification Agreement between the registrant and
each of its directors.
10.2*(8) 1997 Stock Option Plan, as amended.
10.3*(8) Form of Stock Option Agreement.
10.4* Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.5* Lease Agreement, dated September 23, 1997 and amended as of
February 16, 1999, between registrant and Merrill Place LLC.
10.5.1* Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.
10.6(1)(8) Aptimus, Inc. 2001 Stock Plan.
10.6.1(2)(8) Form of Stock Option Agreement.
10.6.2(2)(8) Form of Restricted Stock Agreement (for grants).
10.6.3(2)(8) Form of Restricted Stock Agreement (for rights to purchase).
10.7(4)(8) Change in Control Agreement, dated as of December 6, 2002,
by and between registrant and Timothy C. Choate
10.8(4)(8) Form of Change in Control Agreement, dated as of December 6,
2002, by and between registrant and each of certain
executive managers of registrant
10.9(4) Amendment to Lease Agreement, dated October 1, 2002, between
registrant and Merrill Place LLC.
10.10(5) Form of Convertible Note Purchase Agreement, dated as of
July 1, 2003, by and between the Company and certain
investors.
10.11(5) Form of Convertible Secured Promissory Note, dated July
2003, executed by and between the Company and payable to the
order of certain investors.
10.12(5) Form of Common Stock Warrant, dated July 2003, by and
between the Company and certain investors.
10.13(5) Form of Security Agreement, dated as of July 1, 2003, by and
between the Company and certain investors.
10.14(5) Form of Registration Rights Agreement, dated as of July 1,
2003, by and between the Company and certain investors.
10.15 Agreement of Lease, dated as of April 29, 2004, by and
between Sixth and Virginia Properties and the Company.
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification of the Chief Executive Officer
32.2 Section 1350 Certification of the Chief Financial Officer
__________
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-81151).
(1) Incorporated by reference to the Company's Proxy Statement on Schedule 14A,
dated May 17, 2001.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2001.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K,
dated March 28, 2003.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated August 14, 2003.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated May 15, 2002.
(7) Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
(8) Management compensation plan or agreement.
(b) Reports on Form 8-K
February 12, 2004 Results of Operations and Financial Condition April 26, 2004 -
Results of Operations and Financial Condition
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APTIMUS, INC.
Date: May 17, 2004 /s/ John A. Wade
------------------------------------------
Name: John A. Wade
Title: Chief Financial Officer,
authorized officer and principal
financial officer
-17-