TUMBLEWEED COMMUNICATIONS CORP - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

Commission File Number: 000-26223

TUMBLEWEED COMMUNICATIONS CORP.

(Exact name of registrant as specified in its charter)

DELAWARE

94-3336053

(State of other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

700 SAGINAW DRIVE

REDWOOD CITY, CA 94063

(Address of principal executive offices, including zip code)

(650) 216-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required 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 x No ¨

The number of shares of common stock outstanding as of April 30, 2004 was 47,676,595.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. The forward-looking statements are based on our current expectations and projections about future events. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “predicts,” “projects,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” or the negative of these terms and other comparable terminology, including, but not limited to, the following:

•

any projections of revenues, earnings, cash balances or cash flow, synergies or other financial items;

•

any statements of the plans, strategies and objectives of management for future operations;

•

any statements regarding future economic conditions or performance;

•

implementing our business strategy;

•

attracting and retaining customers;

•

obtaining and expanding market acceptance of the products and services we offer;

•

competition in our market;

•

any statements relating to integration or restructuring plans; and

•

any statements of assumptions underlying any of the foregoing.

These forward-looking statements are only predictions, not historical facts. These forward-looking statements involve certain risks and uncertainties, as well as assumptions. Actual results, levels of activity, performance, achievements and events could differ materially from those stated, anticipated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption “Risks And Uncertainties That You Should Consider Before Investing In Tumbleweed” in section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. You should consider the risks factors and uncertainties under the caption “Risks and Uncertainties That You Should Consider Before Investing in Tumbleweed,” among other things, in evaluating Tumbleweed’s prospects and future financial performance. The occurrence of the events described in the risk factors could harm the business, results of operations and financial condition of Tumbleweed. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. Tumbleweed disclaims any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, or any obligation to explain the reasons why actual results may differ.

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

INDEX


		Page
	Part I
Item 1	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and March 31, 2003	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and March 31, 2003	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4	Controls and Procedures	24

	Part II
Item 1	Legal Proceedings	24
Item 6	Exhibits and Reports on Form 8-K	26
Signatures		27
Certifications

TRADEMARKS

Our registered trademarks include Tumbleweed^®, Tumbleweed Communications^®, Secure Envelope^®, Secure Inbox^®, Tumbleweed IME Integrated Messaging Exchange^®, WorldSecure^® and Worldtalk^®. Additional trademarks belonging to us include Tumbleweed Secure Guardian^™, Tumbleweed Secure Policy Gateway^™, Tumbleweed Secure Staging Server^™, Tumbleweed Staging Server^™, Tumbleweed Secure Mail^™, Tumbleweed Secure Redirect^™, Tumbleweed Secure Public Network^™, Tumbleweed SPN^™, Tumbleweed Secure Archive^™, Tumbleweed Secure Web^™, Tumbleweed Secure CRM^™, Tumbleweed Secure Messenger^™, Tumbleweed Secure Statements^™, Tumbleweed My Copy^™, Tumbleweed L2i^™, Tumbleweed IME Developer^™, Tumbleweed IME Personalize^™, WorldSecure/Mail^™ and Tumbleweed IME Alert^™.

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)


	March 31, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	23,361		$	25,351
Accounts receivable, net		8,300			10,039
Other current assets		1,332			1,068

Total current assets		32,993			36,458
Goodwill		49,363			13,308
Intangible assets, net		10,008			4,392
Property and equipment, net		1,746			1,648
Other assets		772			540

Total assets	$	94,882		$	56,346

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	886		$	250
Current installments of long-term debt		267			267
Accrued liabilities		6,346			6,791
Accrued merger-related and other expenses		1,114			485
Deferred revenue		12,976			11,808

Total current liabilities		21,589			19,601
Long-term debt, excluding current installments		400			467
Accrued merger-related and other costs, excluding current portion		465			540
Deferred revenue, excluding current portion		2,721			2,984
Other long-term liabilities		159			159

Total long-term liabilities		3,745			4,150

Total liabilities		25,334			23,751
Stockholders’ equity:
Common stock		48			43
Additional paid-in capital		352,344			313,532
Treasury stock		(796	)		(796	)
Deferred stock-based compensation expense		(1,616	)		(302	)
Accumulated other comprehensive loss		(604	)		(585	)
Accumulated deficit		(279,828	)		(279,297	)

Total stockholders’ equity		69,548			32,595

Total liabilities and stockholders’ equity	$	94,882		$	56,346

See accompanying Notes to Condensed Consolidated Financial Statements

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2004			2003
Revenue:
Product revenue	$	3,973		$	2,629
Service revenue		5,582			2,871
Intellectual property and other revenue		570			281

Total revenue		10,125			5,781
Cost of revenue:
Cost of product revenue		244			232
Cost of service revenue		980			1,181
Amortization of intangible assets		244			—

Total cost of revenue		1,468			1,413
Gross profit		8,657			4,368
Operating expenses:
Research and development		2,913			1,963
Sales and marketing		4,708			3,441
General and administrative		1,322			1,422
Stock-based compensation (1)		82			34
Amortization of intangible assets		339			—

Total operating expenses		9,364			6,860
Operating loss		(707	)		(2,492	)
Other income, net		171			14

Net loss before provision (benefit) for income taxes		(536	)		(2,478	)
Provision (benefit) for income taxes		(5	)		4

Net loss	$	(531	)	$	(2,482	)

Net loss per share—basic and diluted	$	(0.01	)	$	(0.08	)

Weighted average shares—basic and diluted		43,254			30,494

(1) Stock-based compensation is further classified as follows:
Cost of service revenue	$	7		$	8
Research and development		28			5
Sales and marketing		44			11
General and administrative		3			10

Total stock-based compensation	$	82		$	34

See accompanying Notes to Condensed Consolidated Financial Statements

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three months ended March 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(531	)	$	(2,482	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation		82			34
Depreciation and amortization		970			359
Bad debt expense		—			31
Loss (gain) on disposal of property and equipment		(6	)		30
Changes in operating assets and liabilities, net of effects of acquisitions of Incubator Limited and Corvigo, Inc.
Accounts receivable		2,243			716
Other current assets and other assets		102			(588	)
Accounts payable, accrued liabilities, and other long-term liabilities		(1,366	)		39
Accrued merger-related and other expenses		(10	)		—
Deferred revenue		15			(406	)

Net cash provided by (used in) operating activities		1,499			(2,267	)
Cash flows from investing activities:
Purchase of property and equipment		(325	)		(64	)
Acquisitions of Incubator Limited and Corvigo, Inc., net of cash acquired		(3,379	)		—

Net cash used in investing activities		(3,704	)		(64	)
Cash flows from financing activities:
Repayments of borrowings and other long-term liabilities		(67	)		(50	)
Proceeds from issuance of common stock		301			15

Net cash provided by (used in) financing activities		234			(35	)
Effect of exchange rate fluctuation on cash and cash equivalents		(19	)		157

Net decrease in cash and cash equivalents		(1,990	)		(2,209	)
Cash and cash equivalents, beginning of period		25,351			29,210

Cash and cash equivalents, end of period	$	23,361		$	27,001

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	9			—

Cash paid during the period for taxes	$	20			—

See accompanying Notes to Condensed Consolidated Financial Statements

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(1) Organization

The condensed consolidated financial statements included herein have been prepared by Tumbleweed Communications Corp. (“Tumbleweed”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Tumbleweed’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the SEC on March 15, 2004.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the financial position of Tumbleweed and its subsidiaries as of March 31, 2004, and the results of operations and cash flows for the three months ended March 31, 2004 and 2003. The results for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results expected for the full fiscal year.

The accompanying consolidated condensed financial statements include the accounts of Tumbleweed and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of Tumbleweed’s wholly-owned subsidiaries, Valicert, Inc. (“Valicert”), Incubator, Limited (“Incubator”), and Corvigo, Inc. (“Corvigo”), have been included commencing June 23, 2003, March 15, 2004, and March 18, 2004, the effective dates of those acquisitions, respectively.

(2) Stock-Based Compensation

Tumbleweed accounts for its stock-based compensation arrangements for employees using the intrinsic value method pursuant to Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. As such, deferred stock-based compensation expense is recorded for fixed plan stock options when the fair value of the underlying common stock on the date of grant exceeds the stock option exercise price or the purchase price for issuance or sales of common stock. Deferred stock-based compensation expe

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