FIREPOND INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended April 30, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29251

FIREPOND, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		41-1462409 (I.R.S. Employer Identification No.)

8009 S. 34th Avenue, Minneapolis, MN (Address of principal executive offices)		55425 (Zip Code)

(952) 229-2300

(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 Exchange Act).


Yes [ ]		No [X]

As of June 12, 2003 there were 3,671,983 shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
SIGNATURES
CERTIFICATIONS

FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED April 30, 2003

TABLE OF CONTENTS


		Page No.

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets - April 30, 2003 and October 31, 2002	3
	Condensed Consolidated Statements of Operations - Three Months and Six Months Ended April 30, 2003 and 2002	4
	Condensed Consolidated Statements of Cash Flows - Six Months Ended April 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	28
	SIGNATURES	30
	CERTIFICATIONS	31

FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)


					April 30,			October 31,
					2003			2002

ASSETS
Current assets:
	Cash and cash equivalents				$	13,152		$	13,479
	Short-term investments					10,218			15,690
	Accounts receivable, net of allowance for doubtful accounts of $238 and $463					1,749			2,798
	Unbilled revenue					37			268
	Restricted cash					—			199
	Prepaid expenses and other current assets					1,507			982

			Total current assets			26,663			33,416
Property and equipment, net						1,304			2,105
Other intangible assets, net						86			137
Restricted cash						190			190
Other assets						489			511

					$	28,732		$	36,359

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	830		$	1,546
	Accrued liabilities					3,733			5,062
	Accrued restructuring					1,041			2,266
	Deferred revenue					4,776			5,952

			Total current liabilities			10,380			14,826
Long-term accrued restructuring						—			160
Stockholders’ equity:
	Preferred stock, $0.10 par value —
		Authorized — 5,000,000 shares;
		Issued and outstanding — none at April 30, 2003 and October 31, 2002				—			—
	Common stock, $0.10 par value —
		Authorized — 100,000,000
		Issued and outstanding — 3,671,983 shares at April 30, 2003 and
				3,684,983 shares at October 31, 2002		368			369
	Additional paid-in capital					198,898			198,935
	Accumulated deficit					(174,734	)		(172,094	)
	Loans receivable					(4,015	)		(4,287	)
	Deferred compensation					(8	)		(10	)
	Accumulated other comprehensive loss					(2,157	)		(1,540	)

		Total stockholders’ equity				18,352			21,373

					$	28,732		$	36,359

The accompanying notes are an integral part of these condensed consolidated financial statements.

FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)


				Three Months						Six Months
				Ended April 30,						Ended April 30,

				2003			2002			2003			2002

Revenue:
		License		$	956		$	977		$	1,555		$	4,213
		Services and maintenance			2,349			4,427			5,571			8,687

			Total revenue		3,305			5,404			7,126			12,900

Cost of revenue:
		License			40			40			40			96
		Services and maintenance (1)			1,259			2,861			2,867			5,907

			Total cost of revenue		1,299			2,901			2,907			6,003

Gross profit					2,006			2,503			4,219			6,897
Operating expenses:
		Sales and marketing (1)			1,157			2,145			2,344			4,211
		Research and development (1)			1,102			2,647			2,175			5,510
		General and administrative (1)			1,132			2,164			2,311			3,656
		Stock-based compensation (credit)			2			(50	)		236			1,435
		Amortization of intangible assets			26			26			52			434
		Restructuring charge			650			—			650			—
		Impairment of developed technology and know-how			—			—			—			3,120

			Total operating expenses		4,069			6,932			7,768			18,366

Loss from operations					(2,063	)		(4,429	)		(3,549	)		(11,469	)
Interest income					87			160			189			341
Other income (expense), net					53			127			720			(69	)

Loss before cumulative effect of a change in accounting principle					(1,923	)		(4,142	)		(2,640	)		(11,197	)
Cumulative effect of a change in accounting principle					—			—			—			(3,973	)

Net loss				$	(1,923	)	$	(4,142	)	$	(2,640	)	$	(15,170	)

Net loss per share:
	Basic and diluted loss per share before cumulative effect of a change in accounting principle			$	(0.52	)	$	(1.13	)	$	(0.72	)	$	(3.06	)
	Cumulative effect of a change in accounting principle				—			—			—			(1.09	)

	Basic and diluted net loss per share applicable to common stockholders			$	(0.52	)	$	(1.13	)	$	(0.72	)	$	(4.15	)

	Basic and diluted weighted average common shares outstanding				3,674			3,673			3,680			3,656

(1)

The following summarizes the departmental allocation of the stock-based compensation charge:


		Three Months					Six Months
		Ended April 30,					Ended April 30,

		2003		2002			2003		2002

Cost of revenue		$	—	$	20		$	83	$	112
Operating expenses:
	Sales and marketing		—		(4	)		—		32
	Research and development		1		(19	)		3		187
	General and administrative		1		(47	)		150		1,105

Total stock-based compensation		$	2	$	(50	)	$	236	$	1,435

The accompanying notes are an integral part of these condensed consolidated financial statements.

FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)


					Six Months
					Ended April 30,

					2003			2002

Cash flows from operating activities:
	Net loss				$	(2,640	)	$	(15,170	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Stock-based compensation expense				236			1,435
		Depreciation and amortization				881			1,770
		Impairment of developed technology and know-how				—			3,120
		Cumulative effect of a change in accounting principle				—			3,973
		Changes in assets and liabilities:
			Accounts receivable			903			6,614
			Unbilled revenue			175			99
			Prepaid expenses and other current assets			(582	)		(468	)
			Accounts payable			(758	)		(625	)
			Accrued liabilities			(1,519	)		(731	)
			Accrued restructuring			(1,385	)		(3,814	)
			Deferred revenue			(1,381	)		(5,978	)

				Net cash used in operating activities		(6,070	)		(9,775	)

Cash flows from investing activities:
	Purchases of short-term investments					(997	)		(19,231	)
	Proceeds from the sale and maturities of short-term investments					6,514			14,900
	Purchases of property and equipment					(29	)		(217	)
	Decrease (increase) in restricted cash					199			(437	)
	Return of cash from the Brightware acquisition escrow					—			617

				Net cash provided by (used in) investing activities		5,687			(4,368	)

Cash flows from financing activities:
	Borrowings on note payable					—			880
	Payments on note payable					—			(297	)
	Proceeds from stock options and warrants exercised					—			75

				Net cash provided by financing activities		—			658

Effect of exchange rate changes on cash and cash equivalents						56			38

Net increase (decrease) in cash and cash equivalents						(327	)		(13,447	)
Cash and cash equivalents, beginning of period						13,479			34,660

Cash and cash equivalents, end of period					$	13,152		$	21,213

The accompanying notes are an integral part of these condensed consolidated financial statements.

FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Nature of Business and Basis of Presentation

Firepond, Inc., together with its wholly owned subsidiaries (the “Company”), considers itself to be a leading provider in sales configuration systems that help companies reduce the cost of selling complex products, regardless of the sales channel. Companies may achieve a measurable and meaningful return on investment in Firepond technology by converting more leads into accurate orders, whether they sell through a direct sales force, an indirect channel network, or via the web. Firepond also offers an online customer assistance solution. Marketed as Brightware eService Performer, this product line leverages advanced intelligence engines and natural language processing technology to manage a company’s online customer interaction channels, with an emphasis on email response management.

The Company is subject to a number of risks similar to those of other companies of similar size in its industry, including recurring losses, rapid technological changes, competition, customer concentration, integration of acquisitions, management of international activities and dependence on key individuals.

The accompanying condensed consolidated financial statements include the accounts of Firepond, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the accompanying financial statements.

The accompanying condensed consolidated financial statements for the three and six months ended April 30, 2003 and 2002 are unaudited and have been prepared on a basis consistent with the October 31, 2002 audited financial statements and include normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The Company has combined its product-related revenue and custom development services reporting into one segment. Management determined that the custom development services segment was insufficient in size to warrant separately viewing and managing the engagements and resources. Prior year financials have been reclassified to include custom development services in product-related revenue. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended October 31, 2002 included in the Company’s Form 10-K. The results of operations for the three and six months ended April 30, 2003 are not necessarily indicative of results to be expected for the entire year or any other period.

2. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation of certain variable interest entities for which a controlling financial interest exists. The interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first interim period beginning after June 15, 2003 to pre-existing entities. The adoption of this interpretation does not have a material effect on the Company’s financial statements

In December 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its annual and interim financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by the interpretation, the Company adopted the disclosure requirements for the quarter ended January 31, 2003. In connection with the sale of its products in the ordinary course of business, the Company often makes representations affirming that its products do not infringe on the intellectual property rights of others and agrees to indemnify customers against third-party claims for such infringement. Also, the Company’s amended and restated by-laws provide for indemnification by the Company of its directors, officers and certain non-officer employees under certain circumstances against expenses, including attorneys fees, judgments, fines and amounts paid in settlement, reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceeding in which any such person is involved by reason of the fact that such person is or was a director, officer or employee of the Company if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to criminal actions or proceedings, if such person had no reasonable cause to believe his or her conduct was unlawful. The Company has not been required to make any material payments under such provisions.

FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123 (SFAS No. 148) which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the Company’s method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements for the quarter ended April 30, 2003.

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146) which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This accounting standard requires that liabilities associated with exit or disposal activities be recognized and measured at fair value when incurred, as opposed to at the date an entity commits to the exit or disposal plans. The Company has adopted this standard for its fiscal 2003 restructuring activities.

3. Accrued Liabilities

Accrued liabilities consist of the following:


	April 30,	October 31,
	2003	2002

	(In thousands)
Consulting and professional fees

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