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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of
The Securities Exchange Act of 1934
 
For the Quarter Ended June 30, 2002
 
Commission File Number 0-30881
 
 
CLICK COMMERCE, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
  
36-4088644
(I.R.S. Employer
Identification Number)
 
200 East Randolph Drive, Suite 4900
Chicago, Illinois 60601
(Address of principal executive offices)
 
(312) 482-9006
(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          
 
On August 13, 2002, 40,200,758 shares of the registrant’s common stock were issued and outstanding.
 

Table of Contents
CLICK COMMERCE, INC.
 
INDEX
 
           
Page No.
PART I.    FINANCIAL INFORMATION
       
Item 1.
   
Financial Statements
       
         
1
         
2
         
3
         
4
Item 2.
        
7
Item 3.
        
13
PART II.    OTHER INFORMATION
       
Item 1.
        
15
Item 2.
        
15
Item 3.
        
15
Item 4.
        
15
Item 5.
        
16
Item 6.
        
16
    
17
 

Table of Contents
 
PART 1.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
CLICK COMMERCE, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands)
 
    
June 30, 2002
       
December 31, 2001
  
    
(unaudited)
           
ASSETS
                
Current assets:
                    
Cash and cash equivalents
   
$
27,253
 
     
$
40,677
 
Short-term investments
   
 
10,173
 
     
 
—  
 
Trade accounts receivable, net
   
 
4,505
 
     
 
6,670
 
Income taxes receivable
   
 
—
 
     
 
158
 
Other current assets
   
 
1,446
 
     
 
2,534
 
    
    
Total current assets
   
 
43,377
 
     
 
50,039
 
Property and equipment, net
   
 
3,059
 
     
 
3,934
 
Other assets
   
 
583
 
     
 
721
 
    
    
Total assets
   
$
47,019
 
     
$
54,694
 
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                    
Accounts payable
   
$
795
 
     
$
1,096
 
Billings in excess of revenue earned on contracts in progress
   
 
336
 
     
 
443
 
Deferred revenue
   
 
3,975
 
     
 
2,265
 
Accrued compensation
   
 
962
 
     
 
1,686
 
Accrued expenses and other current liabilities
   
 
1,488
 
     
 
2,274
 
Accrued restructuring
   
 
933
 
     
 
950
 
Current portion of capital lease obligations
   
 
822
 
     
 
815
 
    
    
Total current liabilities
   
 
9,311
 
     
 
9,529
 
Capital lease obligations, less current portion
   
 
305
 
     
 
727
 
    
    
Total liabilities
   
 
9,616
 
     
 
10,256
 
Shareholders’ equity:
                    
Preferred stock
   
 
—
 
     
 
—
 
Common stock
   
 
40
 
     
 
40
 
Additional paid-in capital
   
 
84,997
 
     
 
85,081
 
Accumulated other comprehensive income—currency translation adjustment
   
 
170
 
     
 
125
 
Deferred compensation
   
 
(2,283
)
     
 
(3,334
)
Treasury stock
   
 
(111
)
     
 
—  
 
Accumulated deficit
   
 
(45,410
)
     
 
(37,474
)
    
    
Total shareholders’ equity
   
 
37,403
 
     
 
44,438
 
    
    
Total liabilities and shareholders’ equity
   
$
47,019
 
     
$
54,694
 
    
    
 
See accompanying notes to condensed consolidated financial statements.
 

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Table of Contents
CLICK COMMERCE, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
(dollars in thousands, except per share data)
 
(unaudited)
 
    
Three months ended
June 30,
     
Six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenues
                                    
Product license
   
$
753
 
   
$
7,392
 
   
$
1,316
 
   
$
13,798
 
Service
   
 
4,669
 
   
 
6,620
 
   
 
9,443
 
   
 
11,883
 
    
  
  
  
Total revenues
   
 
5,422
 
   
 
14,012
 
   
 
10,759
 
   
 
25,681
 
    
  
  
  
Cost of revenues
                                    
Product license
   
 
157
 
   
 
481
 
   
 
332
 
   
 
652
 
Service (exclusive of $17 and $15 for the three months ended
June 30, 2002 and 2001, respectively, and $29 and $28 for the six months ended June 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
2,533
 
   
 
3,259
 
   
 
4,583
 
   
 
6,256
 
    
  
  
  
Total cost of revenues
   
 
2,690
 
   
 
3,740
 
   
 
4,915
 
   
 
6,908
 
    
  
  
  
Gross profit
   
 
2,732
 
   
 
10,272
 
   
 
5,844
 
   
 
18,773
 
Operating expenses:
                                    
Sales and marketing (exclusive of $360 and $442 for the three months ended June 30, 2002 and 2001, respectively, and $732 and $999 for the six months ended June 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
2,609
 
   
 
7,001
 
   
 
6,596
 
   
 
15,142
 
Research and development (exclusive of $2 and $4 for the three months ended June 30, 2002 and 2001, respectively, and $5 and $10 for the six months ended June 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
1,320
 
   
 
2,676
 
   
 
2,886
 
   
 
5,283
 
General and administrative (exclusive of $21 and $87 for the three months ended June 30, 2002 and 2001, respectively, and $45 and $126 for the six months ended June 30, 2002 and 2001, respectively, reported below as amortization of stock-based compensation)
   
 
985
 
   
 
2,563
 
   
 
2,677
 
   
 
5,391
 
Amortization of stock-based compensation
   
 
400
 
   
 
548
 
   
 
811
 
   
 
1,163
 
Restructuring and other charges
   
 
1,213
 
   
 
—  
 
   
 
1,213
 
   
 
—  
 
    
  
  
  
Total operating expenses
   
 
6,527
 
   
 
12,788
 
   
 
14,183
 
   
 
26,979
 
    
  
  
  
Operating loss
   
 
(3,795
)
   
 
(2,516
)
   
 
(8,339
)
   
 
(8,206
)
    
  
  
  
Interest income
   
 
245
 
   
 
476
 
   
 
435
 
   
 
1,255
 
Interest expense
   
 
(13
)
   
 
(33
)
   
 
(32
)
   
 
(51
)
Other expense
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(100
)
    
  
  
  
Other income, net
   
 
232
 
   
 
443
 
   
 
403
 
   
 
1,103
 
Loss before income taxes
   
 
(3,563
)
   
 
(2,073
)
   
 
(7,936
)
   
 
(7,103
)
Income tax benefit
   
 
—  
 
   
 
(701
)
   
 
—  
 
   
 
(2,541
)
    
  
  
  
Net loss
   
$
(3,563
)
   
$
(1,372
)
   
$
(7,936
)
   
$
(4,562
)
    
  
  
  
Basic and diluted loss per share
   
$
(0.09
)
   
$
(0.04
)
   
$
(0.20
)
   
$
(0.12
)
    
  
  
  
Weighted average shares outstanding—basic and diluted
   
 
40,243,053
 
   
 
38,545,031
 
   
 
40,259,062
 
   
 
38,451,574
 
Comprehensive loss:
                                    
Net loss
   
$
(3,563
)
   
$
(1,372
)
   
$
(7,936
)
   
$
(4,562
)
Foreign currency translation adjustment
   
 
45
 
   
 
71
 
   
 
46
 
   
 
(9
)
    
  
  
  
Comprehensive loss
   
$
(3,518
)
   
$
(1,301
)
   
$
(7,890
)
   
$
(4,571
)
    
  
  
  
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
CLICK COMMERCE, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(dollars in thousands)
(unaudited)
 
    
Six Months ended
June 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(7,936
)
   
$
(4,562
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Amortization of stock-based compensation
   
 
811
 
   
 
1,163
 
Depreciation and amortization
   
 
835
 
   
 
554
 
Provision for doubtful accounts
   
 
225
 
   
 
50
 
Deferred income taxes
   
 
—  
 
   
 
(2,499
)
Amortization of deferred compensation
   
 
123
 
   
 
110
 
Restructuring and other charges, net of payments
   
 
434
 
   
 
—  
 
Changes in operating assets and liabilities:
                  
Trade accounts receivable
   
 
1,940
 
   
 
(410
)
Revenue earned on contracts in progress in excess of billings
   
 
—  
 
   
 
997
 
Income taxes receivable
   
 
145
 
   
 
—  
 
Other current assets
   
 
1,088
 
   
 
(107
)
Accounts payable
   
 
(400
)
   
 
(718
)
Billings in excess of revenues earned on contracts in progress
   
 
(106
)
   
 
(618
)
Deferred revenue
   
 
1,710
 
   
 
2,806
 
Accrued compensation
   
 
(725
)
   
 
(533
)
Accrued expenses and other current liabilities
   
 
(773
)
   
 
(448
)
Other assets
   
 
157
 
   
 
(91
)
    
  
Net cash used in operating activities
   
 
(2,472
)
   
 
(4,306
)
Cash flows from investing activities:
                  
Purchases of short-term investments
   
 
(10,173
)
   
 
—  
 
Purchases of property and equipment
   
 
(331
)
   
 
(685
)
    
  
Net cash used in investing activities
   
 
(10,503
)
   
 
(685
)
Cash flows from financing activities:
                  
Proceeds from exercise of stock options
   
 
32
 
   
 
678
 
Purchase of treasury stock
   
 
(111
)
   
 
—  
 
Principal payments under capital lease obligations
   
 
(415
)
   
 
(401
)
    
  
Net cash (used in) provided by financing activities
   
 
(494
)
   
 
277
 
Effect of foreign exchange rates on cash and cash equivalents
   
 
46
 
   
 
(9
)
    
  
Net change in cash and cash equivalents
   
 
(13,469
)
   
 
(4,714
)
Cash and cash equivalents at beginning of period
   
 
40,677
 
   
 
51,318
 
    
  
Cash and cash equivalents at end of period
   
$
27,253
 
   
$
46,595
 
    
  
Supplemental disclosures:
                  
Property and equipment acquired under capital leases
   
$
—  
 
   
$
1,742
 
Interest paid
   
 
32
 
   
 
51
 
Income taxes paid
   
 
—  
 
   
 
20
 
 
See accompanying notes to condensed consolidated financial statements.

3

Table of Contents
CLICK COMMERCE, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in thousands, except per share data)
(unaudited)
 
1.    BASIS OF PRESENTATION
 
The unaudited condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the “Company”) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K and other documents that have been filed with the Securities and Exchange Commission.
 
Certain prior year amounts have been reclassified to conform to the 2002 presentation.
 
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Revenue and Cost Recognition
 
The Company recognizes product license revenue from licensing the rights to use its software. To date, substantially all product licenses have been on a perpetual basis. The Company generates service revenues from integrating its software, performing needs analyses for customers and through the sale of maintenance and training services. The Company recognizes revenue in accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” For those contracts that either do not contain a services component or that have services which are not essential to the functionality of any other element of the contract, software license revenue is recognized upon delivery of the Company’s software provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. Revenue from service contracts is typically recognized as the services are performed. The revenue to be recognized from multiple-element software contracts is based on the fair value of each element. The Company records deferred revenue on software contracts for which it has billed or collected amounts, but for which the requirements for revenue recognition have not been met.
 
Revenue from contracts in which the Company’s services are essential to the functionality of the other elements of the contract is recognized using the percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers, customizes and installs the software. The percentage completed is measured either by the percentage of labor hours incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting is used, the Company records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of cash receipts from customers can vary significantly depending on specific contract terms and can therefore have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.

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Table of Contents
 
Revenue from contracts recognized under the percentage-of-completion method are presented as product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software customization or other professional services, revenues are presented as service revenues.
 
Maintenance service is sold separately under contracts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service revenue ratably over the contract period, generally one year. Maintenance fees are generally billed annually in advance and are recorded as deferred revenue. As part of the sales process, the Company may perform a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed. Training revenue is recognized as the services are provided.
 
Cost of product license revenue includes production and shipping expenses which are expensed as incurred, as well as costs of licensing third party software incorporated into the Company’s products. These third party license costs are expensed as the products are delivered. Cost of service revenue includes salaries and related expenses for professional services and technical support personnel who provide development, customization and installation services to customers, as well as an allocation of data processing and overhead costs, which are expensed as incurred.
 
Reimbursement of Out-of-Pocket Expenses
 
Effective January 1, 2002, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 01-14, which addresses income statement characterization of reimbursements received for “out-of-pocket” expenses incurred. This EITF requires entities to characterize the reimbursement of out-of-pocket expenses from their customers as revenue, rather than as a reduction of the related expense in the income statement in certain circumstances. Comparative financial statements for prior periods must conform to this presentation. Although adoption of this EITF Issue effects income statement presentation, it does not impact the Company’s earnings or earnings per share. The Company has classified out-of-pocket expenses billed to its customers as service revenue. The current and prior year effect on revenue and the gross margin percentage was not significant.
 
3. STOCK-BASED COMPENSATION
 
Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4,636. Such deferred compensation is amortized on a straight-line basis over the vesting period of each individual award, resulting in $91 and $239 of stock-based compensation expense for the three months ended June 30, 2002 and 2001, respectively, and $193 and $545 for the six months ended June 30, 2002 and 2001, respectively.
 
In April 2000, the Company issued a warrant to Accenture Ltd (“Accenture”) to purchase up to 818,226 shares of common stock at $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was measured at the date of grant in accordance with EITF Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5,000, which was determined using the Black-Scholes option-pricing model. This amount is being amortized to expense on a straight-line basis over the vesting period of the warrant. The Company recognized amortization expense of $309 for each of the three months ended June 30, 2002 and 2001, respectively, and $618 for each of the six months ended June 30, 2001 and 2002, respectively.
 

5

Table of Contents
4. RESTRUCTURING
 
In the quarter ended June 30, 2002, the Company determined that its cost structure continued to exceed the level suggested by a re-assessment of its current near-term revenue opportunities. The Company continues to experience longer sales cycles and higher executive level review and participation in approval processes on capital projects, particularly for technology and e-commerce projects. As a result, the Company developed a plan to reduce its cost structure to a level in line with current revenue opportunities. This restructuring plan resulted in an $821 restructuring charge in the quarter ended June 30, 2002. Included in this restructuring charge were costs associated with the termination of the employment of 51 employees across all areas of the Company. The Company notified all of these employees of their termination of employment on or prior to June 30, 2002, with all such terminations taking effect on or prior to August 2, 2002. The resulting employee severance and related costs are presented below. The facilities related costs represent the remaining lease payments for closing four region offices.
 
In conjunction with the restructuring, the Company recorded a $451 asset impairment charge. The write-down of assets, primarily computer equipment under capital leases, was a direct result of the recent staffing reductions. The fair value of the equipment included in the write-down was deemed to be $0. The Company has no foreseeable use for such assets. Those assets are held under leases which require the Company to either purchase the equipment at the then fair market value at the end of the lease term or return the equipment to the lessors. The Company intends to return these assets to the lessors upon expiration of the current lease terms.
 
As of June 30, 2002, the majority of the Company’s restructuring accrual related to employee severance, benefits and related costs. Due to extended severance arrangements with certain employees, payments against the restructuring charge will be made through the quarter ending March 31, 2003. In the quarter ended June 30, 2002, the Company adjusted the restructuring accrual for items that were recorded as part of the restructuring charge taken in the third quarter of 2001, primarily for excess subcontractor notice-of-termination costs and employee benefit costs. The following table contains the significant components of the restructuring charge and current period activity relating to those components.
 
    
Accrual at March 31, 2002
     
Additional restructuring charges
     
Adjustment to previous accrual
     
Cash payments
     
Balance at June 30, 2002
Employee severance, benefits and related costs
   
$
594
     
$
720
     
$
(59
)
   
$
(464
)
   
$
791
Facilities related costs
   
 
23
     
 
42
     
 
—  
 
   
 
(11
)
   
 
54
Other
   
 
37
     
 
59
     
 
—  
 
   
 
(8
)
   
 
88
    
    
    
  
  
Total
   
$
654
     
$
821
     
$
(59
)
   
$
(483
)
   
$
933
    
    
    
  
  
 

6

Table of Contents
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Click Commerce, Inc. (the “Company”) is a provider of Partner Portal software products and integration services that connect large and middle market companies with their distribution channel partners. The Company’s software products and integration services enable companies to effectively manage and engage in collaborative business-to-business electronic commerce throughout all levels of their sell-side channels and processes. The Company develops, implements and supports private marketplaces, which are secure systems that use the Internet to communicate between companies with all participants in the network or chain of distribution who have a password and an Internet browser.
 
The Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the Relationship Manager (formerly referred to as the Extranet Manager). In 1996 and 1997, the Company was also engaged in developing Internet Web sites and providing related consulting services. The Company implemented the first Click Commerce Relationship Manager in the second quarter of 1997.
 
The Company’s revenue is derived from sales of licenses of its software, comprised of the Relationship Manager and a portfolio of applications, as well as from needs analyses, professional services, training, maintenance and support and out-of-pocket expenses billed to its customers. The Company’s software is generally licensed on a perpetual basis.
 
Operating expenses are classified into four general categories: sales and marketing, research and development, general and administrative and amortization of stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive management, finance and administrative employees, legal and accounting services and until March 31, 2002 an allocation of project management overhead related to internal projects which were eliminated at the end of the first quarter of 2002. Amortization of stock-based compensation represents the amortization over the related service period of the difference between the exercise price of options granted and the deemed fair market value of the underlying common stock on the date of grant, as well as amortization of the warrant issued in connection with a joint marketing agreement with Accenture Ltd (“Accenture”).
 
In April 2000, the Company issued a warrant to Accenture to purchase up to 818,226 shares of common stock at an exercise price of $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accenture’s failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was determined on the date of grant in accordance with Emerging Issues Task Force Issue No. 96-18 and Statement of Financial Accounting Standards No. 123 to be approximately $5.0 million, which was determined using the Black-Scholes option pricing model. This amount is included in additional paid-in capital and is being amortized to expense over the vesting period of the warrants. For the six months ended June 30, 2002, the Company recognized $0.6 million in amortization expense. The Company expects to recognize future amortization expense of $0.6 million for the remainder of 2002, $1.2 million in 2003 and $0.4 million in 2004.
 
The Company believes that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. The Company’s prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new, rapidly evolving markets. The Company may not be successful in addressing such risks and difficulties.

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Table of Contents
 
Results of Operations
 
The following table sets forth selected unaudited financial data for the periods indicated in dollars and as a percentage of total revenue.
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2002
    
2001
    
2002
    
2002
  
   
in
000’s
     
% of Revenue
    
in
000’s
     
% of Revenue
    
in
000’s
     
% of Revenue
    
in
000’s
     
% of Revenue
  
Revenues
                                                            
Product license
  
$
753
 
   
13.9
%
  
$
7,392
 
   
52.8
%
  
$
1,316
 
   
12.2
%
  
$
13,798
 
   
53.7
%
Service
  
 
4,669
 
   
86.1
 
  
 
6,620
 
   
47.3
 
  
 
9,443
 
   
87.8
 
  
 
11,883
 
   
46.3
 
   
  
 
  
 
  
 
  
Total revenues
  
 
5,422
 
   
100.0
 
  
 
14,012
 
   
100.0
 
  
 
10,759
 
   
100.0
 
  
 
25,681
 
   
100.0
 
   
  
 
  
 
  
 
  
Cost of revenues
                                                            
Product license
  
 
157
 
   
2.9
 
  
 
481
 
   
3.4
 
  
 
332
 
   
3.1
 
  
 
652
 
   
2.5
 
Service (a)
  
 
2,533
 
   
46.7
 
  
 
3,259
 
   
23.3
 
  
 
4,583
 
   
42.6
 
  
 
6,256
 
   
24.4
 
   
  
 
  
 
  
 
  
Total cost of revenues
  
 
2,690
 
   
49.6
 
  
 
3,740
 
   
26.7
 
  
 
4,915
 
   
45.7
 
  
 
6,908
 
   
26.9
 
   
  
 
  
 
  
 
  
Gross profit
  
 
2,732
 
   
50.4
 
  
 
10,272
 
   
73.3
 
  
 
5,844
 
   
54.3
 
  
 
18,773
 
   
73.1
 
Operating expenses:
                                                            
Sales and marketing (a)
  
 
2,609
 
   
48.1
 
  
 
7,001
 
   
50.0
 
  
 
6,596
 
   
61.3
 
  
 
15,142
 
   
59.0
 
Research and development (a)
  
 
1,320
 
   
24.4
 
  
 
2,676
 
   
19.1
 
  
 
2,886
 
   
26.8
 
  
 
5,283
 
   
20.6
 
General and administrative (a)
  
 
985
 
   
18.2
 
  
 
2,563
 
   
18.3
 
  
 
2,677
 
   
24.9
 
  
 
5,391
 
   
21.0
 
Amortization of stock-based compensation
  
 
400
 
   
7.4
 
  
 
548
 
   
3.9
 
  
 
811
 
   
7.5
 
  
 
1,163
 
   
4.5
 
Restructuring and other charges
  
 
1,213
 
   
22.4
 
  
 
—  
 
   
—  
 
  
 
1,213
 
   
11.3
 
  
 
—  
 
   
—  
 
   
  
 
  
 
  
 
  
Total operating expenses
  
$
6,527
 
   
120.4
%
  
$
12,788
 
   
91.3
%
  
$
14,183
 
   
131.8
%
  
$
26,979
 
   
105.1
%
   
  
 
  
 
  
 
  
Operating loss
  
$
(3,795
)
   
(70.0
)%
  
$
(2,516
)
   
(18.0
)%
  
$
(8,339
)
   
(77.5
)%
  
$
(8,206
)
   
(32.0
)%
   
  
 
  
 
  
 
  
(a)
Exclusive of amortization of stock-based compensation presented as a separate caption.
 
Comparison of the three months ended June 30, 2002 to the three months ended June 30, 2001
 
Revenue
 
Total revenue decreased approximately $8.6 million, or 61.3%, to $5.4 million for the three months ended June 30, 2002 from $14.0 million for the three months ended June 30, 2001. Product license revenue, comprised of revenue from separate product-only agreements and from multi-element agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, decreased by $6.6 million, or 89.9%, as a result of a decrease in the number of new contracts and the average selling price of the current quarter’s contracts due to the economic slowdown and significant decline in information technology spending. Service revenue, comprising fees related to time and materials service contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, decreased by $2.0 million, or 29.5%, over the prior year quarter. This decrease was due to a combined $2.7 million decrease in revenue primarily from needs analyses, contract addenda and from

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revenue recognized as service revenue under multi-element contracts. This service revenue decrease was offset by a $0.7 million increase in maintenance and support services. Service revenue from time and materials contracts remained flat. In any period, service revenue from time and materials contracts is dependent, among other things, on license transactions closed during the current and preceding quarters and customer decisions regarding implementations of licensed software.
 
Cost of Revenue
 
Total cost of revenue decreased approximately $1.1 million, or 28.1%, to $2.7 million for the three months ended June 30, 2002 compared to $3.7 million for the three months ended June 30, 2001. This cost of revenue decrease is primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in project management personnel. Cost of product revenue decreased by $0.3 million or 67% due to lower royalty fees for licensed third party software that is embedded in the Company’s products or incorporated in the Company’s product offerings arising from lower product sales, as well as lower amortization of product packaging and other product costs. Gross profit margins decreased to 50.4% for the three months ended June 30, 2002, compared to 73.3% for the three months ended June 30, 2001. The gross margin decrease is due to a decrease in product revenue as a percentage of total revenue as well as lower margins on both product and services revenue. The decrease in service margins is due to the classification of all project management overhead in cost of services rather than general and administrative expenses as a result of eliminating internal projects in the current quarter and lower average hourly rates. Product margins are lower due to lower product revenues against which comparable product-related costs are amortized.
 
Operating Expenses
 
Sales and Marketing.    Sales and marketing expenses decreased by approximately $4.4 million, or 62.7%, to $2.6 million for the three months ended June 30, 2002 from $7.0 million for the three months ended June 30, 2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a reduction in personnel and from lower discretionary marketing spending.
 
Research and Development.    Research and development expenses decreased by approximately $1.4 million, or 50.7%, to $1.3 million for the three months ended June 30, 2002, compared to $1.4 million for the comparable prior year three-month period. This decrease was primarily attributable to lower third party contractor costs. To date, all software development costs have been expensed as incurred.
 
General and Administrative.    General and administrative expenses decreased by approximately $1.6 million, or 61.6%, to $1.0 million for the three months ended June 30, 2002 from $2.6 million for the three months ended June 30, 2001. This decrease was primarily attributable to lower employee compensation and related costs due to a reduction in administrative personnel and lower overhead costs.
 
Amortization of stock-based compensation.    Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of $0.1 million and $0.2 million for the three months ended June 30, 2002 and 2001, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.3 million of amortization expense was recognized during each of the three months ended June 30, 2002 and 2001, respectively.
 
Restructuring.    In the quarter ended June 30, 2002, the Company determined that it was necessary to lower its overall cost structure to more closely align it with expected revenues. As a result, the Company recorded a $0.8 million restructuring charge primarily related to severance and other benefit costs for 51 employees terminated as part of the restructuring plan and a $0.45 million asset write-down for excess equipment. The asset write-down was recorded to adjust the carrying value of excess equipment to its deemed fair value of $0 as these

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excess assets are leased under capital leases with fair market value buy out provisions at the end of the related lease terms. The restructuring charge also included the costs of closing four regional offices. These actions are expected to save approximately $6 million on an annual basis. The Company also reversed into income approximately $59,000 of excess severance accruals originally recorded as part of the restructuring charge taken in the quarter ended September 30, 2001. The current quarter restructuring eliminated 32% of operating costs in the second quarter and is expected to result in a further 25% reduction in the quarter ending September 30, 2002.
 
Income tax expense.    The Company recorded an income tax benefit of $0.7 million for the three months ended June 30, 2001. For the three months ended June 30, 2002, the Company’s earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the Company’s net loss for the three months ended June 30, 2002 was recorded. In the fourth quarter of 2001, the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be sufficient to utilize a substantial amount of the Company’s net operating loss carryforwards and to realize its deferred tax assets, management has concluded that the realization of the Company’s deferred tax assets did not meet the “more likely than not” criteria under SFAS No. 109.
 
Comparison of the six months ended June 30, 2002 to the six months ended June 30, 2001
 
Revenue
 
Total revenue decreased approximately $14.9 million, or 58.1%, to $10.8 million for the six months ended June 30, 2002 from $25.7 million for the six months ended June 30, 2001. Product license revenue, comprised of revenue from separate product-only agreements and from multi-element agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, decreased by $12.5 million, or 90.5%, as a result of a decrease in the number of new contracts and the average selling price of the 2002 contracts due to the economic slowdown and significant decline in information technology spending. Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, reimbursement of out-of-pocket expenses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, decreased by $2.4 million, or 20.5%, over the prior year quarter. This decrease was due to a combined $3.9 million decrease in revenue primarily from needs analyses, contract addenda and from revenue recognized as service revenue under multi-element contracts. This service revenue decrease was offset by a $1.5 million increase in maintenance and support services.
 
Cost of Revenue
 
Total cost of revenue decreased approximately $2.0 million, or 28.9%, to $4.9 million for the six months ended June 30, 2002 compared to $6.9 million for the six months ended June 30, 2001. This cost of revenue decrease is primarily a result of lower third party contractor costs and employee compensation and related costs due to a reduction in project management personnel. Cost of product revenue decreased by $0.3 million or 49% due to lower royalty fees for licensed third party software that is embedded in the Company’s products or incorporated in the Company’s product offerings arising from lower product sales, as well as lower amortization of product packaging and other costs. Gross profit margins decreased to 54.3% for the six months ended June 30, 2002, compared to 73.1% for the six months ended June 30, 2001. The gross margin decrease is due to a decrease in product revenue as a percentage of total revenue as well as lower margins on both product and services revenue. The decrease in service margins is due to the classification of all project management overhead in cost of services rather than general and administrative expenses as a result of eliminating internal projects in the current quarter and lower average hourly rates. Product margins are lower due to lower product revenues against which comparable product-related costs are amortized.
 
Operating Expenses
 
Sales and Marketing.    Sales and marketing expenses decreased by approximately $8.5 million, or 56.4%, to $6.6 million for the six months ended June 30, 2002 from $15.1 million for the six months ended June 30,

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2001. The decrease in sales and marketing expense was primarily attributable to lower employee compensation and related costs due to a reduction in personnel and discretionary marketing spending.
 
Research and Development.    Research and development expenses decreased by approximately $2.4 million, or 45.4%, to $2.9 million for the six months ended June 30, 2002, compared to $5.3 million for the prior year six-month period. This decrease was primarily attributable to lower third party contractor costs. To date, all software development costs have been expensed as incurred.
 
General and Administrative.    General and administrative expenses decreased by approximately $2.7 million, or 50.3%, to $2.7 million for the six months ended June 30, 2002 from $5.4 million for the six months ended June 30, 2001. This decrease was primarily attributable to lower employee compensation and related costs due to a reduction in administrative personnel and lower overhead costs.
 
Amortization of stock-based compensation.    Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of $0.2 million and $0.5 million for the six months ended June 30, 2002 and 2001, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.6 million of amortization expense was recognized during each of the six months ended June 30, 2002 and 2001, respectively.
 
Restructuring.    In the quarter ended June 30, 2002, the Company determined that it was necessary to lower its overall cost structure to more closely align it with expected revenues. As a result the Company recorded a $0.8 million restructuring charge primarily related to severance and other benefit costs for 51 employees terminated as part of the restructuring plan and a $0.45 million asset write-down for excess equipment. The asset write-down was recorded to adjust the carrying value of excess equipment to its deemed fair value of $0 as these excess assets are leased under capital leases with fair market value buy out provisions at the end of the related lease terms. The restructuring charge also included the costs of closing four regional offices. These actions are expected to save approximately $6 million on an annual basis. The Company also reversed into income approximately $59,000 of excess severance accruals originally recorded as part of the restructuring charge taken in the quarter ended September 30, 2001.
 
Income tax expense.    The Company recorded an income tax benefit of $2.5 million for the six months ended June 30, 2001. For the six months ended June 30, 2002, the Company’s earnings did not include an income tax benefit, as a full tax valuation allowance against deferred tax assets generated from the Company’s net loss for the six months ended June 30, 2002 was recorded. In the fourth quarter of 2001, the Company established a valuation allowance for deferred tax assets that were previously generated. Although future taxable income of the Company may be sufficient to utilize a substantial amount of the Company’s net operating loss carryforwards and to realize its deferred tax assets, management has concluded that the realization of the Company’s deferred tax assets did not meet the “more likely than not” criteria under SFAS No. 109.
 
Liquidity and Capital Resources
 
At June 30, 2002, the Company had $37.4 million of cash, cash equivalents and short-term investments, consisting primarily of proceeds from its initial public offering. Net cash used in operating activities was $2.5 million and $4.3 million for the six months ended June 30, 2002 and 2001, respectively. The $2.5 million of cash used in the current six month period primarily consisted of a loss before amortization of stock-based compensation and depreciation and amortization totaling approximately $6.3 million offset by an increase in provision for doubtful accounts of $0.2 million, an increase in deferred revenue of approximately $1.7 million and a decrease in accounts receivable of $1.9 million.
 
Net cash used by investing activities was $10.5 million for the six months ended June 30, 2002, consisting primarily of a $10.2 million investment of short-term investments. During the six months ended June 30, 2002, the Company also purchased $0.3 million of property and equipment.

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Net cash used in financing activities was approximately $0.5 million for the six months ended June 30, 2002. The cash used during the current year period reflects $0.4 million in capital lease payments and $0.1 million for the purchase of treasury stock.
 
On March 31, 2002, the Company renewed its $3.0 million revolving credit facility. In January 2000, the Company obtained a letter of credit under this facility totaling $0.5 million to secure a new office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and fourth anniversaries of the lease and then declines to $38,130 on the fifth anniversary until the lease expires in August 2005. Accordingly, the letter of credit has declined to $0.3 million.
 
The Company may use cash resources to fund investments in complementary businesses or technologies. The Company believes that working capital will be sufficient to meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current plans to raise additional equity during the next twelve months, although such plans are subject to business and market conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the Company does not currently foresee a need for additional cash resources for long-term needs. In the event additional financing is required, the Company may not be able to raise it on acceptable terms or at all.
 
In May 2002, the Company announced that its Board of Directors had authorized the repurchase of up to $5.0 million of its common stock in the open market. These shares may be purchased pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 from time to time in the public market or through privately negotiated transactions. The timing and amount of any repurchase will be at the discretion of the Company’s management. As of June 30, 2002, the Company had repurchased 128,820 shares of its common stock at an average purchase price of $0.86 per share and at an aggregate cost of $110,760.
 
On June 7, 2002, the Company received a letter from Nasdaq informing the Company that, for the prior 30 consecutive trading days, the price of its common stock had closed below the minimum $1.00 per share requirement for continued listing in the Nasdaq National Market. In addition, the letter notified the Company that if the minimum bid price of the common stock had not closed above $1.00 for at least 10 consecutive trading days before September 5, 2002, the common stock would be delisted from the Nasdaq National Market, pending any appeals to Nasdaq the Company may have. The Company’s Board of Directors has determined that the continued listing of the common stock on the Nasdaq National Market is in the best interests of the Company’s stockholders. If the common stock was delisted from the Nasdaq National Market, the Board of Directors believes that the liquidity in the trading market for the common stock would be significantly decreased, which would likely reduce the trading price and increase the transaction costs of trading shares of the common stock. Accordingly, the Company filed a definitive proxy statement with the Securities and Exchange Commission on August 7, 2002 soliciting proxies from holders of the Company’s common stock to authorize a reverse stock split of the Company’s common stock. The purpose of the reverse stock split is to increase the market price of the common stock. The Board of Directors intends to effect a reverse stock split only if the Board believes that a decrease in the number of shares outstanding is likely to improve the trading price for the common stock and improve the likelihood that the Company will be allowed to maintain the common stock’s listing on the Nasdaq National Market. The reverse stock split will be effectuated at a ratio ranging from 1-for-2 to 1-for-5, as determined in the Board’s sole discretion. In addition to pursuing a reverse stock split to avoid delisting of its common stock by the Nasdaq Stock Market, the Company will continue to evaluate strategic alternatives, including opportunities to strategically grow the business, enter into strategic relationships or enter into business combinations.
 
Recent Accounting Pronouncements
 
In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for legal obligations associated with the retirement of tangible long-lived assets be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle as a result of an existing or enacted law, statute, or ordinance, or written or oral contract. These associated asset retirement costs are capitalized as

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part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect that the adoption of this statement will have a material impact on the Company.
 
In July 2002, the FASB issued statement No. 146. “Accounting for Costs Associated with Exit or Disposal Activities.” This statement will require the recording of exit or disposal costs when they are incurred and can be measured at fair value. A liability is incurred when an event obligates a company to transfer or use assets (i.e., when an event leaves the company little or no discretion to avoid transferring or using assets in the future). These costs will be subsequently adjusted for changes in estimated cash flows. This statement is effective for exit or disposal activities initiated after December 31, 2002. This statement does not impact the treatment of liabilities for exit and disposal costs previously recorded prior to adoption. The Company does not expect that the adoption of this statement will have a material impact on the Company.
 
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended:
 
Statements in this Form 10-Q that are not historical facts and refer to the Company’s future prospects are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate” and other similar words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including but not limited to, the ability of the Company to execute on its plan to enter into strategic alliances with system integrators and business consultants, the extent of customer acceptance and utilization of the Company’s channel management solutions, the impact of competitive products and services, the Company’s ability to manage growth and to develop new and enhanced versions of its products and services, the effect of economic and business conditions, the volume and timing of customer contracts, the Company’s ability to expand overseas, changes in technology, deployment delays or errors associated with the Company’s products and the Company’s ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Company’s business, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, which is on file with the Securities and Exchange Commission.
 
Item 3.     Qualitative and Quantitative Disclosures About Market Risk
 
The following discusses the Company’s exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in Part I of the Company’s Annual Report on Form 10-K under “Risk Factors.”
 
    Foreign Currency Exchange Rate Risk
 
To date, predominately all of the Company’s recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the exposure to foreign currency exchange rate changes has been immaterial. The Company expects, however, that future product license and professional services revenues may also be derived from international markets and may be denominated in the currency of the applicable market. As a result, operating results may become subject to significant fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the Company engages in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make the Company’s products less competitive in international markets. Although the Company will continue to monitor its exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there is no assurance that exchange rate fluctuations will not adversely affect financial results in the future.

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    Interest Rate Risk
 
As of June 30, 2002, the Company had cash and cash equivalents of $27.3 million. Declines in interest rates will reduce interest income from short-term investments. Based upon the balance of cash and cash equivalents at June 30, 2002, a change in interest rates of 0.5% would cause a corresponding change in annual interest income of approximately $0.1 million. At June 30, 2002, the Company also had $10.2 million in short-term investments, consisting primarily of short-term bond funds, with an average maturity of three years. A portion of these investments are in fixed rate securities. The fair value of the Company’s fixed rate investments may be adversely impacted by a rise in interest rates.

14

Table of Contents
 
PART II. OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
There have been no material developments to litigation involving the Company.
 
Item 2.     Changes in Securities and Use of Proceeds
 
On June 26, 2000, the Securities and Exchange Commission declared effective the Company’s Registration Statement on Form S-1, File No. 333-30564, relating to the initial public offering of the Company’s common stock, par value $.001 per share. As of June 30, 2002, the Company had spent approximately $15.0 million of the net proceeds for working capital and general corporate purposes. The remaining proceeds are invested in investment grade, interest-bearing securities.
 
Item 3.     Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.     Submission of Matters to a Vote of Security Holders
 
On May 9, 2002, the Company held its Annual Meeting of Shareholders.
 
At the meeting, three Class II directors were elected to serve a three-year term that will expire at the 2005 Annual Meeting of Shareholders. The votes cast for each director were as follows:
 
For election of Andrew J. McKenna
Votes for:         27,060,193
Votes withheld:     229,152
 
For election of Jerry Murdock
Votes for:         26,778,327
Votes withheld:     511,018
 
For election of John F. Sandner
Votes for:         27,060,007
Votes withheld:     229,338
 
 
The appointment of KPMG LLP as independent auditors of the Company for the fiscal year ended December 31, 2002 was ratified at the meeting with 27,167,570 shares voting in favor, 121,710 shares voting against and 65 shares abstaining.

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Item 5.    Other Information
 
Not applicable.
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a) Exhibits:
 
The following exhibits are filed as part of this Form 10-Q.
 
Exhibit Number
   
Description
3.3  
   
Amendment to Bylaws of Click Commerce, Inc.
10.16
   
Employment Agreement between Michael W. Nelson and the Company dated as of August 7, 2002.
99.1  
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2  
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(b) Reports on Form 8-K
 
None.

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SIGNATURES
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CLICK COMMERCE, INC.
By:
  
/S/    MICHAEL W. NELSON
   
Michael W. Nelson
VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
 
Date: August 14, 2002

17