SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2002 | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission file number 000-26241
BackWeb Technologies Ltd.
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Israel
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51-2198508 | |
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
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3 Abba Hillel Street, Ramat-Gan,
Israel
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52136 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(972) 3-6118800
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 þ No o
The number of shares of the registrant’s Ordinary Shares outstanding as of November 11, 2002 was 39,772,254 shares.
BACKWEB TECHNOLOGIES LTD.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
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Item 1.
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Condensed Consolidated Financial Statements (unaudited) | 3 | ||||
| Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 | 3 | |||||
| Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2002 and 2001 | 4 | |||||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk | 35 | ||||
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Item 4.
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Controls and Procedures | 36 | ||||
| PART II. OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 36 | ||||
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Item 2.
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Changes in Securities and Use of Proceeds | 36 | ||||
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Item 3.
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Defaults Upon Senior Securities | 37 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 37 | ||||
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Item 5.
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Other Information | 37 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 38 | ||||
| Signature | 39 | |||||
| Certifications | 40 | |||||
1
This Report on Form 10-Q contains express or implied forward-looking statements. The words “believes,” “expects,” “anticipates,” “intends,” “forecasts,” “projects,” “plans,” “estimates” and similar expressions identify forward-looking statements. Such statements reflect the Company’s current views with respect to future events and financial performance or operations and speak only as of the date the statements are made. Such forward-looking statements involve risks and uncertainties, and readers are cautioned not to place undue reliance on forward-looking statements. The Company’s actual results may differ materially from such statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-Q in, for example, Part I, Item 2, in the section entitled “Risk Factors.” Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. The Company undertakes no obligation to publicly update, review or revise any forward-looking statements to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BACKWEB TECHNOLOGIES LTD.
| September 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| Unaudited | Audited | |||||||||
| ASSETS | ||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 20,002 | $ | 17,209 | ||||||
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Short-term investments
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8,207 | 24,615 | ||||||||
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Trade accounts receivable, net of allowance for
doubtful accounts of $2,843 and $2,957 at September 30,
2002 and December 31, 2001, respectively
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1,046 | 3,529 | ||||||||
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Other accounts receivable and prepaid expenses
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1,825 | 2,015 | ||||||||
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Total current assets
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31,080 | 47,368 | ||||||||
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Long-term investments and other long term assets
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2,616 | 2,458 | ||||||||
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Property and equipment, net
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1,417 | 3,356 | ||||||||
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Intellectual property and other purchased
intangibles, net
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— | 3,330 | ||||||||
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Total assets
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$ | 35,113 | $ | 56,512 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
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Current liabilities:
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Accounts payable and accrued liabilities
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$ | 9,021 | $ | 7,192 | ||||||
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Deferred revenue
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1,228 | 2,271 | ||||||||
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Total current liabilities
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10,249 | 9,463 | ||||||||
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Accrued severance pay, net
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190 | 240 | ||||||||
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Long-term deferred revenue
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182 | 228 | ||||||||
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Shareholders’ equity:
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Series E preferred shares, nominal value NIS
0.01 per share; zero and one share authorized, issued and
outstanding at September 30, 2002 and December 31,
2001, respectively
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— | 3,454 | ||||||||
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Ordinary shares, nominal value NIS 0.03 per
share; 150,067,829 shares authorized at September 30,
2002 and December 31, 2001; 39,608,968 and 38,613,328
shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively
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150,866 | 147,114 | ||||||||
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Notes receivable from shareholders
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(1,014 | ) | (1,235 | ) | ||||||
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Deferred stock compensation
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— | (216 | ) | |||||||
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Accumulated other comprehensive income
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68 | 400 | ||||||||
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Accumulated deficit
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(125,428 | ) | (102,936 | ) | ||||||
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Total shareholders’ equity
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24,492 | 46,581 | ||||||||
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Total liabilities and shareholders’ equity
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$ | 35,113 | $ | 56,512 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
BACKWEB TECHNOLOGIES LTD.
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
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Revenues:
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License
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$ | 148 | $ | 2,635 | $ | 1,571 | $ | 10,642 | ||||||||||
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Service
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754 | 1,846 | 3,433 | 5,635 | ||||||||||||||
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Total revenues
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902 | 4,481 | 5,004 | 16,277 | ||||||||||||||
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Cost of revenues:
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License
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46 | 62 | 173 | 334 | ||||||||||||||
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Service
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813 | 1,132 | 2,791 | 4,218 | ||||||||||||||
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Total cost of revenues
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859 | 1,194 | 2,964 | 4,552 | ||||||||||||||
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Gross profit
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43 | 3,287 | 2,040 | 11,725 | ||||||||||||||
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Operating expenses:
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Research and development, net
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1,438 | 2,017 | 4,998 | 7,165 | ||||||||||||||
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Sales and marketing
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2,505 | 5,375 | 8,601 | 18,675 | ||||||||||||||
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General and administrative
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1,226 | 2,058 | 3,797 | 8,435 | ||||||||||||||
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Restructuring charge
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4,678 | 2,825 | 4,678 | 2,825 | ||||||||||||||
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Write-off of intellectual property and other
intangibles
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1,764 | — | 1,764 | — | ||||||||||||||
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Amortization of intellectual property and other
intangible assets
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— | 783 | 1,566 | 2,349 | ||||||||||||||
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Amortization of deferred stock compensation
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— | 168 | 216 | 506 | ||||||||||||||
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Total operating expenses
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11,611 | 13,226 | 25,620 | 39,955 | ||||||||||||||
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Loss from operations
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(11,568 | ) | (9,939 | ) | (23,580 | ) | (28,230 | ) | ||||||||||
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Finance and other income, net
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268 | 694 | 1,088 | 1,942 | ||||||||||||||
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Write-down of an equity investment
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— | — | — | (2,500 | ) | |||||||||||||
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Net loss
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$ | (11,300 | ) | $ | (9,245 | ) | $ | (22,492 | ) | $ | (28,788 | ) | ||||||
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Basic and diluted net loss per share
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$ | (0.29 | ) | $ | (0.24 | ) | $ | (0.57 | ) | $ | (0.75 | ) | ||||||
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Weighted average number of shares used in
computing basic and diluted net loss per share
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39,512 | 38,313 | 39,222 | 38,147 | ||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
BACKWEB TECHNOLOGIES LTD.
| Nine Months Ended | ||||||||||
| September 30, | September 30, | |||||||||
| 2002 | 2001 | |||||||||
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Operating Activities
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Net loss
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$ | (22,492 | ) | $ | (28,788 | ) | ||||
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Adjustments to reconcile net loss to net cash
used in operating activities:
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Provision for bad and doubtful debts
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205 | 2,542 | ||||||||
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Amortization of intellectual property and other
intangible assets
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1,566 | 2,349 | ||||||||
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Write-off of intellectual property and other
intangibles
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1,764 | — | ||||||||
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Amortization of deferred stock compensation and
premium of investments
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265 | 506 | ||||||||
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Depreciation
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1,933 | 1,309 | ||||||||
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Loss on disposal of property and equipment
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57 | — | ||||||||
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Forgiveness of shareholder note receivable
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221 | — | ||||||||
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Write-down of an equity investment
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— | 2,500 | ||||||||
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Changes in operating assets and liabilities:
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Trade accounts receivable
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2,278 | 2,495 | ||||||||
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Other accounts receivable, prepaid expenses, and
other long-term assets
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29 | 914 | ||||||||
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Accounts payable and accrued liabilities
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1,829 | 44 | ||||||||
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Deferred revenue
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(1,089 | ) | (1,621 | ) | ||||||
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Accrued severance pay, net
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(50 | ) | 58 | |||||||
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Net cash used in operating activities
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(13,484 | ) | (17,692 | ) | ||||||
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Investing Activities
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Purchases of property and equipment
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(51 | ) | (899 | ) | ||||||
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Purchase of short-term investments
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(6,656 | ) | (5,319 | ) | ||||||
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Proceeds from short-term investments
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22,686 | 27,706 | ||||||||
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Long term investments
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— | (500 | ) | |||||||
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Net cash provided by investing activities
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15,979 | 20,988 | ||||||||
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Financing Activities
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Repayment of shareholder loans
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— | (371 | ) | |||||||
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Proceeds from shareholders’ notes receivable
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— | 506 | ||||||||
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Proceeds from issuance of Ordinary shares, net
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298 | 635 | ||||||||
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Net cash provided by financing activities
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298 | 770 | ||||||||
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Net increase in cash and cash equivalents
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2,793 | 4,066 | ||||||||
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Cash and cash equivalents at beginning of the
period
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17,209 | 21,076 | ||||||||
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Cash and cash equivalents at end of the period
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$ | 20,002 | $ | 25,142 | ||||||
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Supplemental disclosure of noncash investing
and financing transactions
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Exchange of Series E preferred stock to
Ordinary Shares
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$ | 3,454 | $ | — | ||||||
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Purchase of property and equipment
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$ | — | $ | 500 | ||||||
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Forfeiture of restricted shares
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$ | — | $ | 238 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
BACKWEB TECHNOLOGIES LTD.
Note 1. Organization and Summary of Significant Accounting Policies
Organization — BackWeb Technologies Ltd. was incorporated under the laws of Israel in August 1995 and commenced operations in November 1995. BackWeb Technologies Ltd., together with its subsidiaries (collectively, “BackWeb” or the “Company”) is a provider of critical communications infrastructure software and application-specific software that enable companies to communicate and distribute business-critical, time-sensitive information throughout their extended enterprise of customers, partners and employees. BackWeb sells its products directly to end users from a variety of industries, including the telecommunications, financial and computer industries, and through OEM and reseller arrangements.
The BackWeb group of companies consists of wholly owned subsidiaries operating as follows: BackWeb Technologies, Inc., a U.S. corporation; BackWeb Canada, Inc., a Canadian corporation; and BackWeb Technologies Europe Limited, a United Kingdom corporation with a branch in Germany.
Four subsidiaries ceased commercial operations in January 2002 but continue to be wholly owned subsidiaries. These subsidiaries are registered as BackWeb Technologies B.V., a Netherlands corporation; BackWeb Technologies (U.K.) Ltd., a United Kingdom corporation; BackWeb Technologies GmbH, a German corporation; and BackWeb Technologies S.a.r.l., a French corporation. Two subsidiaries ceased commercial operations in September 2001 but continue to be wholly owned subsidiaries. These subsidiaries are registered as BackWeb Technologies A.B., a Swedish corporation, and BackWeb K.K. Ltd., a Japanese corporation.
Basis of Presentation — The unaudited interim condensed consolidated financial statements include the accounts of BackWeb Technologies Ltd. and its wholly owned subsidiaries. They have been prepared in accordance with established guidelines for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at December 31, 2001 has been derived from audited financial statements at such date. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting primarily of normal recurring adjustments, to fairly state the Company’s financial position, results of operations and cash flows for the periods indicated. The interim consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Revenue Recognition — The Company recognizes software license revenue in accordance with Statement of Position 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”). SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has also adopted SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP 98-9”), for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the “Residual Method” when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and no VSOE exists for the delivered elements.
To date, the Company has derived its revenue from license fees of its products, maintenance and training, as well as rendering of consulting services. The Company sells its products primarily through its direct sales force, resellers and OEMs.
Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant obligations with regard to installation remain, the fee is fixed or determinable, and collectibility is probable. The Company does not generally grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria have been met. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
When contracts contain multiple elements wherein VSOE of fair value exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the “Residual Method” prescribed by SOP 98-9. Maintenance revenue included in these arrangements is deferred and recognized on a straight-line basis over the term of the maintenance agreement. The VSOE of fair value of the undelivered elements (maintenance, training and consulting services) is determined based on the price charged for the undelivered element when sold separately.
The Company licenses its products on a perpetual and on a term basis. The Company recognizes license revenue arising from the sale of perpetual licenses in the accounting period in which the sale occurs. The Company recognizes license revenue arising from a term license over the contractual term of the license. Management defines a term license as one whose term is one year or less from the date the official order form and sale occurs, and revenue arising during this period is ratably recognized over the license period.
The Company derives revenues primarily from contracts with corporate customers, resellers and OEM’s, as well as from royalty fees earned upon delivery of products that incorporate the Company’s software. Revenues derived from contracts with resellers are not recognized until software is sold through to the end user. Royalty revenues are recognized when reported to the Company after delivery of the related products. In addition, royalty revenue can arise from the right to use the Company’s products.
Service revenues are primarily comprised of revenues from standard maintenance agreements, consulting and training fees. Customers licensing the Company’s products generally purchase the standard annual maintenance agreement for the products. Revenues from maintenance agreements are recognized on a straight-line basis over the life of the maintenance period. Consulting services are billed at an agreed upon rate, plus out-of-pocket expenses and training services are billed at a per session basis. The Company recognizes service revenues from consulting and training when provided to the customer.
Deferred revenue includes amounts billed to customers or cash received from customers for which revenue has not been recognized.
Net Loss Per Share — The Company’s basic and diluted net loss per share has been computed using the weighted-average number of Ordinary Shares outstanding during the period.
The following table presents the calculation of the basic and diluted net loss per Ordinary Share (in thousands, except per share data):
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
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Net loss
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$ | (11,300 | ) | $ | (9,245 | ) | $ | (22,492 | ) | $ | (28,788 | ) | |||||
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Basic and diluted:
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Weighted-average shares
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39,556 | </ | |||||||||||||||