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, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-25331
Critical Path, Inc.
| A California Corporation | I.R.S. Employer No. 91-1788300 |
350 The Embarcadero
San Francisco, California 94105
415-541-2500
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 Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
As of April 30, 2004, the Company had outstanding 21,388,848 shares of common stock, $0.001 par value per share.
CRITICAL PATH, INC.
| Page | ||||
| PART I | ||||
| Item 1. |
1 | |||
| 1 | ||||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
| Item 3. |
47 | |||
| Item 4. |
47 | |||
| PART II | ||||
| Item 1. |
48 | |||
| Item 2. |
50 | |||
| Item 5. |
51 | |||
| Item 6. |
53 | |||
| 55 | ||||
Item 1. Condensed Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2003 |
March 31, 2004 |
|||||||
| (Unaudited) (In thousands, except per |
||||||||
| ASSETS | ||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 18,984 | $ | 37,131 | ||||
| Accounts receivable, net |
16,880 | 16,704 | ||||||
| Prepaid and other current assets |
4,664 | 5,355 | ||||||
| Total current assets |
40,528 | 59,190 | ||||||
| Property and equipment, net |
14,821 | 13,304 | ||||||
| Goodwill |
6,613 | 6,613 | ||||||
| Other assets |
5,763 | 7,751 | ||||||
| Total assets |
$ | 67,725 | $ | 86,858 | ||||
| LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | 5,022 | $ | 4,102 | ||||
| Accrued liabilities |
20,755 | 22,280 | ||||||
| Deferred revenue |
8,856 | 9,966 | ||||||
| Line of credit facility |
2,298 | — | ||||||
| Capital lease and other obligations, current |
1,721 | 1,587 | ||||||
| Total current liabilities |
38,652 | 37,935 | ||||||
| Deferred revenue |
1,343 | 1,360 | ||||||
| Convertible notes payable |
48,376 | 81,921 | ||||||
| Capital lease and other obligations, long-term |
1,295 | 1,009 | ||||||
| Total liabilities |
89,666 | 122,225 | ||||||
| Commitments and contingencies |
||||||||
| Mandatorily redeemable Series D preferred stock, par value $0.001 |
55,301 | 55,288 | ||||||
| Shareholders’ deficit |
||||||||
| Common stock and paid-in-capital, par value $0.001 Shares authorized: 125,000,000 Shares issued and outstanding: 20,037 and 21,182 |
2,154,295 | 2,153,182 | ||||||
| Common stock warrants |
5,947 | 5,947 | ||||||
| Notes receivable from shareholders |
(870 | ) | (1,015 | ) | ||||
| Unearned compensation |
— | (1,484 | ) | |||||
| Accumulated deficit |
(2,238,728 | ) | (2,248,714 | ) | ||||
| Accumulated other comprehensive income |
2,114 | 1,429 | ||||||
| Total shareholders’ deficit |
(77,242 | ) | (90,655 | ) | ||||
| Total liabilities, mandatorily redeemable preferred stock and shareholders’ deficit |
$ | 67,725 | $ | 86,858 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
- 1 -
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended |
||||||||
| March 31, 2003 |
March 31, 2004 |
|||||||
| (Unaudited) (In thousands, except |
||||||||
| Net revenues |
||||||||
| Software license |
$ | 5,047 | $ | 4,251 | ||||
| Hosted messaging |
5,386 | 4,343 | ||||||
| Professional services |
3,220 | 2,659 | ||||||
| Maintenance and support |
4,381 | 5,825 | ||||||
| Total net revenues |
18,034 | 17,078 | ||||||
| Cost of net revenues |
||||||||
| Software license |
1,797 | 911 | ||||||
| Hosted messaging |
6,263 | 6,381 | ||||||
| Professional services |
3,450 | 3,094 | ||||||
| Maintenance and support |
1,929 | 1,449 | ||||||
| Stock-based expense — Hosted messaging |
8 | 5 | ||||||
| Stock-based expense — Professional services |
3 | — | ||||||
| Stock-based expense — Maintenance and support |
6 | — | ||||||
| Total cost of net revenues |
13,456 | 11,840 | ||||||
| Gross profit |
4,578 | 5,238 | ||||||
| Operating expenses |
||||||||
| Sales and marketing |
9,309 | 6,939 | ||||||
| Research and development |
4,623 | 5,779 | ||||||
| General and administrative |
3,226 | 3,122 | ||||||
| Stock-based expense — Sales and marketing |
18 | 14 | ||||||
| Stock-based expense — Research and development |
15 | 18 | ||||||
| Stock-based expense — General and administrative |
9 | 9 | ||||||
| Restructuring and other expenses |
3,189 | 1,065 | ||||||
| Total operating expenses |
20,389 | 16,946 | ||||||
| Loss from operations |
(15,811 | ) | (11,708 | ) | ||||
| Interest and other income (expense), net |
(6,427 | ) | 3,667 | |||||
| Interest expense |
(769 | ) | (1,580 | ) | ||||
| Loss before income taxes |
(23,007 | ) | (9,621 | ) | ||||
| Provision for income taxes |
(194 | ) | (366 | ) | ||||
| Net loss |
(23,201 | ) | (9,987 | ) | ||||
| Accretion on mandatorily redeemable preferred stock |
(3,665 | ) | (3,147 | ) | ||||
| Net loss attributable to common shares |
$ | (26,866 | ) | $ | (13,134 | ) | ||
| Net loss per share attributable to common shares — basic and diluted |
$ | (1.37 | ) | $ | (0.63 | ) | ||
| Weighted average shares — basic and diluted |
19,666 | 21,014 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
- 2 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended |
||||||||
| March 31, 2003 |
March 31, 2004 |
|||||||
| (Unaudited) (In thousands) |
||||||||
| Operating |
||||||||
| Net loss |
$ | (23,201 | ) | $ | (9,987 | ) | ||
| Recovery of doubtful accounts |
(165 | ) | (93 | ) | ||||
| Depreciation and amortization |
4,624 | 2,658 | ||||||
| Stock-based costs and expenses |
59 | 46 | ||||||
| Change in fair value of preferred stock instrument |
6,200 | (3,160 | ) | |||||
| Amortization of non-cash interest expense |
— | 60 | ||||||
| Restructuring charges — non-cash |
142 | — | ||||||
| Accounts receivable |
3,144 | (448 | ) | |||||
| Other assets |
(3,321 | ) | (362 | ) | ||||
| Accounts payable |
(1,296 | ) | (798 | ) | ||||
| Accrued liabilities |
96 | 1,475 | ||||||
| Deferred revenue |
(1,292 | ) | 1,295 | |||||
| Net cash used in operating activities |
(15,010 | ) | (9,314 | ) | ||||
| Investing |
||||||||
| Notes receivable from officers |
7 | 3 | ||||||
| Property and equipment purchases |
(4,319 | ) | (1,090 | ) | ||||
| Sale of marketable securities |
9,573 | — | ||||||
| Restricted cash |
2,729 | — | ||||||
| Net cash provided by (used in) investing activities |
7,990 | (1,087 | ) | |||||
| Financing |
||||||||
| Proceeds from issuance of convertible notes, net |
— | 31,156 | ||||||
| Proceeds from issuance of common stock, net |
5 | 163 | ||||||
| Proceeds from (payments on) line of credit facility |
4,900 | (2,298 | ) | |||||
| Principal payments on note and lease obligations |
(307 | ) | (287 | ) | ||||
| Net cash provided by financing activities |
4,598 | 28,734 | ||||||
| Net change in cash and cash equivalents |
(2,422 | ) | 18,333 | |||||
| Effect of exchange rates on cash and cash equivalents |
333 | (186 | ) | |||||
| Cash and cash equivalents at beginning of period |
33,498 | 18,984 | ||||||
| Cash and cash equivalents at end of period |
$ | 31,409 | $ | 37,131 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
- 3 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
The Company
Critical Path, Inc. was incorporated in California on February 19, 1997. Critical Path, along with its subsidiaries (collectively referred to herein as the “Company”), provides digital communications software and services that enable enterprises, government agencies, wireless carriers, and service providers to rapidly deploy scalable solutions for messaging and identity management. Built upon an open, extensible software platform, these solutions help organizations expand the range of digital communications services they provide, while helping to reduce overall costs. Critical Path’s messaging solutions - which are available both as licensed software or hosted services - provide integrated access to a broad range of communication and collaboration applications from wireless devices, Web browsers, desktop clients, and voice systems. This provides new revenue opportunities for carriers and service providers and helps enable them to attract new subscribers, drive more usage, and retain subscribers longer. For enterprises and governments, Critical Path’s solutions help to reduce burdens on helpdesks, simplify the deployment of key security infrastructure, enable easier compliance with new regulatory mandates, and reduce the cost and effort of deploying modern messaging services to distributed organizations, mobile users, deskless workers, suppliers and customers.
The unaudited condensed consolidated financial statements (“Financial Statements”) of the Company furnished herein reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for each interim period presented. All adjustments are normal recurring adjustments. The Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire year.
Liquidity
Since inception, the Company has incurred aggregate consolidated net losses of approximately $2.2 billion, which includes $1.3 billion related to the impairment of long-lived assets, $445 million related to non-cash charges associated with the Company’s ten acquisitions and $172 million related to non-cash stock-based employee compensation expenses. With the Company’s history of losses, revenue generated from the sale of its products and services may not increase to a level that exceeds its operating expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. Accordingly, the Company’s cash flow from operations may continue to be negatively impacted.
Cash and cash equivalents totaled $37.1 million at March 31, 2004. Of the Company’s cash and cash equivalents at March 31, 2004, $2.7 million is expected to support its outstanding obligations to Silicon Valley Bank (See Note 7 - Credit Facility) and $7.6 million is located in accounts outside the United States, which may not be available to the Company’s domestic operations. Accordingly, the Company’s readily available cash resources in the United States as of March 31, 2004 were $26.8 million. At December 31, 2003, the Company’s readily available cash resources in the United States totaled $6.4 million. During 2003 and the first quarter of 2004, the Company used an average of approximately $8.8 million of cash per quarter to fund the Company’s operating activities. Historically, the Company has suffered recurring losses from operations and negative cash flow from operations. Given this factor, in combination with the Company’s financial position in the fourth quarter of 2003, the Company has recently consummated several financing transactions in order to secure sufficient funding to meet the Company’s expected cash requirements through at least December 31, 2004.
- 4 -
Recent Financing Transactions
On November 18, 2003, the Company entered into a definitive agreement to issue an aggregate of $10 million in principal amount of 10% Senior Convertible Notes to General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC and GAPCO GmbH & Co. K.G., (“the General Atlantic Investors”), and to convert the notes, plus $1 million in accrued interest, into approximately 7.3 million shares of the Company’s Series E Preferred Stock. In the same agreement, the Company agreed to exchange approximately $32.8 million in face value of the Company’s 5 3/4% convertible subordinated notes held by a group of investors led by Cheung Kong Group and its Whampoa Limited affiliates including Campina Enterprises Limited, Cenwell Limited, Great Affluent Limited, Dragonfield Limited and Lion Cosmos Limited (“the Cheung Kong Investors”) for approximately 21.9 million shares of the Company’s Series E Preferred Stock. These notes and related interest are convertible into shares of Series E Preferred Stock at $1.50 per share only if the Company receives shareholder approval.
In November 2003, the Company announced its intention to make a rights offering to public shareholders of record to purchase up to approximately $21 million of newly issued Series E convertible preferred shares at a purchase price of $1.50 per share. Shareholders of record on the record date of April 30, 2004 will receive 0.65 subscription rights for each share of the Company’s common