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 October 31, 2004
Commission File Number 001-15715
TippingPoint Technologies, Inc.
| Delaware | No.74-2902814 | |
| (State of Incorporation) | (I.R.S. Employer ID No.) |
7501B North Capital of Texas Highway
Austin, Texas 78731
(Address of Principal Executive Offices)
(512) 681-8000
(Telephone Number)
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 December 9, 2004, 7,757,154 shares of the registrant’s common stock, $0.01 par value, were outstanding.
TIPPINGPOINT TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 31, 2004
| Page Number | ||||
| 1 | ||||
| ITEM 1. |
1 | |||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
9 | ||
| ITEM 3. |
27 | |||
| ITEM 4. |
28 | |||
| 29 | ||||
| ITEM 1. |
29 | |||
| ITEM 6. |
29 | |||
| SIGNATURE |
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| INDEX TO EXHIBITS |
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PART I — FINANCIAL INFORMATION
| ITEM 1. | Financial Statements |
TIPPINGPOINT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| October 31, 2004 |
January 31, 2004 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 28,237,264 | $ | 33,153,764 | ||||
| Certificate of deposit |
1,359,703 | — | ||||||
| Accounts receivable |
7,111,663 | 1,822,213 | ||||||
| Inventory |
4,033,400 | 2,485,117 | ||||||
| Prepaid expenses and other current assets |
2,158,496 | 2,243,409 | ||||||
| Total current assets |
42,900,526 | 39,704,503 | ||||||
| Property and equipment, net |
2,119,266 | 2,221,837 | ||||||
| Other |
714,774 | 1,446,936 | ||||||
| Total assets |
$ | 45,734,566 | $ | 43,373,276 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Current portion of long-term debt |
$ | 767,423 | $ | 582,283 | ||||
| Trade accounts payable |
2,717,922 | 2,031,785 | ||||||
| Deferred revenue |
5,190,310 | 811,969 | ||||||
| Accrued liabilities |
5,263,676 | 2,878,450 | ||||||
| Total current liabilities |
13,939,331 | 6,304,487 | ||||||
| Long-term debt |
751,110 | 420,583 | ||||||
| Deferred revenue, long term |
1,093,078 | — | ||||||
| Other liabilities |
167,550 | 216,730 | ||||||
| Total liabilities |
15,951,069 | 6,941,800 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.01 par value; 35,000,000 and 250,000,000 shares authorized, respectively; 7,467,855 and 7,335,933 shares issued and outstanding, respectively |
74,679 | 73,359 | ||||||
| Additional paid-in capital |
350,308,646 | 347,950,650 | ||||||
| Deferred stock-based compensation |
(9,454,966 | ) | (10,133,031 | ) | ||||
| Stockholder notes receivable |
(510,000 | ) | (652,800 | ) | ||||
| Accumulated deficit |
(310,634,862 | ) | (300,806,702 | ) | ||||
| Total stockholders’ equity |
29,783,497 | 36,431,476 | ||||||
| Total liabilities and stockholders’ equity |
$ | 45,734,566 | $ | 43,373,276 | ||||
See accompanying notes to condensed consolidated financial statements.
1
TIPPINGPOINT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 9,651,732 | $ | 2,052,510 | $ | 20,264,064 | $ | 3,019,947 | ||||||||
| Cost of revenues |
2,876,898 | 627,991 | 6,140,930 | 1,782,322 | ||||||||||||
| Gross margin |
6,774,834 | 1,424,519 | 14,123,134 | 1,237,625 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development (1) |
2,493,323 | 1,980,872 | 7,436,989 | 6,708,937 | ||||||||||||
| Sales and marketing (1) |
4,605,850 | 1,730,200 | 11,893,177 | 5,183,673 | ||||||||||||
| General and administrative (1) |
780,172 | 652,399 | 2,576,726 | 2,068,403 | ||||||||||||
| Amortization of employee deferred stock-based compensation |
747,196 | 221,052 | 2,308,874 | 492,990 | ||||||||||||
| Total operating expenses |
8,626,541 | 4,584,523 | 24,215,766 | 14,454,003 | ||||||||||||
| Operating loss |
(1,851,707 | ) | (3,160,004 | ) | (10,092,632 | ) | (13,216,378 | ) | ||||||||
| Interest income, net |
91,188 | 57,476 | 264,472 | 230,962 | ||||||||||||
| Net loss |
$ | (1,760,519 | ) | $ | (3,102,528 | ) | $ | (9,828,160 | ) | $ | (12,985,416 | ) | ||||
| Per share data: |
||||||||||||||||
| Net basic and diluted loss per common share |
$ | (0.24 | ) | $ | (0.57 | ) | $ | (1.33 | ) | $ | (2.44 | ) | ||||
| Weighted basic and diluted average common shares outstanding |
7,425,435 | 5,429,651 | 7,408,939 | 5,322,462 | ||||||||||||
| (1) | Amounts exclude amortization of employee deferred stock-based compensation as follows: |
| Three Months Ended October 31, |
Nine Months Ended October 31, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| Research and development |
$ | 217,768 | $ | 96,973 | $ | 834,669 | $ | 180,053 | ||||
| Sales and marketing |
350,106 | 114,497 | 894,292 | 226,716 | ||||||||
| General and administrative |
179,322 | 9,582 | 579,913 | 86,221 | ||||||||
| TOTAL |
$ | 747,196 | $ | 221,052 | $ | 2,308,874 | $ | 492,990 | ||||
See accompanying notes to condensed consolidated financial statements.
2
TIPPINGPOINT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from continuing operating activities: |
||||||||
| Net loss |
$ | (9,828,160 | ) | $ | (12,985,416 | ) | ||
| Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
1,271,608 | 2,162,252 | ||||||
| Accretion of investment securities |
— | (3,750 | ) | |||||
| Stock-based compensation expense |
2,308,874 | 492,990 | ||||||
| Inventory writedown |
— | 362,605 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(5,289,450 | ) | (1,687,691 | ) | ||||
| Inventory |
(1,548,283 | ) | (1,042,835 | ) | ||||
| Prepaid expenses and other current assets |
84,913 | 121,646 | ||||||
| Other non-current assets |
29,903 | (13,775 | ) | |||||
| Deferred revenue |
5,471,419 | — | ||||||
| Trade accounts payable, accrued liabilities and other non-current liabilities |
3,023,537 | 399,790 | ||||||
| Net cash used in operating activities |
(4,475,638 | ) | (12,194,184 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(1,169,038 | ) | (479,207 | ) | ||||
| Investment securities matured |
— | 6,064,626 | ||||||
| Net cash provided by (used in) investing activities |
(1,169,038 | ) | 5,585,419 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from borrowings under long-term debt |
1,092,044 | 365,351 | ||||||
| Increase in restricted cash related to leases |
(657,444 | ) | (1,399,674 | ) | ||||
| Principal payments on debt |
(576,377 | ) | (349,061 | ) | ||||
| Proceeds from stockholder note receivable |
142,800 | — | ||||||
| Net proceeds from private placement of common stock |
— | 11,642,495 | ||||||
| Proceeds from issuance of common stock |
728,507 | 187,311 | ||||||
| Net cash provided by financing activities |
729,530 | 10,446,422 | ||||||
| Cash used in discontinued operations |
(1,354 | ) | (89,032 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
(4,916,500 | ) | 3,748,625 | |||||
| Cash and cash equivalents at beginning of period |
33,153,764 | 21,085,869 | ||||||
| Cash and cash equivalents at end of period |
$ | 28,237,264 | $ | 24,834,494 | ||||
See accompanying notes to condensed consolidated financial statements.
3
TIPPINGPOINT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Incorporation, Nature of Business and Significant Accounting Policies
TippingPoint Technologies, Inc. was incorporated in the State of Texas in January 1999 and was reincorporated in the State of Delaware in March 2000. We design, manufacture and market network security systems and appliances that deliver in-depth protection and attack eradication for corporate enterprises, government agencies, service providers and academic institutions.
As a result of the stage of our network security business, we expect to report operating losses through at least the end of our fiscal year ending January 31, 2005. We cannot assure you that we will ever achieve positive cash flow from our operations, and we face numerous risks associated with this business.
We have funded our activities primarily through private equity offerings, which included sales of our common stock and preferred stock, the initial public offering of our common stock on March 17, 2000, and borrowings under our term loan facility with a commercial bank, with which we also established a revolving loan facility. In July 2004, we amended the loan and security agreement with our lender relating to these facilities to, among other things, establish an additional equipment term loan facility, extend the maturity date of our revolving loan facility to July 31, 2006, increase the amount we may borrow under our revolving loan facility and improve the terms under which the company may borrow. We may need to raise additional funds at any time, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all.
In the opinion of our management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of such information. We derived the balance sheet as of January 31, 2004 from our audited financial statements as of that date. While we believe that the disclosures are adequate to make the information not misleading, we suggest that these financial statements be read in conjunction with the audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 31, 2004. Interim results are not necessarily indicative of results we expect in future periods.
(a) Principles of Consolidation
In February 2004, we incorporated TippingPoint Technologies Europe B.V. as a subsidiary of TippingPoint Technologies, Inc. to act as our European sales office in Amsterdam, The Netherlands. In June 2004, we incorporated TippingPoint Holdings, Inc. as a subsidiary of TippingPoint Technologies, Inc. to serve as the U.S.-based holding company for all of our international subsidiaries. In July 2004 we also incorporated TippingPoint Technologies United Kingdom, Ltd. as a subsidiary of TippingPoint Holdings, Inc. to act as our sales office in the United Kingdom. The consolidated financial statements include the accounts of TippingPoint Technologies, Inc., TippingPoint Holdings, Inc. and our wholly owned Netherlands and United Kingdom subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
(b) Revenue Recognition
We account for revenues in accordance with the AICPA’s Statement of Position 97-2 “Software Revenue Recognition” and its related interpretations. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of our hardware-based security systems is specified by the customer, revenues are deferred until all acceptance criteria have been met. Service revenues, which principally consist of our Digital Vaccine attack filter service and related support, are generally deferred and are recognized ratably over the period in which the services are to be performed, which is typically one to three years.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the
4
fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.
Our sales involve multiple elements, including the sale of our products and related services. We use the residual method of accounting to recognize revenues when an arrangement includes one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE) of the fair value of all undelivered elements exists.
We sell primarily to resellers, including value-added resellers, or VARs. We do not expect these resellers to hold significant inventories of our products, if at all. As a result, we expect returns to be minimal. If our estimate of returns is too low, additional charges will be incurred in future periods and these additional charges could have a material adverse effect on our financial position and results of operations. We record discounts, if any, provided to resellers for achieving purchasing targets as a reduction of revenues on the date of sale.
(c) Inventories
Our inventory is stated at the lower of actual cost (first-in, first-out method) or market value (estimated net realizable value). The valuation of inventory at the lower of actual cost or market value requires us to use estimates regarding the amount of current inventory that will be sold and the prices at which it will be sold. These estimates are dependent on our assessment of expected orders from our customers. Additionally, these estimates reflect changes in our products or changes in demand because of various factors including the market for our products, obsolescence, technology changes and competition.
As of October 31, 2004 and January 31, 2004, our inventory consisted of component parts of approximately $1.5 million and $1.0 million, respectively, and finished goods of approximately $2.5 million and $1.5 million, respectively. A significant portion of our finished goods inventory is held for evaluation purposes at potential customer locations.
(d) Stock-Based Compensation