UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITITES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended March 31, 2005 |
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OR |
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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 000-30654
APROPOS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Illinois |
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36-3644751 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
One Tower Lane, 28th Floor
Oakbrook Terrace, Illinois 60181
(Address of principal executive offices, including zip code)
(630) 472-9600
(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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
The number of shares outstanding of the registrant’s Common Shares, par value $0.01 per share, as of April 22, 2005, was 17,871,916.
APROPOS TECHNOLOGY, INC.
TABLE OF CONTENTS
2
Part I. Financial Information.
Item 1. Financial Statements.
Apropos Technology, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts
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March 31 |
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December 31 |
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(Unaudited) |
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(Note 1) |
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Assets |
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Current assets : |
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Cash and cash equivalents |
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$ |
29,662 |
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$ |
12,291 |
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Short-term investments |
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11,577 |
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28,867 |
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Accounts receivable, less allowances for doubtful accounts of $232 at March 31, 2005 and $219 at December 31, 2004 |
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2,332 |
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3,155 |
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Inventory |
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51 |
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34 |
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Prepaid expenses and other current assets |
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583 |
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355 |
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Total current assets |
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44,205 |
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44,702 |
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Equipment, net |
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540 |
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565 |
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Other assets |
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28 |
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21 |
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Total assets |
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$ |
44,773 |
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$ |
45,288 |
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Liabilities and shareholders’ equity |
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Current liabilities : |
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Accounts payable |
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$ |
173 |
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$ |
155 |
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Accrued expenses |
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1,053 |
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1,134 |
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Accrued compensation and related accruals |
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474 |
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821 |
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Accrued restructuring, current portion |
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656 |
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720 |
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Advance payments from customers |
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221 |
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35 |
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Deferred revenues |
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3,547 |
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3,403 |
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Total current liabilities |
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6,124 |
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6,268 |
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Accrued restructuring, less current portion |
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98 |
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245 |
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Commitments and contingencies |
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— |
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— |
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Shareholders’ equity : |
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Preferred shares, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding |
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— |
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— |
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Common shares, $0.01 par value, 60,000,000 shares authorized, 17,846,291 shares issued and outstanding at March 31, 2005; 17,638,400 issued and outstanding at December 31, 2004 |
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178 |
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176 |
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Additional paid-in capital |
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103,440 |
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103,155 |
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Accumulated deficit |
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(65,067 |
) |
(64,556 |
) |
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Total shareholders’ equity |
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38,551 |
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38,775 |
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Total liabilities and shareholders’ equity |
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$ |
44,773 |
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$ |
45,288 |
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See notes to condensed consolidated financial statements.
3
Apropos Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
In thousands, except per share amounts
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Quarter ended March 31 |
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2005 |
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2004 |
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Revenue |
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Software licenses |
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$ |
1,099 |
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$ |
1,987 |
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Services and other |
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3,116 |
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3,173 |
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Total revenue |
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4,215 |
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5,160 |
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Cost of goods and services |
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Cost of software |
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36 |
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170 |
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Cost of services and other |
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1,076 |
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852 |
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Total cost of goods and services |
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1,112 |
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1,022 |
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Gross margin |
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3,103 |
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4,138 |
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Operating expenses |
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Sales and marketing |
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1,738 |
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1,674 |
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Research and development |
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1,096 |
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1,052 |
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General and administrative |
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1,007 |
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1,096 |
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Restructuring and other charges |
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— |
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368 |
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Total operating expenses |
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3,841 |
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4,190 |
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Loss from operations |
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(738 |
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(52 |
) |
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Other income |
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Interest income |
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239 |
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95 |
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Other, net |
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(12 |
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(28 |
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Total other income |
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227 |
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67 |
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Net income (loss) |
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$ |
(511 |
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$ |
15 |
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Net income (loss) per share |
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Basic |
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$ |
(0.03 |
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$ |
0.00 |
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Diluted |
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$ |
(0.03 |
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$ |
0.00 |
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Weighted average shares outstanding |
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Basic |
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17,789 |
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17,104 |
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Diluted |
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17,789 |
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18,537 |
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See notes to condensed consolidated financial statements.
4
Apropos Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands
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Quarter ended March 31 |
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2005 |
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2004 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
(511 |
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$ |
15 |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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101 |
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131 |
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Provision for doubtful accounts |
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31 |
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— |
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Non-cash restructuring charge |
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— |
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332 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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792 |
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(135 |
) |
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Inventory |
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(17 |
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17 |
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Prepaid expenses and other current assets |
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(227 |
) |
(152 |
) |
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Other assets |
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(6 |
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11 |
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Accounts payable |
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17 |
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(41 |
) |
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Accrued expenses |
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(81 |
) |
(214 |
) |
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Accrued compensation and related accruals |
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(347 |
) |
37 |
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Accrued restructuring |
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(211 |
) |
(160 |
) |
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Advanced payments from customers |
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185 |
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(43 |
) |
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Deferred revenue |
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144 |
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707 |
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Net cash provided by (used in) operating activities |
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(130 |
) |
505 |
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Cash flows from investing activities |
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Maturities and sales of short-term investments |
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28,140 |
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2,125 |
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Purchases of short-term investments |
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(10,850 |
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(509 |
) |
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Purchases of equipment |
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(76 |
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(67 |
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Net cash provided by investing activities |
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17,214 |
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1,549 |
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Cash flows from financing activities |
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Proceeds from exercise of options |
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287 |
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604 |
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Net cash provided by financing activities |
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287 |
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604 |
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Net change in cash and cash equivalents |
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17,371 |
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2,658 |
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Cash and cash equivalents, beginning of period |
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12,291 |
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9,971 |
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Cash and cash equivalents, end of period |
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$ |
29,662 |
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$ |
12,629 |
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See notes to condensed consolidated financial statements.
5
Apropos Technology, Inc.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Apropos Technology, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented.
The balance sheet at December 31, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2004, included with its Annual Report on Form 10-K filed with the SEC on March 30, 2005. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year.
Certain prior period amounts have been reclassified to conform to the current period presentation.
Recently Issued Accounting Standards
In December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment” (FAS 123(R)). This statement requires that the compensation cost relating to share based payment transactions be recognized in the financial statements. Compensation cost is to be measured based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the requisite service period (often the vesting period) for each grant. The statement requires the use of assumptions and judgments about future events and some of the inputs to the valuation models will require considerable judgment by management. FAS No. 123(R) replaces FAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB 25, “Accounting for Stock Issued to Employees.” The provisions of FAS 123(R) are required to be applied by public companies as of the first interim or annual reporting period that begins after June 15, 2005.
On April 14, 2005, the SEC adopted a new rule amending the effective date for Statement 123(R). The amended rule allows registrants to implement Statement 123(R) as of the first annual period after June 15, 2005, which is January 1, 2006 for the Company.
Apropos intends to continue applying APB 25 to equity-based compensation awards until the effective date of FAS 123(R). At the effective date of FAS 123(R), Apropos expects to use the modified prospective application transition method without restatement of prior interim periods in the year of adoption. This will result in recognizing compensation cost based on the requirements of FAS 123(R) for all equity-based compensation awards issued after January 1, 2006. For all equity-based compensation awards that are unvested as of January 1, 2006, compensation cost will be recognized for the unamortized portion of compensation cost not previously included in the FAS No. 123 pro forma footnote disclosure. The impact on the Company’s results of operations or financial position as of the adoption of this pronouncement is not expected to be materially different from the pro-forma results included in Note 3 below.
6
2. Income or Loss Per Share
Basic net income or loss per share is based upon the net income or loss and using the weighted-average number of common shares outstanding during the period. Diluted net income per common share adjusts for the effect of common share equivalents, such as stock options and stock warrants, net of assumed repurchases, only in the periods presented in which such effect would have been dilutive. Diluted net loss per share is not presented separately, as the effect of the common share equivalents is anti-dilutive for the respective period presented. Accordingly, diluted net loss per share is the same as basic net loss per share.
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Three months |
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in thousands, except per share amounts |
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2005 |
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2004 |
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Basic Income (loss) per share |
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Net income (loss) |
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$ |
(511 |
) |
$ |
15 |
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Weighted average shares outstanding |
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17,789 |
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17,104 |
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Income (loss) per share |
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$ |
(0.03 |
) |
$ |
0.00 |
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Diluted Income per share |
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Net income |
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$ |
15 |
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Shares: |
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Weighted average shares outstanding |
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17,104 |
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Assumed option exercises |
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1,419 |
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Assumed warrant exercises |
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14 |
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Weighted average shares outstanding, as adjusted |
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18,537 |
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Diluted income per share |
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$ |
0.00 |
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3. Stock Based Compensation
The Company has elected to determine the value of stock-based compensation arrangements under the provisions of Accounting Principles Board, or APB, Opinion No. 25 “Accounting for Stock Issued to Employees.” The pro forma disclosures required under Statement of Financial Accounting Standards, or SFAS, No. 148, “Accounting for Stock Based Compensation Transition and Disclosure–an Amendment of SFAS, No. 123” are included below. SFAS, No. 123, “Accounting for Stock Based Compensation” permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements.
7
In accordance with the interim disclosure provisions of SFAS No. 148, the pro forma effect on the Company’s net income (loss) had compensation expense been recorded for the first quarter of 2005 and 2004, respectively, as determined under the fair value method, is shown below.
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Three months |
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in thousands, except per share amounts |
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2005 |
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2004 |
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Net income (loss), as reported |
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$ |
(511 |
) |
$ |
15 |
|
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Add: Stock-based employee compensation expense included in reported net income (loss) |
|
— |
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— |
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Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |
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(181 |
) |
(204 |
) |
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Net loss, pro forma |
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$ |
(692 |
) |
$ |
(189 |
) |
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Basic net income (loss) per share, as reported |
|
$ |
(0.03 |
) |
$ |
0.00 |
|
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Basic net loss per share, pro forma |
|
$ |
(0.04 |
) |
$ |
(0.01 |
) |
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Diluted net income per share, as reported |
|
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|
$ |
0.00 |
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Options to purchase 1,778,212 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of March 31, 2005, and options to purchase 2,417,379 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of March 31, 2004.
4. Geographic Information
Revenues derived from customers outside of North America accounted for 34.9% and 19.1% of the Company’s total revenues in the quarters ended March 31, 2005 and 2004, respectively.
The Company attributes its revenues to countries based on the country in which the client is located. The Company’s long-lived assets located outside the United States are not considered material.
5. Litigation and Contingencies
In November 2001, the Company was named as a defendant in a shareholder class action suit. In April 2002, a consolidated amended class action complaint was filed in the United States District Court for the Southern District of New York asserting claims relating to the initial public offering (IPO) of Apropos and approximately 300 other public companies. The complaint names as defendants the Company, certain of its current and former officers, and certain underwriters of the Company’s IPO, among numerous others, and asserts, among other things, that the underwriters of the Company’s IPO improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s stock in the aftermarket as conditions of receiving shares in the Company’s IPO. The lawsuit further claims that these supposed practices of the underwriters should have been disclosed in the Company’s IPO prospectus and registration statement. The Company believes that the claims against the Apropos defendants are without merit and has defended the litigation vigorously.
In June 2003, the Company elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elect to participate
8
in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by insurers of the participating issuer defendants. If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, the Company and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPO’s.
The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. The Company expects that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement.
Consummation of the proposed settlement is conditioned upon obtaining both preliminary and final approval by the Court. Formal settlement documents were submitted to the Court in June 2004, together with a motion asking the Court to preliminarily approve the form of settlement. Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, opposed preliminary approval of the proposed settlement of those cases. The Court has issued an order preliminarily approving the proposed settlement in all respects but one. The plaintiffs and the issuer defendants are in the process of assessing whether to proceed with the proposed settlement, as modified by the Court. If the plaintiffs and the issuer defendants elect to proceed with the proposed settlement, as modified by the Court, they will submit revised settlement documents to the Court. The underwriter defendants may then have an opportunity to object to the revised settlement documents. If the Court approves the revised settlement documents, it will direct that notice of the terms of the proposed settlement be published in a newspaper and on the internet, mailed to all proposed class members, and schedule a fairness hearing, at which objections to the proposed settlement will be heard. Thereafter, the Court will determine whether to grant final approval to the proposed settlement.
If the proposed settlement described above is not consummated, the Company intends to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, the Company believes that the underwriters may have an obligation to indemnify it for the legal fees and other costs of defending this suit. While the Company cannot guarantee the outcome of the above proceedings, the Company believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.
The Company is a party in various other disputes and litigation that have arisen in the course of the Company’s business. In the opinion of management, although legal proceedings can not be predicted with certainty, the ultimate outcome of these disputes and lawsuits are not expected to have a material impact on the Company’s financial condition or results of operations, or cash flows.
6. Restructuring and Other Charges
In the first quarter of 2004, the Company recorded a charge of $368,000. In late January 2004, the U.K. operations moved into new premises that are more suitable for their current staffing levels. The old facility, which had a lease through March 2005, was in use until the move. The U.K. lease termination charge of approximately $309,000 consisted of forfeiture of the rent deposit, abandonment of assets, and other direct disposal costs. Additionally, the Company recorded an adjustment of $59,000 for the reserve related to the consolidation of the corporate headquarters. This adjustment is due to the fact the Company has been unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by three months.
9
A summary of the restructuring and other charge, is as follows:
|
In thousands |
|
Employee |
|
Facility |
|
Asset |
|
Other |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance as of December 31, 2003 |
|
$ |
6 |
|
$ |
981 |
|
$ |
— |
|
$ |
11 |
|
$ |
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
2004 Provision |
|
— |
|
205 |
|
104 |
|
— |
|
309 |
|
|||||
|
2004 Adjustments |
|
— |
|
59 |
|
— |
|
— |
|
59 |
|
|||||
|
2004 Cash payments |
|
— |
|
(197 |
) |
— |
|
— |
|
(197 |
) |
|||||
|
2004 Non-cash charge offs |
|
— |
|
(169 |
) |
(104 |
) |
— |
|
(273 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance as of March 31, 2004 |
|
$ |
6 |
|
$ |
879 |
|
$ |
— |
|
$ |
11 |
|
$ |
896 |
|
|
In thousands |
|
Employee termination costs |
|
Facility |
|
Asset impairment charge |
|
Other |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance as of December 31, 2004 |
|
$ |
181 |
|
$ |
784 |
|
$ |
— |
|
$ |
— |
|
$ |
965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
2005 Provision |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
2005 Adjustments |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
2005 Cash payments |
|
(62 |
) |
(149 |
) |
— |
|
— |
|
(211 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance as of March 31, 2005 |
|
$ |
119 |
|
$ |
635 |
|
$ |
— |
|
$ |
— |
|
$ |
754 |
|
Included in Accrued restructuring at March 31, 2005 is approximately $119,000 related to the separation agreement with the Company’s former Chief Executive Officer, which the Company estimates will be disbursed over the next two quarters. The remaining $635,000, of which $98,000 is classified as non-current, related to the facility termination costs, which the Company estimates will be disbursed over remaining life of the lease through the second quarter of 2006.
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Except for historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the Company’s current expectations and are subject to a number of risks, uncertainties, and assumptions relating to the Company’s operations, financial condition, and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statement made by the Company in this Quarterly Report. These and other risks are detailed under the caption “Risk Factors Associated with Apropos’ Business and Future Operating Results” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission. The Company does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.
Overview
The Company develops, markets, and supports a leading real-time, multi-channel interaction management application for managing customer interactions across a variety of communications media, including E-mail, Fax, Web, and Voice. The Company’s solution enhances customer relationship management applications, such as sales, marketing, and service, through intelligent, value-based management of all interactions.
The Company’s operations commenced in January 1989, and, from inception to early 1995, operating activities consisted primarily of research and development and consulting. As an integral part of the Company’s growth strategy, during February 2000, the Company completed an initial public offering of 3,977,500 Common Shares (the “IPO”) resulting in net proceeds to the Company of approximately $79.3 million.
Revenue recognition. The Company recognizes revenue from the sale of software licenses upon delivery. The Company recognizes revenue from fees for professional services when they are completed. The Company recognizes support and maintenance services ratably over the term of its maintenance contracts, which are typically annual contracts. Training services are recognized as such services are completed.
The Company derives revenue principally from the sale of software licenses and from fees for implementation, technical support, and training services.
The Company markets its solution to its customers primarily through its direct sales force, value-added resellers, and original equipment manufacturers, or OEMs, in North America, Europe, South America, Asia, Africa, and Australia. Revenue generated via resellers and OEMs accounted for 34.3% and 36.8% of the Company’s total revenue for the three months ended March 31, 2005 and 2004, respectively. Management expects that revenue derived from sales to resellers and OEMs may increase as a percentage of total revenue as the Company expands its product capabilities and focuses its sales efforts on its distribution channels.
The Company relies on its customers and resellers to submit purchase orders for its product and services. In addition, the Company enters into general sales contracts with its customers and resellers; however, none of its customers or
11
resellers is obligated to purchase its product or its services pursuant to these contracts. All of the Company’s sales contracts contain provisions regarding the following:
• payment terms and conditions;
• warranties and repair procedures; and
• support and training obligations.
Typically, these contracts provide that the exclusive remedy for breach of the Company’s specified warranty is either a refund of the price paid or modification of the product to satisfy the warranty.
The Company has generally experienced a product sales cycle of six to nine months. The Company considers the life of the sales cycle to begin on the first face-to-face meeting with the prospective customer and end when product is shipped. The length of the sales cycle for customer orders depends on a number of factors, including:
• a customer’s awareness of the capabilities of the type of solutions Apropos sells and the amount of customer education required;
• concerns that the Company’s customer may have about its limited operating history and track record and the Company’s size compared to many of its larger competitors;
• a customer’s budgetary constraints;
• the timing of a customer’s budget cycles;
• concerns of the Company’s customer about the introduction of new products by the Company or its competitors that would render its current product noncompetitive or obsolete; and
• downturns in general economic conditions, including reductions in demand for contact center services.
The Company’s OEM contracts contain additional provisions regarding product technical specifications, labeling instructions, and other instructions regarding customization and rebranding. The Company’s OEM contracts contain volume discounts.
Sales to customers outside the United States accounted for 34.9% and 19.1% of the Company’s total revenue during the three months ended March 31, 2005 and 2004, respectively. Management expects the portion of the Company’s total revenue derived from sales to customers outside the United States to be comparable in the foreseeable future.
Cost of goods and services. Cost of goods and services consists primarily of:
• payments for third party software used with the Company’s product;
• the cost of compensation for technical support, education, and professional services personnel;
• other costs related to facilities and office equipment for technical support, education, and professional services personnel; and
• the cost of reimbursable travel included in revenue.
The Company recognizes costs of software, implementation services, support and training services as they are incurred.
Operating expenses. The Company generally recognizes its operating expenses as they are incurred. Sales and marketing expenses consist primarily of compensation, commission, and travel expenses along with other marketing expenses, including trade shows, public relations, telemarketing campaigns, and other promotional expenses. Research and development expenses consist primarily of compensation expenses for personnel and, to a lesser extent, independent contractors. General and administrative expenses consist primarily of compensation for administrative, financial, and information technology personnel and a number of non-allocable costs, including professional fees, legal fees, accounting fees, and bad debts.
Capitalization of certain software development costs. Research and development expenditures are charged to operations as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed,” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and
12
the point at which the product is ready for general release have not been significant. Through March 31, 2005, all software development costs have been expensed.
Allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectability of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company has determined that the receivable will not be collected. Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer.
Income taxes. The Company provides for income taxes under the liability method, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, a valuation allowance is required against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management regularly evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be appropriately reduced.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items included in the Company’s “Condensed Consolidated Statements of Operations” in the condensed consolidated financial statements. Percentages are calculated from operating results rounded to the nearest thousand and may not equal calculations from the numbers referenced below in this section which may be rounded to the nearest hundred thousand. Operating performance for any period is not necessarily indicative of performance for any future periods.
|
|
|
Quarter ended March 31 |
|
||
|
|
|
2005 |
|
2004 |
|
|
Revenue |
|
|
|
|
|
|
Software licenses |
|
26.1 |
% |
38.5 |
% |
|
Services and other |
|
73.9 |
|
61.5 |
|
|
Total revenue |
|
100.0 |
|
100.0 |
|
|
|
|
|
|
|
|
|
Costs of goods and services |
|
|
|
|
|
|
Cost of software |
|
0.9 |
|
3.3 |
|
|
Cost of services and other |
|
25.5 |
|
16.5 |
|
|
Total costs of goods and services |
|
26.4 |
|
19.8 |
|
|
|
|
|
|
|
|
|
Gross margin |
|
73.6 |
|
80.2 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
Sales and marketing |
|
41.2 |
|
32.4 |
|
|
Research and development |
|
26.0 |
|
20.4 |
|
|
General and administrative |
|
23.9 |
|
21.2 |
|
|
Restructuring and other charges |
|
0.0 |
|
7.2 |
|
|
Total operating expenses |
|
91.1 |
|
81.2 |
|
|
|
|
|
|
|
|
|
Operating loss |
|
(17.5 |
) |
(1.0 |
) |
|
|
|
|
|
|
|
|
Other income (expense) |
|
5.4 |
|
1.3 |
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
(12.1 |
)% |
0.3 |
% |
Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004
Revenue. Revenue decreased 18.3% to $4.2 million in the quarter ended March 31, 2005, from $5.2 million in the quarter ended March 31, 2004.
13
Revenue from software licenses decreased 44.7% to $1.1 million in the quarter ended March 31, 2005, from $2.0 million in the quarter ended March 31, 2004. The Company attributes this decrease to fewer new customers and fewer orders from existing customers in the current quarter compared to the first quarter of 2004.
Revenue from services and other, consisting of professional services, customer support and rebillable costs, decreased 1.8% to $3.1 million in the quarter ended March 31, 2005, from $3.2 million in the quarter ended March 31, 2004. Customer support revenues of $2.4 million were basically flat with the comparable period last year as the Company’s expanding customer base was offset by certain customers downsizing their systems or not renewing their support coverage. Professional services revenue decreased due to the mix of services performed which included fewer new system implementations in the current quarter.
Gross margin. Gross margins declined to 73.6% of total revenue in the quarter ended March 31, 2005, from 80.2% of total revenue in the quarter ended March 31, 2004. A shift in product mix, principally due to a decrease in higher margin software revenues, negatively impacted gross margins by 3.9%. In addition, the decrease reflects the increased use of subcontracted services for implementation services, which was partially offset by lower costs of third party software used in conjunction with the Company’s software.
Gross margins from software licenses increased to 96.7% of software revenue in the quarter ended March 31, 2005 from 91.4% of software revenue in the quarter ended March 31, 2004. Product costs consist primarily of third party software used in conjunction with the Company’s software.
Gross margin from services and other represented 65.6% of services and other revenue in the quarter ended March 31, 2005, and 73.1% of services and other revenue in the quarter ended March 31, 2004. This decrease is due primarily to increased use of subcontracted services for implementation services.
Operating expenses. Operating expenses decreased 8.3% to $3.8 million in the quarter ended March 31, 2005, from $4.2 million in the quarter ended March 31, 2004. This decrease is primarily the result of reduced restructuring charges and to a lesser extent, lower professional fees and insurance. Total operating headcount decreased by 2.8% to 70 employees at March 31, 2005, from 72 employees at March 31, 2004. As a percentage of total revenue, operating expenses were 91.1% in the first quarter ended March 31, 2005, and 81.2% in the first quarter ended March 31, 2004.
Sales and marketing expenses increased 3.8% to $1.7 million in the first quarter ended March 31, 2005, from $1.7 million in the first quarter ended March 31, 2004. The increase in sales and marketing expenses resulted primarily from increased marketing programs, offset by lower commissions due to lower license revenue.
Research and development expenses increased 4.4% to $1.1 million in the first quarter ended March 31, 2005, from $1.1 million in the first quarter ended March 31, 2004. The increase in research and development expenses related primarily to an increase in consulting services.
General and administrative expenses decreased 8.1% to $1.0 million in the first quarter ended March 31, 2005, from $1.1 million in the first quarter ended March 31, 2004. The decreases in general and administrative expenses were primarily due to lower legal fees and lower insurance costs.
Restructuring and other charges. In the first quarter of 2004, the Company recorded a charge of $368,000. In late January 2004, the U.K. operations moved into new premises that are more suitable for their current staffing levels. The old facility, which had a lease through March 2005, was in use until the move. The U.K. lease termination charge of approximately $309,000, consisted of forfeiture of the rent deposit, abandonment of assets, and other direct disposal costs. Additionally, the Company recorded an adjustment of $59,000 for the reserve related to the consolidation of the corporate headquarters. This adjustment is due to the fact the Company has been unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by three months.
Other income and expense. Interest income was $239,000 in the first quarter ended March 31, 2005, and $95,000 in the first quarter ended March 31, 2004. The increase in interest income is a result of an increase in investment yields and higher cash, cash equivalents, and short-term investment balances.
14
Income taxes. There has been no provision or benefit for income taxes for any period since 1995 due to the Company’s operating losses. At March 31, 2005, the Company had approximately $55.5 million of domestic operating loss carryforwards for federal income tax purposes, which expire beginning in 2011 through 2025. Based on Internal Revenue Code regulations relating to changes in ownership in the Company, utilization of a portion of the net operating loss carryforwards is subject to annual limitations. At March 31, 2005, the Company had foreign operating losses of approximately $3.6 million, which may be limited. The Company’s use of these net operating losses may be limited in future periods.
The Company’s operating activities resulted in net cash outflows of $130,000 in the first quarter of 2005 compared to net cash inflows of $505,000 in the first quarter of 2004. The operating cash outflow in 2005 was primarily the result of net losses and payments for compensation accruals, restructuring charges and prepayments of insurance. These outflows were offset to a lesser extent by a reduction of accounts receivable and increases in deferred revenue and deposits received from customers. The operating cash inflows for the first quarter of 2004 resulted primarily from the seasonal increase in deferred revenue billings, offset to a lesser extent by increases in prepaid expenses and accounts receivable.
The Company’s investing activities resulted in net cash inflows of $17.2 million and $1.5 million in the first quarter of 2005 and 2004, respectively. The inflows were the result of net proceeds from maturities of short-term investments offset by purchases of short-term investments and, to a lesser extent, capital expenditures. During the first quarter of 2005, management made a decision to divest its short-term investments in auction rate securities. A portion of these proceeds has been reinvested in investments classified as cash equivalents.
Financing activities generated $287,000 and $604,000 in cash in the first quarter of 2005 and 2004, respectively. These funds were generated from proceeds received from stock option exercises.
As of March 31, 2005, the Company had no long-term obligations other than operating leases related to facilities utilized by the Company. The following table summarizes the minimum lease payments for these operating leases as of March 31, 2005:
|
in thousands |
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
More than 5 |
|
|||
|
Operating leases |
|
$ |
1,599 |
|
$ |
1,384 |
|
$ |
215 |
|
None |
|
None |
|
|
Total contractual cash obligations |
|
$ |
1,599 |
|
$ |
1,384 |
|
$ |
215 |
|
None |
|
None |
|
The Company believes that its capital requirements, in large part, depend on future results of operations and, ultimately, achievement of profitability. The Company expects to devote resources to research and development efforts, to expand sales channels and marketing lead generation programs, to fund capital expenditures, and to provide for working capital and other general corporate purposes. Management believes that the existing cash and short-term investment balances will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relate primarily to the change in the amount of interest income the Company can earn on its investments. The Company does not use derivative financial instruments in its investment portfolio. The Company had short-term investments of $11.6 million at March 31, 2005. The Company’s short-term investments consist primarily of government agency bonds. The Company considers all investments with original maturities of less than one year, but greater than 90 days from the respective balance sheet date to be short-term investments. These investments are subject to interest rate risk and will fall in value if market interest rates increase. The Company believes a hypothetical increase in market interest rates by 10.0% from levels at December 31, 2004, would cause the fair value of these short-term investments to fall by an immaterial amount. Since the Company is not required to sell these investments before maturity, the Company has the ability to avoid realizing losses on these investments due to a sudden change in market interest rates. On the other hand, declines in the interest rates over time will reduce interest income.
Foreign Currency Risk
The Company develops products in the United States and sells these products in North America, Europe, South America, Asia, Africa, and Australia. As a result, its financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. As sales are generally made in U.S. dollars or British pound sterling, a strengthening of the dollar or pound could make the Company’s products less competitive in foreign markets. Given the level of income the Company currently derives from its foreign operations, the Company considers this exposure to be minimal. The Company believes a 10.0% change in exchange rates would not have a significant impact on its future earnings.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
16
Part II. Other Information.
Item 1. Legal Proceedings.
See Note 5 to the Company’s unaudited condensed consolidated financial statements in Item 1 – Part I of this Quarterly Report on Form 10-Q, which is hereby incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) The following exhibits are included herein:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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, on May 13, 2005.
|
|
Apropos Technology, Inc. |
|
|
|
|
|
|
|
|
|
|
|
/s/FRANCIS J. LEONARD |
|
|
|
Francis J. Leonard |
|
|
|
Chief Financial Officer and Vice President |
|
|
|
(Principal Financial Officer and Authorized Officer) |
|
17