UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________________________
FORM
10-Q
| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
quarterly period ended March 31, 2005
OR
| q |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
transition period from ___________________ to
______________________.
Commission
file number 0-28968
APTIMUS,
INC.
(Exact
name of registrant as specified in its charter)
|
WASHINGTON |
|
91-1809146 |
|
(State
of other jurisdiction of incorporation) |
|
(I.R.S.
Employer Identification No.) |
100
Spear Street, Suite 1115
San
Francisco, CA 94105
(Address
of principal executive offices and zip code)
(415)
896-2123
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
number of shares of the registrant's Common Stock outstanding as of April 30,
2005 was 6,395,326.
APTIMUS,
INC.
INDEX
TO THE FORM 10-Q
For
the quarterly period ended March 31, 2005
| |
|
Page |
| Part I
- |
FINANCIAL
INFORMATION |
| |
|
|
| ITEM 1. |
FINANCIAL STATEMENTS (UNAUDITED) |
|
| |
|
|
| |
Balance Sheets as of December 31, 2004 and
March 31, 2005 |
1 |
| |
|
|
| |
Statements of Operations for the three months
ended March 31, 2004 and 2005 |
2 |
| |
|
|
| |
Condensed Statements of Cash Flows for the
three months ended
March 31, 2004 and 2005 |
3 |
| |
|
|
| |
Notes to Unaudited Condensed Financial
Statements |
4 |
| |
|
|
| ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
9 |
| |
|
|
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
21 |
| |
|
|
| Part II -
|
OTHER
INFORMATION |
21 |
| |
|
|
| ITEM 1. |
LEGAL
PROCEEDINGS |
21 |
| |
|
|
| ITEM 2. |
CHANGES
IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
21 |
| |
|
|
| ITEM 3. |
DEFAULTS
UPON SENIOR SECURITIES |
22 |
| |
|
|
| ITEM 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
22 |
| |
|
|
| ITEM 5. |
OTHER
INFORMATION |
22 |
| |
|
|
| ITEM 6. |
EXHIBITS
AND REPORTS ON FORM 8-K |
23 |
| |
|
|
| |
|
|
| SIGNATURES |
|
25 |
PART
I — FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
APTIMUS,
INC.
BALANCE
SHEETS
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
|
March
31, 2005 |
|
|
December
31, 2004 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
9,391 |
|
$ |
3,610 |
|
|
Accounts
receivable, net |
|
|
2,539 |
|
|
2,857 |
|
|
Prepaid
expenses and other assets |
|
|
122 |
|
|
130 |
|
|
Total
current assets |
|
|
12,052 |
|
|
6,597 |
|
|
Fixed
assets, net |
|
|
648 |
|
|
549 |
|
|
Intangible
assets, net |
|
|
10 |
|
|
15 |
|
|
Deposits |
|
|
37 |
|
|
45 |
|
| |
|
$ |
12,747 |
|
$ |
7,206 |
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
650 |
|
$ |
1,375 |
|
|
Accrued
and other liabilities |
|
|
401 |
|
|
631 |
|
|
Total
current liabilities |
|
|
1,051 |
|
|
2,006 |
|
|
Commitments
and contingent Liabilities
Common
stock warrants |
|
|
955 |
|
|
— |
|
|
Shareholders'
equity |
|
|
|
|
|
|
|
|
Common
stock, no par value; 100,000 shares authorized, 6,391 and 5,973 issued and
outstanding at March 31, 2005 and December 31, 2004,
respectively |
|
|
69,018 |
|
|
63,495 |
|
|
Additional
paid-in capital |
|
|
1,981 |
|
|
2,644 |
|
|
Accumulated
deficit |
|
|
(60,258 |
) |
|
(60,939 |
) |
|
Total
shareholders' equity |
|
|
11,696 |
|
|
5,200 |
|
| |
|
$ |
12,747 |
|
$ |
7,206 |
|
The
accompanying notes are an integral part of these financial statements.
APTIMUS,
INC.
STATEMENTS
OF OPERATIONS
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| |
|
Three
months ended March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Revenues |
|
$ |
3,852 |
|
|
1,806 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
1,466 |
|
|
679 |
|
|
Sales
and marketing |
|
|
725 |
|
|
437 |
|
|
Connectivity
and network costs |
|
|
211 |
|
|
176 |
|
|
Research
and development |
|
|
167 |
|
|
152 |
|
|
General
and administrative |
|
|
558 |
|
|
339 |
|
|
Depreciation
and amortization |
|
|
65 |
|
|
66 |
|
|
Total
operating expenses |
|
|
3,192 |
|
|
1,849 |
|
|
Operating
income (loss) |
|
|
660 |
|
|
(43 |
) |
|
Interest
expense |
|
|
— |
|
|
27 |
|
|
Interest
income |
|
|
21 |
|
|
5 |
|
|
Net
income (loss) |
|
$ |
681 |
|
$ |
(65 |
) |
|
Earnings
(loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.11 |
|
$ |
(0.01 |
) |
|
Diluted |
|
$ |
0.09 |
|
$ |
(0.01 |
) |
|
Weighted
average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
6,005 |
|
|
5,237 |
|
|
Diluted |
|
|
7,342 |
|
|
5,237 |
|
The
accompanying notes are an integral part of these financial statements.
APTIMUS,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
Three
Months Ended March 31, |
| |
|
|
2005 |
|
|
2004 |
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
681 |
|
$ |
(65 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
65 |
|
|
66 |
|
|
Bad
debt expense |
|
|
40 |
|
|
11 |
|
|
Amortization
of discount on notes payable |
|
|
— |
|
|
3 |
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
278 |
|
|
(508 |
) |
|
Prepaid
expenses and other assets |
|
|
16 |
|
|
45 |
|
|
Accounts
payable |
|
|
(725 |
) |
|
(41 |
) |
|
Accrued
and other liabilities |
|
|
(181 |
) |
|
31 |
|
|
Net cash provided by (used in) operating
activities |
|
|
174 |
|
|
(458 |
) |
|
CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
|
(159 |
) |
|
(128 |
) |
|
Payments for intangible assets |
|
|
— |
|
|
(5 |
) |
|
Net cash used in investing activities |
|
|
(159 |
) |
|
(133 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
6,033 |
|
|
14 |
|
|
Costs
of issuance of common stock |
|
|
(267 |
) |
|
(5 |
) |
|
Principal payments under capital leases |
|
|
— |
|
|
(28 |
) |
|
Net cash provided by (used in) financing activities |
|
|
5,766 |
|
|
(19 |
) |
|
Net
decrease in cash and cash equivalents |
|
|
5,781 |
|
|
(610 |
) |
|
Cash
and cash equivalents at beginning of period |
|
|
3,610 |
|
|
2,368 |
|
|
Cash
and cash equivalents at end of period |
|
$ |
9,391 |
|
$ |
1,758 |
|
The
accompanying notes are an integral part of these financial statements.
APTIMUS,
INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. UNAUDITED
INTERIM FINANCIAL INFORMATION
The
accompanying unaudited condensed financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with accounting principles generally accepted
in the United States of America, have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
The
unaudited condensed financial statements should be read in conjunction with the
Company’s audited financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2005. The
interim financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months ended March 31, 2005 are
not necessarily indicative of the results to be expected for any subsequent
quarter or the entire year ending December 31, 2005.
2. REVENUE
RECOGNITION
The
Company currently derives revenue primarily from providing response-based
advertising programs through a network of website and email distribution
publishers.
Revenue
earned for lead generation through the Aptimus network is based on a fee per
lead and is recognized when the lead information is delivered to the client.
Revenue earned for e-mail mailings can be based on a fee per lead, a percentage
of revenue earned from the mailing, or a cost per thousand e-mails delivered.
Revenue from e-mail mailings delivered on a cost per thousand basis is
recognized when the e-mail is delivered. Revenue from e-mail mailings sent on a
fee per lead or a percentage of revenue earned from the mailing basis is
recognized when amounts are determinable, generally when the customer receives
the leads.
Revenues
generated through network publishers and opt-in email list owners are recorded
on a gross basis in accordance with Emerging Issues Task Force consensus 99-19
(EITF consensus 99-19). Fees paid to network publishers and opt-in email list
owners related to these revenues are shown as Publisher fees on the Statement of
Operations. Aptimus shares a portion of the amounts it bills its advertiser
clients with the third-party website owners or “publishers” and email list
owners on whose web properties and email lists Aptimus distributes the
advertisements. While this “revenue share” approach is Aptimus’ primary payment
model, it will as an alternative occasionally pay website owners either a fixed
fee for each completed user transaction or a fee for each impression of an
advertisement served on the website. Email based campaigns that are sent to
Company owned lists do not have publisher fees associated with them.
The
Company has evaluated the guidance provided by EITF consensus 99-19 as it
relates to determining whether revenue should be recorded gross or net for the
payments made to network publishers and opt-in email list owners. The Company
has determined the recording of revenues gross is appropriate based upon the
following factors:
| · |
Aptimus
acts as a principal in these transactions; |
| · |
Aptimus
and its customer are the only companies identified in the signed
contracts; |
| · |
Aptimus
and its customer are the parties who determine pricing for the
services; |
| · |
Aptimus
is solely responsible to the client for fulfillment of the
contract; |
| · |
Aptimus
bears the risk of loss related to
collections |
| · |
Aptimus
determines how the offer will be presented across the network;
and |
| · |
Amounts
earned are based on leads or emails delivered and are not based on amounts
paid to publishers. |
In
addition to lead generation revenues, the Company earns revenues from list
rental activities. List rental revenues are received from the rental of customer
names to third parties through the use of list brokers. Revenue from list rental
activities are recognized in the period the payment is received due to
uncertainty surrounding the net accepted number of names.
3. STOCK
COMPENSATION
At March
31, 2005, the Company had two stock-based employee compensation plans, which are
more fully described in the Company’s Annual Report on Form 10-K filed with the
SEC on March 31, 2005. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting
for Stock Issued to Employees, and
related Interpretations. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standard
(SFAS) 123, Accounting
for Stock-Based Compensation, as
amended by SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, to
stock-based employee compensation for the applicable periods (in thousands,
except per share data):
|
|
|
Three
Months Ended
March
31,
(unaudited) |
| |
|
|
2005 |
|
|
2004 |
|
|
Net
income (loss), as reported |
|
$ |
681 |
|
$ |
(65 |
) |
|
Add:
Total stock-based employee compensation expense, included in the
determination of net income as reported, net of related tax
effects |
|
|
— |
|
|
— |
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects |
|
|
(99 |
) |
|
(21 |
) |
|
Pro
forma net income (loss) |
|
$ |
582 |
|
$ |
(86 |
) |
| |
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
Basic
- as reported |
|
$ |
0.11 |
|
$ |
(0.01 |
) |
|
Basic
- pro forma |
|
$ |
0.10 |
|
$ |
(0.02 |
) |
|
Diluted
- as reported |
|
$ |
0.09 |
|
$ |
(0.01 |
) |
|
Diluted
- pro forma |
|
$ |
0.08 |
|
$ |
(0.02 |
) |
4. NET
EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share represents net income (loss) available to common
shareholders divided by the weighted average number of shares outstanding during
the period. Diluted earnings (loss) per share represents net income (loss)
available to common shareholders divided by the weighted average number of
shares outstanding, including the potentially dilutive impact of common stock
options, warrants and convertible notes payable, using the treasury stock
method.
The
following table sets forth the computation of the numerators and denominators in
the basic and diluted earnings (loss) per share calculations for the periods
indicated and the common stock equivalent securities as of the end of the period
that are not included in the diluted net loss per share calculation as their
effect on earnings (loss) per share is anti-dilutive (in thousands):
|
|
|
Three
Months Ended
March
31,
(unaudited) |
| |
|
|
2005 |
|
|
2004 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net
income (loss) (A) |
|
$ |
681 |
|
$ |
(65 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock (B) |
|
|
6,005 |
|
|
5,237 |
|
|
Weighted
average dilutive effect of options to purchase common
stock |
|
|
111 |
|
|
— |
|
|
Weighted
average dilutive effect of warrants to purchase common stock |
|
|
1,226 |
|
|
— |
|
|
Weighted
average common stock and common stock equivalents (C) |
|
|
7,342 |
|
|
5,237 |
|
| |
|
|
|
|
|
|
|
|
Earnings
(loss) per share: |
|
|
|
|
|
|
|
|
Basic
(A/B) |
|
$ |
0.11 |
|
$ |
(0.01 |
) |
|
Diluted
(A/C) |
|
$ |
0.09 |
|
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
Antidilutive
securities excluded consist of the following: |
|
|
|
|
|
|
|
|
Options
to purchase common stock |
|
|
— |
|
|
1,486 |
|
|
Warrants
to purchase common stock |
|
|
— |
|
|
183 |
|
|
|
|
|
— |
|
|
1,669 |
|
|
5.
|
|
PRIVATE
EQUITY FINANCING |
In March
2005, the Company completed a $6 million private placement transaction with
seven accredited investors. The Company sold the accredited investors 351,083
shares of the Company’s unregistered common stock at a price of $17.09 per
share. In connection with this sale, warrants for an additional 70,216 shares of
common stock at a strike price of $20.22 were also issued to the investors. In
addition to the warrants issued to the seven purchasers warrants to purchase a
total of 21,065 shares of common stock at a strike price of $18.15 were also
issued to a company who acted as our financial advisor in the transaction and an
accredited-investor assignee of the financial advisor. The shares were issued in
reliance upon the exemptions from registration provided by Rule 506 of
Regulation D and Section 4(2) under the Securities Act. The
warrants are exercisable upon issuance and expire March 24, 2010. Net proceeds
from the transactions, after issuance costs and placement fees, were
approximately $5.7 million.
Within 30
calendar days following the closing date, the Company was required to file with
the Securities and Exchange Commission (SEC) a registration statement
covering the resale of all of the common stock purchased and the common stock
underlying the warrants issued to the investors. The Company was required to use
its commercially reasonable efforts to obtain effectiveness of the registration
statement before the earlier of (a) the 120th calendar day following the
closing date or (b) the fifth trading day following notification by the SEC
that the registration statement will not be reviewed or is no longer subject to
further review and comments.
The
company timely filed a registration statement on Form S-3 (S-3) covering the
resale of the purchased and warrant-related common stock on April 28, 2005. By
correspondence, dated May 9, 2005, the SEC informed the company it was waiving
review of the S-3. By letter, dated May 10, 2005, the company requested the SEC
accelerate the effectiveness date of the S-3 to May 13, 2005. The company now
anticipates the SEC will take the S-3 effective as of 2 p.m. EDT on Friday, May
13, 2005.
The
registration rights agreement provides that if a registration statement is not
filed, or does not become effective, within the defined time period, then in
addition to any other rights the investors may have, the Company would be
required to pay to each investor an amount in cash, as liquidated damages, equal
to 2% per month of the aggregate purchase price, prorated daily.
In
accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company’s Own Stock,” and the terms of
the warrants, the fair value of the warrants issued to the investors has been
accounted for as a liability, with an offsetting reduction to the carrying value
of the common stock. The warrant liability will be reclassified to equity as of
the effective date of the registration statement, May 13, 2005.
The fair
value of the warrants was estimated using the Black-Scholes option-pricing model
with the following assumptions: no dividends; risk-free interest rate of 4.3%,
the contractual life of 5 years and volatility of 100%. The fair value of
the warrants was estimated to be $955,000 on the closing date of the
transaction. The fair value of the warrants was then re-measured at March 31,
2005 and approximated the amount of the recorded liability. Accordingly, no
charge was recorded to other expenses in the statement of operations for the
three-month period ended March 31, 2005. The fair value of the warrants
decreased by approximately $75,000 from March 31, 2005 to May 13, 2005 and such
amount will be reflected as other income in the statement of operations in the
second quarter of 2005.
Litigation
The
Company may be subject to various claims and pending or threatened lawsuits in
the normal course of business. Management believes that the outcome of any such
lawsuits would not have a materially adverse effect on the Company’s financial
position, results of operations or cash flows.
Change
in Control Agreement
In
December 2002, the Board of Directors approved a Change in Control Agreement.
Under the terms of this agreement, key members of management are to receive a
severance package ranging between eight and twelve months salary in the event of
a change in control of the Company and termination of the employee.
Guarantees
and Indemnifications
The
following is a summary of our agreements that we have determined are within the
scope of Interpretation No. 45, or FIN 45, which are separately grandfathered
because the guarantees were in effect prior to December 31, 2002. Accordingly,
we have no liabilities recorded for these agreements as of March 31, 2005.
As
permitted under Washington law and our by-laws and certificate of incorporation,
Aptimus has agreements whereby we indemnify our officers and directors for
certain events or occurrences while the officer or director is, or was serving,
at our request in such capacity. The term of the indemnification period is the
applicable statute of limitations for indemnifiable claims. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, Aptimus has a directors’ and
officers’ insurance policy that may enable us to recover a portion of any future
amounts paid. Assuming the applicability of coverage and the willingness of the
insurer to assume coverage and subject to certain retention, loss limits and
other policy provisions, we believe the estimated fair value of this
indemnification obligation is not material. However, no assurances can be given
that the insurers will not attempt to dispute the validity, applicability or
amount of coverage, which attempts may result in expensive and time-consuming
litigation against the insurers.
Aptimus’
standard advertising client and distribution publisher contracts include
standard cross indemnification language that requires, among other things, that
we indemnify the client or publisher, as the case may be, for certain claims and
damages asserted by third-parties that arise out of Aptimus’ breach of the
contract. In the past, Aptimus has not been subject to any claims for such
losses and has thus not incurred any material costs in defending or settling
claims related to these indemnification obligations. Accordingly, we believe the
estimated fair value of these obligations is not material.
Pursuant
to these agreements, Aptimus may indemnify the other party for certain losses
suffered or incurred by the indemnified party in connection with various types
of third-party claims, which may include, claims of intellectual property
infringement, breach of contract and intentional acts in the performance of the
contract. The term of these indemnification obligations is generally limited to
the term of the contract at issue. In addition, Aptimus limits the maximum
potential amount of future payments we could be required to make under these
indemnification obligations to the consideration paid during a limited period of
time under the applicable contract, but in some infrequent cases the obligation
may not be so limited. In addition, our standard policy is to disclaim most
warranties, including any implied or statutory warranties such as warranties of
merchantability, fitness for a particular purpose, quality and non-infringement,
as well as any liability with respect to incidental, indirect, consequential,
special, exemplary, punitive or similar damages. In some states, such
disclaimers may not be enforceable. If necessary, the Company would provide for
the estimated cost of service warranties based on specific warranty claims and
claim history. Aptimus has not been subject to any claims for such losses and
has not incurred any costs in defending or settling claims related to these
indemnification obligations. Accordingly, we believe the estimated fair value of
these agreements is not material.
ITEM
2: MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD
LOOKING STATEMENTS
Certain
statements in this filing constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements can often be identified by terminology such as may,
will, should, expect, plan, intend, expect, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Aptimus, Inc. (“Aptimus”, “we”, “us” or the “Company”), or
developments in the Company’s industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements include, without limitation, fluctuation of the Company’s operating
results, the ability to compete successfully, the ability of the Company to
maintain current client and distribution publisher relationships and attract new
ones, and the sufficiency of remaining cash and short-term investments to fund
ongoing operations and the risk factors set forth in the Company’s 10-K for the
fiscal year ended December 31, 2004.
Although
we believe the expectations reflected in our forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements or other future events. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of forward-looking
statements. We are under no duty to update any of our forward-looking statements
after the date of this filing. You should not place undue reliance on
forward-looking statements.
OVERVIEW
We are a
results-based advertising network that distributes advertisements for direct
marketing advertisers across a network of third-party web sites and
company-owned and licensed email lists. For advertisers, the Aptimus Network
offers an Internet-based distribution channel to present their advertisements to
users on web sites and email lists. Advertisers pay us only for the results that
we deliver. We then share a portion of the amounts we bill our advertiser
clients with the third party web site owners or “publishers” and email list
owners on whose web properties and email lists we distribute the advertisements.
While this “revenue share” approach is our primary payment model, we will as an
alternative occasionally pay web site owners either a fixed fee for each
completed user transaction or a fee for each impression of an advertisement
served on the web site. Because fixed fee arrangements have an inherent risk of
distribution costs exceeding the ultimate revenue generated, we will continue to
structure substantially all of our distribution contracts on a revenue share
basis.
Advertisers
generally pay us based on one of the following approaches:
| · |
when
a user opens an advertisement served by Aptimus with a “click” of the
cursor on the user’s computer screen (a “cost per click” pricing model);
|
| · |
when
a user opens an advertisement served by Aptimus, expresses his or her
interest in the advertisement by providing certain information desired by
the advertiser such as the user’s name and email address, and then submits
that information to Aptimus or the advertiser directly by “clicking” the
submit button on the computer screen (a “cost per lead” pricing model);
|
| · |
when
a user opens an advertisement and orders the advertised product or service
by providing the desired information such as a name, postal address and
payment, and then submits the order to Aptimus or the advertiser directly
by “clicking” the submit button on the computer screen (a “cost per
acquisition” or “percentage of revenue” pricing model);
|
| · |
when
an advertisement is displayed on a user’s computer screen (a “cost per
impression” pricing model); or |
| · |
any
combination of the pricing models described
above. |
As a
result, advertisers can refine their offers and payment models to achieve their
specific objectives. For web site publishers and email list owners, we believe
the Aptimus Network generates high revenues for publishers or email list owners
while promoting offers from recognized brand advertisers in graphical formats
that complement the publishers’ sites and add value for their customers. Our
most effective placement on publishers’ websites is at the point of a
transaction where we host the offer page and the user initiates an action to
view the page. Transaction-oriented web site placements are thus the focus of
our model. We define a transaction as a registration, download or other active
participation point on a publisher website.
At the
core of the Aptimus Network is a database configuration and software platform
and direct marketing approach for which we have filed a non-provisional business
method patent application called Dynamic Revenue Optimization™. This system is
designed to determine the advertisements in our system for promotion on each
individual web site and in each email sent that the system estimates may
generate the greatest user response and revenue potential for that specific web
site or email placement. This estimation is made using computer-based logic on a
real-time basis incorporating response history and value of the advertisements
in our system. The purpose of the system is to enhance results for our
advertiser clients by presenting the offers in our database that are more likely
to be of interest to specific customers, which enhancing revenues for our
publishers and us.
Our lead
quality control efforts include real-time validation of postal address, email
address and telephone number so that only leads with valid data are passed along
to our clients. Our primary offer presentation formats include cross-marketing
promotions at the point of registration or other transactional activity on web
sites, online advertising programs, and email marketing campaigns. As the
network aspects of our business have experienced more rapid growth than our
email marketing campaigns, the percentage contribution of email to our overall
revenues has declined to approximately 11% of overall revenue as of the quarter
ended March 31, 2005. Because our focus has shifted away from email marketing
toward our network approach, we anticipate that network growth will continue
while the revenue from email campaigns will remain close to current levels
subject to some quarterly positive and negative fluctuations. We anticipate
email will gradually contribute lower percentages of revenue for the foreseeable
future as network revenues are expected to increase.
The
growth of our email marketing campaigns also may be limited by the effect of
ISPs limiting access to their networks. For example, Yahoo has periodically
placed a temporary block on mailings from one of our lists. In addition, we have
voluntarily stopped or limited sending emails to subscribers of certain ISPs as
we work to secure agreements with them to allow our emails to reach their
subscribers unimpeded. Out of an aggregate email database of approximately 38
million names, we do not mail to approximately 22 million names either due to
ISP blocks or voluntary action on our part.
Our
advertisements typically appear on a dedicated offer page where no other
advertisements or editorial content is presented. The number of advertisements
displayed on the page ranges from one to as many as twenty or more. They can
appear in a single column or in two columns and the method of selecting
advertisements can either be in a check box or a yes/no button format. All of
these elements are variables that we can change on the fly. We have found that
different publisher web sites will generate different results with the same
offer format. Our ability to test offer formats on a publisher-by-publisher
basis allows us to present the optimally performing format in terms of user
response and value for each individual publisher in our network.
We
believe that users are more inclined to respond to our clients’ advertisements
in an environment where they are engaged in some form of transaction, the logic
being a consumer is more likely to take the additional action of responding to
an ad when he or she is in a transaction frame of mind. We thus strive to have
our offers displayed in environments on our publishers’ web sites where
consumers are taking some form of action. Actions can include when a user
registers to be included in a web site community or to receive a newsletter,
when a user logs in to a site where he or she is already registered, when a user
downloads a software program or other product, and when a user completes an
online survey. In identifying potential publisher sites to contract with, a key
consideration for us is the number of registrations, log-ins, downloads or other
form of user transactions taking place on the site. The more user transactions,
the more desirable that publisher is for inclusion in our network.
Given the
importance transacting consumers are to our business, a key focus of ours has
been expanding the number of publishers in our network. Because we remain at an
early stage in the focused development of our distribution network, our lead
volumes are concentrated among a limited number of top performing publishers.
For the quarters ended March 31, 2004 and 2005, user leads from our top five
largest website publishers accounted for 49.6% and 33.2% of our total revenues,
respectively. For the quarter ended March 31, 2005, user leads from the top two
publishers accounting for 8.2% and 7.8% of revenues, respectively. The
concentration of revenue among our five largest website publishers decreased as
a result of our continued focus to expand the number of publishers in our
network. While our goal is to expand the number of publishers and reduce the
concentration of revenue from any one publisher, we anticipate that a limited
number of publishers collectively will continue to account for a significant
portion of our lead volume for the foreseeable future.
The
limited three-year history of the business, together with the evolving nature of
results-based online advertising in general, makes it difficult to identify
business metrics other than total revenue and profitability that will prove
useful if consistently applied over the long term. For example, identifying the
number of new publisher sites added to our network in a quarter can be
confusing. Because impressions play an important role in our performance, the
addition of ten publishers each with relatively few impressions may not be as
meaningful to the company as the addition of one publisher with high impression
volumes. Similarly, identifying the total number of impressions can be
confusing, since we have found that depending on the site and the placement
within that site revenues per impression can vary widely. The type of impression
makes a difference in performance of each impression. For example, a pop-up
advertising impression that appears at the end of a user visit to a publisher’s
site may occur with high frequency, but is likely to generate a limited number
of orders and thus lower average revenue for the company. On the other hand,
transaction-based impressions - where an advertisement is displayed in the
middle of a registration process for example - may be fewer in number, but they
usually generate higher average revenues.
Identifying
average revenue for each lead or other paid action on a quarterly basis is
likely to be confusing as well. Lead fees our clients pay vary widely based on
the specific offer and offer requirements. Also, our Dynamic Revenue
Optimization system is designed to maximize revenues per impression regardless
of the payment model a client uses, basing its calculations on the combination
of the responses an offer generates in each placement and the value of those
responses. A popular offer with a lower lead fee can achieve greater exposure
than less popular offers with higher lead fees. Therefore, we do not find our
average lead fee a useful indicator of the health or prospects of the
business.
Our most
effective placement on publishers’ websites is at the point of a transaction
where we host an offer page that is included as an intermediate step in the
user-initiated transaction process. We define a transaction as a registration,
download or other active participation point on a publisher website. We consider
these transaction-oriented web site placements our core placements, and they are
thus the focus of our model and are referred to as our “core placements”. Our
offers also appear in other formats where we either do not host the offer page
or the page that we do host is not included as an intermediate step in a
transaction process. These other formats, which are collectively referred to as
“other placements”, include pop-ups and pop-unders, log-ins, thank you pages,
and non-hosted pages with unrelated editorial and advertising content. They do
not include banners, skyscrapers and other, similar ad units, which to date we
have elected not to support with our Dynamic Revenue Optimization system. The
overall performance of these other placements has been widely variable
historically, yet the supply of impressions in these other formats on a
publisher’s site can be substantial.
Our
website publishers measure our performance by comparing the revenue per thousand
impression results to other available revenue generating solutions. An
impression occurs each time an offer is displayed on a user’s computer screen.
While we do not use average revenue per impression or per lead in evaluating the
performance of our business, website publishers do use this metric in comparing
various advertising options. Publishers can source advertisements directly from
advertisers and agencies, they can contract with advertising networks like our
network to satisfy their advertising requirements or they can do a combination
of both. Almost exclusively publishers use revenue per impression when comparing
the relative benefits of these various options. In addition, because of its
value as a marketing tool to the publisher base, industry analysts find revenue
per impression data useful. We thus have regularly provided data on average
revenues per impression in our public filings, intend to do so in the future and
discuss average revenues per impression in our Results of Operations
below.
However,
the most important, consistent and reliable business metrics management
considers in determining the health of the business are revenues and net profit
(loss).
For the
quarters ended March 31, 2005 and 2004 the Company’s ten largest clients
accounted for 56.6% and 63.2% of revenue, respectively. During the quarter ended
March 31, 2005 Adteractive accounted for 11.9% of revenue, Emarketmakers
accounted for 11.0% of revenue, and no other client accounted for more than 10%
of revenue. During the quarter ended March 31, 2004, Advertising.com, Inc.
accounted 19.4% of revenue and no other client accounted for more than 10% of
revenue. The percentage of revenue represented by our ten largest clients when
compared to the same quarter of 2004 has remained relatively consistent. We
expect our revenues to be composed of a similar mix of large and small
advertiser clients in the immediate future.
Our
business operated at a loss and generating negative cash flows from operations,
since inception through March 31, 2004. As of March 31, 2005, we had an
accumulated deficit of approximately $60.3 million. We are currently generating
positive earnings and cash flows and we expect to continue to maintain positive
earnings and cash flows. However, there are still many challenges to achieving
this goal and the achievement is by no means assured.
In March
2005, the Company completed a $6 million private placement investment with seven
accredited investors. The Company sold the accredited investors 351,083 shares
of unregistered Aptimus, Inc. common stock at a price of $17.09 per share. In
connection with this sale, warrants for an additional 70,216 shares of common
stock at a strike price of $20.22 were also issued to the investors. In addition
to the warrants issued to the seven investors, warrants to purchase a total of
21,065 shares of common stock at a strike price of $18.15 were also issued to a
company who acted as our financial advisor in the transaction and an
accredited-investor assignee of the financial advisor.
In March
2005, our common stock (APTM) was re-listed for trading on the Nasdaq National
Market Exchange.
RESULTS
OF OPERATIONS
Revenues
We derive
our revenues primarily from response-based advertising contracts. Leads are
obtained through promoting our clients’ offers across our Aptimus Network of web
site publishers and opt-in email lists. Revenues generated through network
publishers and opt-in email list owners are recorded on a gross basis in
accordance with EITF consensus 99-19. Fees paid to network publishers and opt-in
email list owners related to these revenues are shown as Cost of revenues on the
Statement of Operations.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
2004 |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
3,852 |
|
$ |
1,806 |
|
|
113.3 |
% |
|
|
|
Three
months ending March 31, |
|
|
|
|
(Page
impressions in thousands) |
|
|
2005 |
|
|
2004 |
|
|
Percentage
Increase (Decrease) |
|
|
Core
placement CPM |
|
$ |
251.72 |
|
$ |
307.29 |
|
|
(18 |
)% |
|
Core
placement page impressions |
|
|
10,835 |
|
|
2,288 |
|
|
374 |
% |
|
Percentage
of revenue from core placements |
|
|
70.8 |
% |
|
38.9 |
% |
|
82 |
% |
|
Other
placement CPM |
|
$ |
18.93 |
|
$ |
18.77 |
|
|
1 |
% |
|
Other
placement page impressions |
|
|
37,541 |
|
|
25,270 |
|
|
49 |
% |
|
Percentage
of revenue from other placements |
|
|
18.5 |
% |
|
26.3 |
% |
|
(30 |
)% |
|
Percentage
of revenue from email programs |
|
|
10.7 |
% |
|
33.8 |
% |
|
(68 |
)% |
The core
CPM declined in the current quarter primarily as a result of seasonality in
education oriented offers running in the Aptimus network during the first two
months of 2005. At the same time, the number of core impressions increased 374%
over the comparable period of the prior year as a result of our ability to sign
up new website publishers to participate in our network. The average core CPM
will generally fluctuate from period to period depending on both the mix of
client offers and the type of publisher placements running in the network at any
given time. Revenues in the current quarter sequentially declined from the
quarter ended December 31, 2004 by 19%, also primarily as a result of
seasonality in the education offers presented in our network. We expect core
impression oriented revenue in future quarters to grow from quarter to quarter
as we plan to continue to expand our network with new publisher placements and
client offers.
Revenue
from email programs in the current quarter has decreased compared to the first
quarter of 2004 but has remained relatively consistent with the fourth quarter
of 2004. The decrease in revenues from the comparable quarter of 2004 was
primarily attributable to a decrease in the number of email sent. Percentage of
revenue from email programs has decreased as a result of the increase in website
based programs. We expect revenues from email programs in future quarters to be
similar to the current quarter.
Cost
of revenue
Costs of
revenues consist of fees owed to network distribution publishers and opt-in
email list owners based on revenue generating activities created in conjunction
with these publishers.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
1,466 |
|
|
38.1 |
% |
$ |
679 |
|
|
37.6 |
% |
|
115.9 |
% |
Cost of
revenues has increased primarily as a result of the increase in total revenue.
Publisher fees are expected to increase further as a percentage of revenues as
revenues increase and are expected to normalize at around 47% of revenues.
Sales
and Marketing
Sales and
marketing expenses consist primarily of marketing and operational personnel
costs, bad debts, and outside sales costs.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
725 |
|
|
18.8 |
% |
$ |
437 |
|
|
24.2 |
% |
|
65.9 |
% |
The
increase in sales and marketing expenses was a result of increases in labor
costs, advertising costs for the EasyJoin process and increases in bad debts.
These items accounted for 43%, 38%, 10% of the increase in sales and marketing
expense, respectively. Labor costs have increased primarily as a result of
hiring additional employees since the first quarter of 2004. The EasyJoin
process was launched in August 2004 and promotion of the program started in the
fourth quarter of 2004. The increase in bad debts expense is a result of the
increase in revenue. It is expected that sales and marketing expenses will
increase in future quarters as we continue to increase sales and the related
commissions and bad debts thereon, continue outbound marketing of our EasyJoin
process, and the hiring of additional employees.
Connectivity
and Network Costs
Connectivity
and network costs consist of expenses associated with the maintenance and usage
of our network as well as email delivery costs. Such costs include email
delivery costs, Internet connection charges, hosting facility costs and
personnel costs.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
211 |
|
|
5.5 |
% |
$ |
176 |
|
|
9.7 |
% |
|
19.9 |
% |
This
increase was primarily the result of increased labor costs as a result of hiring
an additional network engineer in the second quarter of 2004. Connectivity and
network costs are expected to be similar to amounts recorded in the current
quarter.
Research
and Development
Research
and development expenses primarily consist of personnel costs related to
maintaining and enhancing the features, content and functionality of our Web
sites, network and related systems.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
167 |
|
|
4.3 |
% |
$ |
152 |
|
|
8.4 |
% |
|
9.9 |
% |
This
increase in research and development expense was primarily due to increases in
labor costs. The increase in labor costs is a result of hiring an additional
software developer in the first quarter of 2005. Research and development
expense is expected to be similar to amounts recorded in the current quarter.
General
and Administrative
General
and administrative expenses primarily consist of management, financial and
administrative personnel expenses and related costs, business taxes and
professional service fees.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Increase |
|
|
Three
months ended March 31, |
|
$ |
558 |
|
|
14.5 |
% |
$ |
339 |
|
|
18.8 |
% |
|
64.6 |
% |
The
increase in general and administrative expense was due to increases in
shareholder service costs, accounting and audit fees, labor costs, and business
taxes. These items accounted for 48%, 23%, 16% and 9% of the increase,
respectively. The increase in shareholder service costs is primarily a result of
costs incurred in our re-listing on the Nasdaq National Market. The increase in
accounting and audit fees relates to the timing of when the audit costs were
recorded. For the 2003 audit more of the costs were recorded in 2003. For the
2004 audit more of the costs were recorded in the first quarter of 2005. In
addition to the timing of audit costs recent changes in auditing standards have
increased the overall cost of our audits and reviews. The increase in labor
costs is a result of salary increases in July 2004 and higher payroll taxes
resulting from option exercises. The increase in business taxes has occurred in
both the San Francisco and Seattle locations. In San Francisco business taxes
are based on labor costs, which have increased from the prior year. In Seattle
business taxes are based on revenue, which has increased from the prior year.
General and administrative expenses are expected to increase compared to the
current quarter as a result of annual pay increases, Sarbanes-Oxley compliance
related expenses, additional hiring and continued increases in business taxes
related to revenues.
Depreciation
and Amortization
Depreciation
and amortization expenses consist of depreciation on leased and owned computer
equipment, software, office equipment and furniture and amortization on
intellectual property and purchased email lists.
|
(In
thousands, except percentages) |
|
|
2005 |
|
|
%
of
revenue |
|
|
2004 |
|
|
%
of
revenue |
|
|
Percentage
Decrease |
|
|
Three
months ended March 31, |
|
$ |
65 |
|
|
1.7 |
% |
$ |
66 |
|
|
3.7 |
% |
|
(1.5 |
)% |
Depreciation
and amortization in the current quarter is similar to the same period of the
prior year. Although older assets have become fully depreciated recent
acquisition of new computer equipment and software has resulted in depreciation
and amortization expenses remaining stable. Depreciation and amortization is
expected to be slightly higher in future quarters compared to the current
quarter as a result of additional computer hardware and software purchases.
Interest
Expense
Interest
expense in 2004 results from capital equipment leases and convertible notes
payable. The capital equipment leases were paid in full during July 2004 and the
convertible notes payable were converted in March 2004. As a result there is no
interest expense recorded in the current quarter. Interest expense is expected
to be zero in future quarters.
Interest
Income
Interest
income results from earnings on our available cash reserves. Interest income
totaled $21,000 in the quarter ended March 31, 2005 and $5,000 in the same
quarter of 2004. The increase in interest income is primarily a result of
increased cash generated from operations and an increase in the interest rate
received. Interest income in future quarters is expected to be increase slightly
as a result of the proceeds received from the sale of common stock in March
2005, continued cash flows from operations and additional increases in the
interest rate received on available cash reserves.
Income
Taxes
No
current or deferred federal income tax expense or benefit has been provided for
any of the periods presented as we have incurred net tax losses from inception
through the quarter ended March 31, 2005. Aptimus has provided full valuation
allowances on the related net deferred tax assets because of the uncertainty
regarding their realizability. As of March 31, 2005, approximately $65.1 million
of net operating losses for federal income tax reporting purposes exist. We
determined that a change in ownership, as defined in the Internal Revenue Code
Section 382 and similar state provisions, has occurred and may substantially
limit the utilization of the net operating loss carry-forwards. The annual
limitation may result in the expiration of net operating losses before
utilization.
LIQUIDITY
AND CAPITAL RESOURCES
Since we
began operating as an independent company in July 1997, we have financed our
operations primarily through the issuance of equity securities. Net proceeds
from the issuance of stock through March 31, 2005 totaled $73 million. As of
March 31, 2005, we had approximately $9.4 million in cash and cash equivalents,
providing working capital of $11.0 million. No off-balance sheet assets or
liabilities existed at March 31, 2005, other than deferred tax assets that have
been fully reserved.
Net cash
provided by (used in) operating activities was $174,000 and $(458,000) for the
three months ended March 31, 2005 and 2004, respectively. Cash used in
operations during the three months ended March 31, 2005 and 2004 consisted of:
|
|
|
Three
months ended March 31, |
| |
|
|
2005 |
|
|
2004 |
|
|
Cash
received from customers |
|
$ |
4,130 |
|
$ |
1,298 |
|
|
Cash
paid to employees and vendors |
|
|
(3,977 |
) |
|
(1,751 |
) |
|
Interest
received |
|
|
21 |
|
|
5 |
|
|
Interest
paid |
|
|
— |
|
|
(10 |
) |
|
Net
cash provided by (used in) operations |
|
$ |
174 |
|
$ |
(458 |
) |
Net cash
used in investing activities was $159,000 and $133,000 in the three months ended
March 31, 2005 and 2004, respectively. In the three months ended March 31, 2005,
$159,000 was used for the purchase of additional computer equipment and
software. In the three months ended March 31, 2004, $133,000 was used for the
purchase of additional software, equipment and intangible assets.
Net cash
provided by (used in) financing activities was $5.8 million and $(19,000) in the
three months ended March 31, 2005 and 2004, respectively. In the three months
ended March 31, 2005, net cash provided by financing activities resulted from
$5.8 million of net proceeds from the issuance of common stock, primarily from a
private placement in March 2005. In the three months ended March 31, 2004, net
cash used in financing activities resulted from $28,000 in principal payments
made on capital leases offset by $9,000 in receipts for the Company's common
stock resulting from the exercise of stock options.
We
believe our current cash and cash equivalents will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
foreseeable future. This is based on the cash generated by operations during the
current quarter and the year ended December 31, 2004. We currently anticipate
spending an additional $250,000 to $350,000 on capital expenditures in 2005 in
order to expand and improve our network infrastructure. Should our goal of
maintaining positive cash flow not be met, we may need to raise additional
capital to meet our long-term operating requirements.
Our cash
requirements depend on several factors, including the rate of market acceptance
of our services and the extent to which we use cash for acquisitions and
strategic investments. At this moment in time, no material acquisitions or major
strategic investments are definitively planned. However, unanticipated expenses,
poor financial results or opportunities requiring financial commitments could
give rise to earlier financing requirements. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our shareholders would be reduced, and these securities might have
rights, preferences or privileges senior to those of our common stock.
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of business opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures would be significantly limited, and we might need to significantly
restrict our operations.
The
following table summarizes the contractual obligations and commercial
commitments entered into by the Company, in thousands.
| |
|
Payments
Due by Period |
|
|
|
|
|
|
|
|
Nine
months ending December
31, |
|
Year
ending December 31, |
|
Contractual
Obligations |
|
|
Total |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases (1) |
|
$ |
803 |
|
$ |
170 |
|
$ |
233 |
|
$ |
250 |
|
$ |
100 |
|
$ |
50 |
|
|
Operating
agreements (2) |
|
|
88 |
|
|
58 |
|
|
30 |
|
|
— |
|
|
— |
|
|
— |
|
|
Total
Contractual Cash Obligations |
|
$ |
891 |
|
$ |
228 |
|
$ |
263 |
|
$ |
250 |
|
$ |
100 |
|
$ |
50 |
|
| (1) |
These
commitments relate to the leasing of our offices in Seattle and San
Francisco. We expect to fund these commitments with existing cash and cash
flows from operations. |
| (2) |
These
commitments relate to connectivity and collocation contracts. We expect to
fund these commitments with existing cash and cash flows from
operations. |
OFF-BALANCE
SHEET ARRANGEMENTS
No
off-balance sheet arrangements existed as of March 31, 2005.
CRITICAL
ACCOUNTING POLICIES
Our
significant accounting policies are described in Note 2 to the financial
statements included in Item 8 of the Annual Report on Form 10-K, filed with the
SEC on March 31, 2005. We believe those areas subject to the greatest level of
uncertainty are the allowance for doubtful accounts, the valuation allowance on
deferred tax assets and depreciation of fixed and intangible assets. In addition
to those areas subject to the greatest level of uncertainty revenue recognition
is also considered a critical accounting policy. In the future when SFAS No.
123(R) is implemented share based compensation expenses will also be included as
an area subject to the greatest level of uncertainty.
Revenue
Recognition
The
Company currently derives revenue from providing response-based advertising
programs through a network of web site and email distribution publishers.
Revenue
earned for response-based advertising through the Aptimus network is based on a
fee per lead and is recognized when the lead information is delivered to the
client. Revenue earned for email mailings can be based on a fee per lead, a
percentage of revenue earned from the mailing, or a cost per thousand emails
delivered. Revenue from email mailings delivered on a cost per thousand basis is
recognized when the email is delivered. Revenues from email mailings sent on a
fee per lead or a percentage of revenue earned from the mailing basis are
recognized when amounts are determinable, generally when the customer receives
the leads.
Revenues
generated through network publishers and opt-in email list owners are recorded
on a gross basis in accordance with Emerging Issues Task Force consensus 99-19
(EITF 99-19). Fees paid to network publishers and opt-in email list owners
related to these revenues are shown in cost of revenues on the Statement of
Operations. Aptimus shares a portion of the amounts it bills its advertiser
clients with the third-party web site owners or “publishers” and email list
owners on whose web properties and email lists Aptimus distributes the
advertisements. While
this “revenue share” approach is Aptimus’ primary payment model, we also pay web
some site owners either a fixed fee for each completed user transaction or a fee
for each impression of an advertisement served on the web site. Email based
campaigns that are sent to Company owned lists do not have publisher fees
associated with them.
The
Company has evaluated the guidance provided by EITF 99-19 as it relates to
determining whether revenue should be recorded gross or net for the payments
made to network publishers and opt-in email list owners. The
Company has determined the recording of revenues gross is appropriate based upon
the following factors:
| · |
Aptimus
acts as a principal in these transactions; |
| · |
Aptimus
and its customer are the only companies identified in the signed
contracts; |
| · |
Aptimus
and its customer are the parties who determine pricing for the
services; |
| · |
Aptimus
is solely responsible to the client for fulfillment of the
contract; |
| · |
Aptimus
bears the risk of loss related to
collections |
| · |
Aptimus
determines how the offer will be presented across the network;
and |
| · |
Amounts
earned are based on leads or emails delivered and are not based on amounts
paid to publishers. |
In
addition to response-based advertising revenues, the Company earns revenue from
list rental activities. List rental revenues are received from the rental of
customer names to third parties through the use of list brokers. Revenue from
list rental activities are recognized in the period the payment is received due
to uncertainty surrounding the net accepted number of names.
Valuation
Allowance for Deferred Tax Assets
SFAS 109,
“Accounting for Income Taxes,” requires that deferred tax assets be evaluated
for future realization and reduced by a valuation allowance to the extent we
believe a portion will not be realized. We consider many factors when assessing
the likelihood of future realization of our deferred tax assets including our
recent cumulative earnings experience by taxing jurisdiction, expectations of
future taxable income, the carry-forward periods available to us for tax
reporting purposes, and other relevant factors. At March 31, 2005, our net
deferred tax assets are $22.9 million. Currently a valuation allowance equal to
the balance of the deferred tax assets has been recorded. This valuation
allowance has been recorded, as the ability of the Company to utilize the
deferred tax assets has not been assessed as being more likely than not.
Any
change in the assessment of whether it is more likely than not that the deferred
tax assets will be utilized will have a significant impact on the estimate of
the valuation allowance. We believe the impact of the section 382 change in
control limitations may result in an inability to fully remove the valuation
allowance. Should the ability of the company to utilize the deferred tax assets
not be assessed as more likely than not, no reduction in the valuation allowance
would be made.
Allowance
for Doubtful Accounts
The
estimate of allowance for doubtful accounts is comprised of two parts, a
specific account analysis and a general reserve. Accounts where specific
information indicates a potential loss may exist are reviewed and a specific
reserve against amounts due is recorded. As additional information becomes
available such specific account reserves are updated. Additionally, a general
reserve is applied to the aging categories based on historical collection and
write-off experience. As trends in historical collection and write-offs change,
the percentages applied against the aging categories are updated. Except were
specific information indicates otherwise, the following rates were applied
against the total balance due from the client when they had an amount in the
applicable aging category as of the date the reserve analysis was performed:
|
|
|
As
of March 31, |
| |
|
|
2005 |
|
|
2004 |
|
|
Current |
|
|
0 |
% |
|
0 |
% |
|
Past
due 1-30 days |
|
|
0 |
% |
|
0 |
% |
|
Past
due 31-60 days |
|
|
25 |
% |
|
25 |
% |
|
Past
due 61-90 days |
|
|
50 |
% |
|
50 |
% |
|
Past
due greater than 90 days |
|
|
100 |
% |
|
100 |
% |
Additional
metrics related to the allowance for doubtful accounts are as follow:
|
|
|
As
of March 31, |
| |
|
|
2005 |
|
|
2004 |
|
|
Reserve
balance |
|
$ |
140,000 |
|
$ |
72,000 |
|
|
%
Of overall AR reserved |
|
|
5.2 |
% |
|
5.1 |
% |
|
Days
sales outstanding (1) |
|
|
61 |
|
|
72 |
|
(1) Days
sales outstanding is calculated by dividing net accounts receivable by revenue
for the preceding quarter divided by the number of days in the preceding
quarter.
As of
March 31, 2005 and 2004, reserves were based on applying the standard rates to
the aging categories as no specific accounts were identified as needing to be
reserved.
We expect
our overall reserve balance will stabilize around a range of 4-6%. As a result
of our focus on credit and collections we believe a range of 4-6% range is an
accurate expectation of reserve balances, although they could be reduced further
or increase again should future information indicate a need to do so. Any
increase in the rates used to calculate the reserve would result in the
recognition of additional bad debts expense and reduce the net accounts
receivable balance.
Depreciation
of Fixed and Intangible Assets
Property
and equipment are stated at cost less accumulated depreciation and are
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements are amortized on a straight-line method over their
estimated useful lives or the term of the related lease, whichever is shorter.
Equipment under capital leases, which all contain bargain purchase options, is
recorded at the present value of minimum lease payments and is amortized using
the straight-line method over the estimated useful lives of the related assets.
The estimated useful lives are as follows:
| |
Office furniture and equipment |
Five years |
| |
Computer hardware and software |
Three years |
| |
Leasehold improvements |
Three to Five years |
| |
|
|
Intangible
assets are stated at cost less accumulated amortization and are amortized using
the straight-line method over their estimated useful lives. The estimated useful
lives are as follows:
| |
Email names |
Two years |
| |
Aptimus patents and trademarks |
Three years |
| |
|
|
The cost
of normal maintenance and repairs are charged to expense as incurred and
expenditures for major improvements are capitalized. Gains or losses on the
disposition of assets in the normal course of business are reflected in
operating expenses as part of the results of operations at the time of disposal.
Changes
in circumstances such as technological advances or changes to the Company’s
business model can result in the actual useful lives differing from the
Company’s estimates. In the event the Company determines that the useful life of
a capital asset should be shortened the Company would depreciate the net book
value in excess of the estimated salvage value, over its remaining useful life
thereby increasing depreciation expense. Long-lived assets, including fixed
assets and intangible assets other than goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. A review for impairment involves developing an
estimate of undiscounted cash flow and comparing this estimate to the carrying
value of the asset. The estimate of cash flow is based on, among other things,
certain assumptions about expected future operating performance. The Company’s
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, and changes to
our business model or changes in our operating performance.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB revised SFAS No. 123(R) Share-Based Payment. This
Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award—the requisite service period (usually the vesting
period). No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. Employee share purchase plans
will not result in recognition of compensation cost if certain conditions are
met; those conditions are much the same as the related conditions in Statement
123. This statement is effective as of the beginning of the first interim or
annual reporting period that begins after January 1, 2006. Early adoption is
encouraged and retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. This statement will be implemented using a modified version of
prospective application. Under that transition method, compensation cost is
recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under Statement
123 for either recognition or pro forma disclosures. For periods before the
required effective date, those entities may elect to apply a modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those
periods by Statement 123. The impact of this statement on net income in periods
beginning after January 1, 2006 is expected to be similar to the pro-forma
disclosure amounts previously include in the financial statements.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of
the Company’s cash equivalents are at fixed interest rates and therefore the
fair value of these instruments is affected by changes in market interest rates.
As of March 31, 2005, however, the Company’s cash equivalents mature within one
month. As of March 31, 2005, the Company believes the reported amounts of cash
equivalents to be reasonable approximations of their fair values. As a result,
the Company believes that the market risk and interest risk arising from its
holding of financial instruments is minimal.
ITEM
4. CONTROLS
AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
During
the quarter ended March 31, 2005, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II — OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
As of the
date hereof, there is no material litigation pending against the Company. From
time to time, the Company may be a party to litigation and claims incident to
the ordinary course of business. While the results of litigation and claims
cannot be predicted with certainty, we believe that the final outcome of such
matters will not have a material adverse effect on our business, financial
condition, results of operations or cash flows.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Sales
of Unregistered Securities
In March
2005, Aptimus completed a $6 million private placement investment with seven
accredited investors. The Company sold the accredited investors 351,083 shares
of unregistered Aptimus, Inc. common stock at a price of $17.09 per share. In
connection with this sale warrants for an additional 70,216 shares of common
stock at a strike price of $20.22 were also issued to the investors. In addition
to the warrants issued to the seven investors, warrants to purchase a total of
21,065 shares of common stock at a strike price of $18.15 were also issued to a
company who acted as our financial advisor in the transaction and an
accredited-investor assignee of the financial advisor. The shares were issued in
reliance upon the exemptions from registration provided by Rule 506 of
Regulation D and Section 4(2) under the Securities Act for sales to accredited
investors, as that term is defined in Rule 501(a) of Regulation D.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
|
Exhibit
Number |
Description |
|
3.1* |
Second
Amended and Restated Articles of Incorporation of
registrant. |
|
3.1.1(2) |
Articles
of Amendment filed September 16, 2000. |
|
3.1.2(6) |
Articles
of Amendment filed March 29, 2002. |
|
3.2* |
Amended
and Restated Bylaws of registrant. |
|
4.1* |
Specimen
Stock Certificate. |
|
4.2(3) |
Rights
Agreement dated as of March 12, 2002 between registrant and Mellon
Investor Services LLC, as rights agent. |
|
10.1*(7)
|
Form
of Indemnification Agreement between the registrant and each of its
directors. |
|
10.2*(7) |
1997
Stock Option Plan, as amended. |
|
10.3*(7) |
Form
of Stock Option Agreement. |
|
10.4(1)(7) |
Aptimus,
Inc. 2001 Stock Plan. |
|
10.4.1(2)(7) |
Form
of Stock Option Agreement. |
|
10.4.2(2)(7) |
Form
of Restricted Stock Agreement (for grants). |
|
10.4.3(2)(7) |
Form
of Restricted Stock Agreement (for rights to purchase). |
|
10.5(4)(7) |
Change
in Control Agreement, dated as of December 6, 2002, by and between
registrant and Timothy C. Choate |
|
10.6(4)(7) |
Form
of Change in Control Agreement, dated as of December 6, 2002, by and
between registrant and each of certain executive managers of
registrant |
|
10.7(5) |
Form
of Convertible Note Purchase Agreement, dated as of July 1, 2003, by and
between the Company and certain investors. |
|
10.8(5) |
Form
of Convertible Secured Promissory Note, dated July 2003, executed by and
between the Company and payable to the order of certain
investors. |
|
10.9(5) |
Form
of Common Stock Warrant, dated July 2003, by and between the Company and
certain investors. |
|
10.10(5) |
Form
of Security Agreement, dated as of July 1, 2003, by and between the
Company and certain investors. |
|
10.11(5) |
Form
of Registration Rights Agreement, dated as of July 1, 2003, by and between
the Company and certain investors. |
|
10.12 |
Agreement
of Lease, dated as of November 18, 2003, by and between 100 Spear Street
Owner’s Corp. and the Company. |
|
10.13(9) |
Agreement
of Lease, dated as of April 29, 2004, by and between Sixth and Virginia
Properties and the Company. |
|
10.14(8) |
Stock
Purchase Agreement, dated as of December 4, 2003, by and between the
Company and certain investors. |
|
10.15(10) |
Stock
Purchase Agreement, dated as of March 25, 2005, by and between the Company
and certain investors. |
|
10.16(10) |
Form
of Common Stock Warrant, dated March 25 2005, by and between the Company
and certain investors and service providers. |
|
31.1 |
Rule
13a-14(a) Certification of the Chief Executive Officer |
|
31.2 |
Rule
13a-14(a) Certification of the Chief Financial Officer |
|
32.1 |
Section
1350 Certification of the Chief Executive Officer |
|
32.2 |
Section
1350 Certification of the Chief Financial
Officer |
__________
* Incorporated
by reference to the Company’s Registration Statement on Form S-1 (No.
333-81151).
(1) Incorporated
by reference to the Company’s Proxy Statement on Schedule 14A, dated May 17,
2001.
(2) Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q, dated November 14,
2001.
(3) Incorporated
by reference to the Company’s Current Report on Form 8-K, dated March 12,
2002.
(4) Incorporated
by reference to the Company’s Annual Report on Form 10-K, dated March 28,
2003.
(5) Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q, dated August 14,
2003.
(6) Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q, dated May 15,
2002.
(7) Management
compensation plan or agreement.
(8) Incorporated
by reference to the Company’s Annual Report on Form 10-K, dated March 30,
2004
(9) Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q, dated May 17,
2004.
(10) Incorporated
by reference to the Company’s Registration Statement on Form S-3 (No.
333-124403), dated April 28, 2005.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
|
|
| |
APTIMUS,
INC. |
|
|
|
| Date: May 13, 2005 |
|
/s/ John A. Wade |
| |
Name: John A. Wade |
| |
Title:
Chief Financial Officer, authorized
officer and principal financial
officer |