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, 2006
OR
o 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 0-28968
APTIMUS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON | 91-1809146 | |
(State of other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
100 Spear Street, Suite 1115
San Francisco, CA 94105
(Address of principal executive offices and zip code)
(415) 896-2123
(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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
The number of shares of the registrant's Common Stock outstanding as of April 30, 2006 was 6,536,468.
APTIMUS, INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2006
Page | ||
Part I - FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | |
Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006 | 1 | |
Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006 | 2 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006 | 3 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 4 | |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL | |
CONDITION AND RESULTS OF OPERATIONS | 12 | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 22 |
ITEM 4. | CONTROLS AND PROCEDURES | 22 |
Part II - OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 22 |
ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES | |
OF EQUITY SECURITIES | 23 | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 23 |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 23 |
ITEM 5. | OTHER INFORMATION | 23 |
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 24 |
SIGNATURES | 26 |
APTIMUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, 2006 | December 31, 2005 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 998 | $ | 4,349 | |||
Accounts receivable, net | 2,085 | 2,498 | |||||
Prepaid expenses and other assets | 173 | 140 | |||||
Short-term investments | 9,227 | 6,091 | |||||
Total current assets | 12,483 | 13,078 | |||||
Fixed assets, net | 661 | 690 | |||||
Intangible assets, net | 8 | 20 | |||||
Deposits | 39 | 39 | |||||
$ | 13,191 | $ | 13,827 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Accounts payable | $ | 817 | $ | 1,016 | |||
Accrued and other liabilities | 371 | 325 | |||||
Total current liabilities | 1,188 | 1,341 | |||||
Commitments and contingent Liabilities | |||||||
Shareholders' equity | |||||||
Common stock, no par value; 100,000 shares authorized, 6,536 and 6,528 issued and outstanding at March 31, 2006 and December 31, 2005, respectively | 69,245 | 69,223 | |||||
Additional paid-in capital | 3,085 | 2,850 | |||||
Accumulated deficit | (60,327 | ) | (59,587 | ) | |||
Total shareholders' equity | 12,003 | 12,486 | |||||
$ | 13,191 | $ | 13,827 |
The accompanying notes are an integral part of these financial statements.
APTIMUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended March 31, | |||||||
2006 | 2005 | ||||||
Revenues | $ | 2,959 | $ | 3,852 | |||
Operating expenses: | |||||||
Cost of revenues | 1,363 | 1,466 | |||||
Sales and marketing | 1,311 | 725 | |||||
Connectivity and network costs | 210 | 211 | |||||
Research and development | 190 | 167 | |||||
General and administrative | 630 | 558 | |||||
Depreciation and amortization | 99 | 65 | |||||
Loss on disposal of long-term assets | 1 | ||||||
Total operating expenses | 3,804 | 3,192 | |||||
Operating income (loss) | (845 | ) | 660 | ||||
Interest income | 105 | 21 | |||||
Net income (loss) | $ | (740 | ) | $ | 681 | ||
Earnings (loss) per share: | |||||||
Basic | $ | (0.11 | ) | $ | 0.11 | ||
Diluted | $ | (0.11 | ) | $ | 0.09 | ||
Weighted average shares outstanding: | |||||||
Basic | 6,530 | 6,005 | |||||
Diluted | 6,530 | 7,342 |
The accompanying notes are an integral part of these financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | (740 | ) | $ | 681 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||||
Depreciation and amortization | 99 | 65 | |||||
Bad debt expense | 13 | 40 | |||||
Loss (gain) on disposal of assets | 1 | — | |||||
Issuance of options/warrants | 235 | — | |||||
Amortization of discount on short term investments | (89 | ) | — | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable | 400 | 278 | |||||
Prepaid expenses and other assets | (33 | ) | 16 | ||||
Accounts payable | (199 | ) | (725 | ) | |||
Accrued and other liabilities | 46 | (181 | ) | ||||
Net cash provided by (used in) operating activities | (267 | ) | 174 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchases of property and equipment | (59 | ) | (159 | ) | |||
Purchase of short-term investments | (6,104 | ) | — | ||||
Sale of short-term investments | 3,057 | — | |||||
Net cash used in investing activities | (3,106 | ) | (159 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Issuance of common stock | 22 | 6,033 | |||||
Costs of issuance of common stock | — | (267 | ) | ||||
Net cash provided by financing activities | 22 | 5,766 | |||||
Net increase (decrease) in cash and cash equivalents | (3,351 | ) | 5,781 | ||||
Cash and cash equivalents at beginning of period | 4,349 | 3,610 | |||||
Cash and cash equivalents at end of period | $ | 998 | $ | 9,391 |
The accompanying notes are an integral part of these financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED INTERIM FINANCIAL INFORMATION
a) Description of Business
We are a results-based advertising network that distributes advertisements for direct marketing advertisers across a network of third-party web sites and company-owned and licensed email lists. Advertisers pay us only for the results that we deliver through one of four pricing models - (i) cost per click, (ii) cost per lead, (iii) cost per acquisition or (iv) cost per impression. We then share a portion of the amounts we bill to our advertiser clients with publishers and email list owners on whose web properties and email lists we distribute the advertisements. In addition, we occasionally pay web site owners either a fixed fee for each completed user transaction or a fee for each impression of an advertisement served on the web site.
At the core of the Aptimus Network is a database configuration and software platform used in conjunction with a direct marketing approach for which we have filed a non-provisional business method patent application called Dynamic Revenue Optimization™ (DRO). DRO determines through computer-based logic, on a real-time basis, which advertisements in our system, using the yield of both response history and value, should be reflected for prominent promotion on each individual web site placement and in each email sent to consumers. The outcome of this approach is that we generate superior user response and revenue potential for that specific web site or email placement and a targeted result for our advertiser clients.
b) Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2006. The interim financial information included herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for any subsequent quarter or the entire year ending December 31, 2006.
a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Aptimus and its wholly owned subsidiary Neighbornet LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.
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b) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant accounting policies and estimates underlying the accompanying financial statements include:
· | the timing of revenue recognition; |
· | the allowance for doubtful accounts; |
· | the lives and recoverability of equipment; |
· | our determination of the need for reserves for deferred tax assets; |
· | stock-based compensation. |
It is reasonably possible that the estimates we make may change in the future.
c) Revenue Recognition
The Company currently derives revenue primarily from providing response-based advertising programs through a network of website and email distribution publishers.
Revenue earned for lead generation through the Aptimus network is based on a fee per lead and is recognized when the lead information is delivered to the client. Revenue earned for e-mail mailings can be based on a fee per lead, a percentage of revenue earned from the mailing, or a cost per thousand e-mails delivered. Revenue from e-mail mailings delivered on a cost per thousand basis is recognized when the e-mail is delivered. Revenue from e-mail mailings sent on a fee per lead or a percentage of revenue earned from the mailing basis is recognized when amounts are determinable, generally when the customer receives the leads.
Revenues generated through network publishers and opt-in email list owners are recorded on a gross basis in accordance with Emerging Issues Task Force consensus 99-19 (EITF consensus 99-19). Fees paid to network publishers and opt-in email list owners related to these revenues are shown as Publisher fees on the Statement of Operations. Aptimus shares a portion of the amounts it bills its advertiser clients with the third-party website owners or “publishers” and email list owners on whose web properties and email lists Aptimus distributes the advertisements. While this “revenue share” approach is Aptimus’ primary payment model, it will as an alternative occasionally pay website owners either a fixed fee for each completed user transaction or a fee for each impression of an advertisement served on the website. Email based campaigns that are sent to Company owned lists do not have publisher fees associated with them.
We have evaluated the guidance provided by EITF consensus 99-19 as it relates to determining whether revenue should be recorded gross or net for the payments made to network publishers and opt-in email list owners and have determined the recording of revenues gross is appropriate based upon the following factors:
· | Aptimus acts as a principal in these transactions; |
· | Aptimus and its customer are the only companies identified in the signed contracts; |
· | Aptimus and its customer are the parties who determine pricing for the services; |
· | Aptimus is solely responsible to the client for fulfillment of the contract; |
· | Aptimus bears the risk of loss related to collections |
· | Aptimus determines how the offer will be presented across the network; and |
· | Amounts earned are based on leads or emails delivered and are not based on amounts paid to publishers. |
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b) Recent Accounting Pronouncements
In November 2005, the FASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We continue to evaluate the impact that the adoption of this FSP could have on our financial statements.
a) Stock Option Plans
Effective June 30, 1997, Aptimus approved the 1997 Stock Option Plan (the 1997 Plan) to provide for the granting of stock options for up to 2.4 million shares to employees, directors and consultants of Aptimus to acquire ownership in Aptimus and provide them with incentives for their service. As of March 31, 2006, under the terms of the 1997 Plan, 17,856 shares of common stock remain unissued and not subject to options and have been reserved for issuance to plan participants.
Effective June 12, 2001, the shareholders approved the 2001 Stock Plan (the 2001 Plan) to provide for the granting of stock options and restricted stock for up to 2.4 million shares to employees, directors and consultants of Aptimus to provide them with incentives for their service. As of March 31, 2006, under the terms of the 2001 Plan, 849,267 shares of common stock remain unissued and not subject to options and have been reserved for issuance to plan participants.
The Board of Directors of Aptimus, which determines the terms and conditions of the options or restricted stock shares granted, including exercise price, number of shares granted and the vesting period of such shares, administers the Plans. The maximum term of options is ten years from the date of grant. The options are generally granted at the estimated fair value of the underlying stock, as determined by the closing market price, on the date of grant and are generally granted with a vesting period of from one to four years. Shares used to settle options issued under the plan are issued from the Company’s authorized but unissued shares.
On December 22, 2005 the Board of Directors approved the acceleration of vesting of the unvested portion of certain "out-of-the money" non-qualified stock options previously awarded to employees, officers and directors with option exercise prices greater than $13.97 to be effective as of December 31, 2005. The Company's directors, executive officers, and certain senior-level managers, prior to the acceleration effective date, entered into a Resale Restriction Agreement that imposes restrictions on the sale of any shares received through the exercise of accelerated options until the earlier of the original vesting dates set forth in the option or the individual holder’s termination of employment or Board service, as the case may be. The accelerated options represent approximately 23% of the total of all outstanding Company options. The Board of Directors' decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the applicable effective date of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” ("SFAS 123(R)"). SFAS 123(R) requires companies to recognize the grant-date fair value of stock options issued to employees as an expense in the income statement and, as of the applicable effective date, will require the Company to recognize the compensation costs related to share-based payment transactions, including stock options. In addition, the Board of Directors considered that because these options had exercise prices in excess of the current market value, they were not fully achieving their original objectives of incentive compensation, employee retention and goal alignment. The acceleration of the vesting of these options resulted in approximately $3.0 million of additional stock-based employee compensation expense as determined under the fair value based method for the year ended December 31, 2005.
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Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123). No stock-based employee compensation cost was recognized in the Statement of Operations for the three months ended March 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006 the Company adopted the fair value recognition provisions of FASB Statement No. 123(R) Share-Based Payment, (SFAS 123(R)), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the three months ended March 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The compensation cost for share-based payments granted subsequent to January 1, 2006 are expensed using a straight-line attribution methodology as permitted by SFAS 123(R). The compensation cost for share-based payments granted prior to January 1, 2006 are expensed using the accelerated attribution methodology of FASB Interpretation No. 28 (FIN 28) as previously included in the Company’s pro forma disclosures. Results for prior periods have not been restated.
SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and restricted stock grants related to the Company’s incentive plans, to be based on fair values. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes-Merton model to determine the fair value of employee stock options granted.
The fair value of each option grant under the plans was estimated on the date of grant using the Black Scholes Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience. Expected volatilities are based on the historical volatility of Aptimus common stock. The expected term of options granted is represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the yield for U.S. Treasury Constant Maturities for the applicable grant date and expected term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. Compensation expense is only recognized for those options expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. Prior to the adoption of SFAS 123(R), the effect of forfeitures on the pro-forma expense amounts was recognized as the forfeitures occurred.
A summary of option activity and stock options outstanding under the Plans is presented below:
Shares (in thousands) | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value (in thousands) | ||||||||||
Outstanding, December 31, 2005 | 1,697 | $ | 5.67 | ||||||||||
Options granted | 207 | 4.58 | |||||||||||
Options exercised | (4 | ) | 0.43 | ||||||||||
Options forfeited | (4 | ) | 12.53 | ||||||||||
Outstanding, March 31, 2006 | 1,896 | 5.55 | 7.33 | $ | 6,125 | ||||||||
Exercisable March 31, 2006 | 1,590 | $ | 5.57 | 6.89 | $ | 5,675 |
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The aggregate intrinsic value in the table above is, before applicable income taxes, based on the Company’s closing stock price of $6.46 a of the last business day of the period ended March 31, 2006, which would have been received by the optionees had all options been exercised on that date. As of March 31, 2006, total unrecognized equity-based compensation expense related to non-vested stock options was approximately $1.2 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. During the three months ended March 31, 2006, the intrinsic value of stock options exercised was $17,000. During the three months ended March 31, 2006, the total fair value of options vested was $68,000.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss for the three months ended March 31, 2006 is $235,000 lower than if it had continued to account for share-based compensation under APB 25. The $235,000 of share-based compensation is comprised of the following components. On March 9, 2006 the Company re-priced 364,275 outstanding stock options that had an original exercise price between $14.43 and $17.59 per share. These options have been re priced to change the exercise price of these shares to $7.00 per share. This re pricing resulted in stock based compensation expense of $153,000 for the quarter. In addition, $55,000 of the share based compensation expense is related to existing options at the beginning of the year that had not yet vested and $23,000 of the expense is for additional option grant issuances during the quarter. In addition, there is $4,000 of stock based compensation recorded as a result of the company’s ESPP plan.
Basic and diluted loss per share for the three months ended March 31, 2006 would have been $0.08 per share if the Company had not adopted SFAS 123(R), compared to reported basic and diluted loss per share of $0.11. Share based compensation included in the statement of operation is as follows:
Three months ended March 31, 2006 | ||||
Sales and marketing | $ | 212 | ||
Internet and network | 6 | |||
Research and development | 10 | |||
General and administrative | 7 | |||
Total Equity-based compensation | $ | 235 |
The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option pricing formula and amortized to expense over the options’ vesting periods, using the accelerated attribution methodology of FIN 28 (in thousands, except per share data):
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Three Months Ended March 31, (unaudited) 2005 | ||||
Net income (loss), as reported | $ | 681 | ||
Add: Total stock-based employee compensation expense, included in the determination of net income as reported, net of related tax effects | — | |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (99 | ) | ||
Pro forma net income (loss) | $ | 582 | ||
Earnings per share: | ||||
Basic - as reported | $ | 0.11 | ||
Basic - pro forma | $ | 0.10 | ||
Diluted - as reported | $ | 0.09 | ||
Diluted - pro forma | $ | 0.08 |
b) Employee Stock Purchase Plan
The Company adopted the ESPP in April 2000. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for a detailed description of the ESPP. There were 4,447 and 3,505 shares issued for the ESPP periods that ended in the three months ended March 31, 2006 and 2005, respectively.
3. NET EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents net income (loss) available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share represents net income (loss) available to common shareholders divided by the weighted average number of shares outstanding, including the potentially dilutive impact of common stock options, warrants and convertible notes payable, using the treasury stock method.
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The following table sets forth the computation of the numerators and denominators in the basic and diluted earnings (loss) per share calculations for the periods indicated and the common stock equivalent securities as of the end of the period that are not included in the diluted net loss per share calculation as their effect on earnings (loss) per share is anti-dilutive (in thousands):
Three Months Ended March 31, (unaudited) | |||||||
2006 | 2005 | ||||||
Numerator: | |||||||
Net income (loss) (A) | $ | (740 | ) | $ | 681 | ||
Denominator: | |||||||
Weighted average outstanding shares of common stock (B) | 6,530 | 6,005 | |||||
Weighted average dilutive effect of options to purchase common stock | — | 111 | |||||
Weighted average dilutive effect of warrants to purchase common stock | — | 1,226 | |||||
Weighted average common stock and common stock equivalents (C) | 6,530 | 7,342 | |||||
Earnings (loss) per share: | |||||||
Basic (A/B) | $ | (0.11 | ) | $ | 0.11 | ||
Diluted (A/C) | $ | (0.11 | ) | $ | 0.09 | ||
Antidilutive securities excluded consist of the following: | |||||||
Options to purchase common stock | 661 | — | |||||
Warrants to purchase common stock | 91 | — | |||||
752 | — |
4. Contingencies
Litigation
The Company may be subject to various claims and pending or threatened lawsuits in the normal course of business. Management believes that the outcome of any such lawsuits would not have a materially adverse effect on the Company’s financial position, results of operations or cash flows.
Change in Control Agreement
In December 2002, the Board of Directors approved a Change in Control Agreement. Under the terms of this agreement, key members of management are to receive a severance package ranging between eight and twelve months salary in the event of a change in control of the Company and termination of the employee.
Guarantees and Indemnifications
The following is a summary of our agreements that we have determined are within the scope of Interpretation No. 45, or FIN 45, which are separately grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2006.
As permitted under Washington law and our by-laws and certificate of incorporation, Aptimus has agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is the applicable statute of limitations for indemnifiable claims. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, Aptimus has a directors’ and officers’ insurance policy that may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, we believe the estimated fair value of this indemnification obligation is not material. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage, which attempts may result in expensive and time-consuming litigation against the insurers.
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Aptimus’ standard advertising client and distribution publisher contracts include standard cross indemnification language that requires, among other things, that we indemnify the client or publisher, as the case may be, for certain claims and damages asserted by third-parties that arise out of Aptimus’ breach of the contract. In the past, Aptimus has not been subject to any claims for such losses and has thus not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe the estimated fair value of these obligations is not material.
Pursuant to these agreements, Aptimus may indemnify the other party for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims, which may include, claims of intellectual property infringement, breach of contract and intentional acts in the performance of the contract. The term of these indemnification obligations is generally limited to the term of the contract at issue. In addition, Aptimus limits the maximum potential amount of future payments we could be required to make under these indemnification obligations to the consideration paid during a limited period of time under the applicable contract, but in some infrequent cases the obligation may not be so limited. In addition, our standard policy is to disclaim most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, quality and non-infringement, as well as any liability with respect to incidental, indirect, consequential, special, exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, the Company would provide for the estimated cost of service warranties based on specific warranty claims and claim history. Aptimus has not been subject to any claims for such losses and has not incurred any costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe the estimated fair value of these agreements is not material.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Certain statements in this filing constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can often be identified by terminology such as may, will, should, expect, plan, intend, expect, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Aptimus, Inc. (“Aptimus”, “we”, “us” or the “Company”), or developments in the Company’s industry, to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include, without limitation, fluctuation of the Company’s operating results, the ability to compete successfully, the ability of the Company to maintain current client and distribution publisher relationships and attract new ones, and the sufficiency of remaining cash and short-term investments to fund ongoing operations and the risk factors set forth in the Company’s 10-K for the fiscal year ended December 31, 2005.
Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this filing. You should not place undue reliance on forward-looking statements.
We are a results-based advertising network that distributes advertisements for direct marketing advertisers across a network of third-party web sites. For advertisers, the Aptimus Network offers an Internet-based distribution channel to present their advertisements to users on web sites. Advertisers pay us only for the results that we deliver. We then share a portion of the amounts we bill our advertiser clients with the third-party web site owners or “publishers” on whose web properties we distribute the advertisements.
At the core of the Aptimus Network is a database configuration and software platform and direct marketing approach for which we have filed a non-provisional business method patent application called Dynamic Revenue Optimization™.
Focus in current quarter
Over the past three years, a key focus of ours has been expanding the number of publishers in our network. To this end, we have added six employees to our business development team since early December 2003, whose job is to focus exclusively on adding new publishers to our network and expanding our relationships with current publishers. In 2005, we hired two senior-level employees to head the business development team and expect to continue hiring business development personnel in the future as necessary. Our lead volumes remain concentrated among a limited number of top performing publishers. While our goal is to expand the number of publishers and reduce the concentration of revenue from any one publisher, we anticipate that a limited number of publishers collectively will continue to account for a significant portion of our lead volume for the foreseeable future.
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In late 2005, we indefinitely suspended our email operations, which had been in decline in recent years. While this business was historically high margin and contributed nearly 9% and 18% of the company’s revenues in 2005 and 2004, respectively, increasing resistance from ISPs and resulting deliverability challenges made growth and stability in this area uncertain. Marketplace trends also indicated further challenges ahead for the email business as a whole. We thus elected to suspend our email marketing activities indefinitely to focus on more stable and predictable network-based offer distribution solutions that we believe best serve our clients’ needs.
The key factors impacting revenues in the current quarter were the discontinuation of our email marketing business in the fourth quarter of last year and decreases in impression volumes from some of our larger publishers. Moving forward, Aptimus has chosen to focus its energies on the significant top 100 publishers and as we grow that base of large publishers, our impression volumes are more closely tied to the seasonality of the individual publishers. Also impacting our first quarter revenues was an insufficient focus on direct client sales in the past that we are in the process of correcting. As we add more strong advertiser relationships, it positions us to increase our revenues per impression further.
Concentrations
Given the importance of transacting consumers to our business, a key focus of our business development efforts has been to expand the number of publishers participating in our network. Because we remain at an early stage in the focused development of our distribution network, our lead volumes are concentrated among a limited number of top performing publishers. For the quarters ended March 31, 2006 and 2005, user leads from our top five largest website publishers accounted for 58.5% and 33.2% of our total revenues, respectively. For the quarter ended March 31, 2006, user leads from the top two publishers accounted for 26.5% and 13.2% of revenues, respectively. The concentration of revenue among our five largest website publishers increased as a result of our continued focus toward more brand-oriented destination publisher sites. While our goal is to expand the number of publishers and reduce the concentration of revenue from any one publisher, we anticipate that a limited number of publishers collectively will continue to account for a significant portion of our lead volume for the foreseeable future.
In the quarters ended March 31, 2006 and 2005 our ten largest clients accounted for 64.4 % and 56.6% of our revenues, respectively. During the quarter ended March 31, 2006, Prospective Direct, Inc. accounted for 23.4% of our revenues, The Vendare Group, Inc. accounted for 12.2% of our revenues and no other client accounted for more than 10% of our revenues. During the quarter ended March 31, 2005, Adteractive, Inc. accounted for 11.9% of revenue, The Vendare Group, Inc. accounted for 11.0% of revenue, and no other client accounted for more than 10% of revenue. The percentage of revenue represented by our ten largest clients when compared to the same quarter of 2005 has increased slightly. We expect our revenues to be composed of a similar mix of large and small advertiser clients in the immediate future.
Other information
In 2005, we initiated a focused drive to improve lead quality and customer conversion for our advertising clients. To this end, we terminated relationships with publishers with lower quality traffic and added or enhanced a number of automated data validation processes that screen in real time the lead data a user submits before that lead is passed on to our advertisers. We also directed considerable energy in the year toward building distribution relationships with name brand and high quality web sites. Going forward, to support enhanced lead quality and attract new and larger advertisers and budgets, Aptimus will continue to expand our technology and validation capabilities, add innovative product solutions, as well as develop focused marketing strategies around specific targeted verticals such as our newly updated www.euniversitydegree.com education site. We will also continue pursuing distribution relationships with name brand and high quality publishers. Finally, we plan to hire seasoned sales professionals and support staff to target the primary education, finance, technology and other industry verticals.
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On March 9, 2006, the Company’s board of directors repriced the strike price of certain option grants issued to certain employees and directors in 2005, including Rob Wrubel, Director and President, Bob Bejan, Director, senior members of the Company’s sales and business development groups, and other employees. The original strike price of the grants that were affected by the repricing ranged from $14.45 to $17.50. The new strike price is $7.00. A total of 31 individuals representing 364,275 option shares were affected by the repricing. This repricing of 364,275 stock option grants resulted in stock based compensation of $153,000 in the three months ended March 31, 2006 period. No future expense will be incurred as a result of repricing these options as the full repricing cost was fully incurred in the three months ended March 31, 2006 period. Under paragraph 51 of 123R and illustration 12(a), paragraph A149-A150 of FAS 123R states that - a modification of the exercise price of the options will result in recognition of additional expense in the period the grant is modified. The Incremental cost was measured as the excess, if any, of the fair value of the modified award determined in accordance with this Statement over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. In addition, the board of directors authorized the grant of 70,000 option shares to Mr. Wrubel, and the grant an additional 65,000 to certain other senior members of the Company’s sales and business development groups. Each of these grants has a strike price of $4.58 and vest over a four-year period from the date of grant.
We derive our revenues primarily from response-based advertising contracts. Leads are obtained through promoting our clients’ offers across our Aptimus Network of web site publishers and opt-in email lists. Revenues generated through network publishers and opt-in email list owners are recorded on a gross basis in accordance with EITF consensus 99-19. Fees paid to network publishers and opt-in email list owners related to these revenues are shown as Cost of revenues on the Statement of Operations.
(In thousands, except percentages) | 2006 | 2005 | Percentage (Decrease) | |||||||
Three months ended March 31, | $ | 2,959 | $ | 3,852 | (23.2 | %) |
Three months ending March 31, | ||||||||||
(Page impressions in thousands) | 2006 | 2005 | Percentage Increase (Decrease) | |||||||
Core placement CPM | $ | 216.16 | $ | 251.72 | (14 | )% | ||||
Core placement page impressions | 10,411 | 10,835 | (4 | )% | ||||||
Percentage of revenue from core placements | 76.0 | % | 70.8 | % | 7 | % | ||||
Other placement CPM | $ | 17.65 | $ | 18.93 | (7 | )% | ||||
Other placement page impressions | 39,508 | 37,541 | 5 | % | ||||||
Percentage of revenue from other placements | 23.6 | % | 18.5 | % | 28 | % | ||||
Percentage of revenue from email programs | 0.4 | % | 10.7 | % | (96 | )% |
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While the core CPM declined in the current quarter compared to the same quarter of 2005 it remained at a level consistent with the previous quarter. Core impressions on the other hand declined from the previous quarter as a result of a decrease in the number of impressions provided by our primary publishers. The average core CPM will generally fluctuate from period to period depending on both the mix of client offers and the type of publisher placements running in the network at any given time. Revenues in the current quarter sequentially declined from the quarter ended December 31, 2005 by 20%. We expect core impression oriented revenue in future quarters to grow from quarter to quarter as we plan to continue to expand our network with new publisher placements and client offers.
Revenue from email programs in the current quarter has decreased compared to the first quarter of 2005 as the majority of our email activities were paused in December 2005. We expect revenues from email programs for the foreseeable future to be near zero.
Costs of revenues consist of fees owed to network distribution publishers and opt-in email list owners based on revenue generating activities created in conjunction with these publishers.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage (Decrease) | |||||||||||
Three months ended March 31, | $ | 1,363 | 46.1 | % | $ | 1,466 | 38.1 | % | (7.0 | %) |
Cost of revenues has decreased as a result of the decrease in total revenue and also as a result of the decrease as a percentage of revenue. The decrease as a percentage of revenue is primarily a result of the decrease in email revenues that historically provided a lower cost of revenue. Publisher fees are expected to normalize at around 47% to 50% of revenues.
Sales and marketing expenses consist primarily of marketing and operational personnel costs, bad debts, and outside sales costs.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage Increase | |||||||||||
Three months ended March 31, | $ | 1,311 | 44.3 | % | $ | 725 | 18.8 | % | 80.8 | % |
The increase in sales and marketing expenses was a result of increases in labor costs, reductions in advertising costs for the EasyJoin process and equity-based compensation charges. These items accounted for 71%, (18)%, 36% of the increase in sales and marketing expense, respectively. Labor costs have increased primarily as a result of hiring additional employees since the first quarter of 2005. The EasyJoin process was launched in August 2004 and promotion of the program continued through July 2005 when the focus was shifted to larger publishers. Equity-based compensation charges are a result of adoption of SFAS 123(R), the re-pricing of options on March 9, 2006 and the grant of new options to employees. It is expected that sales and marketing expenses will increase in future quarters as we continue to increase sales and the related commissions and bad debts thereon, continue the hiring of additional employees and continue to record equity-based compensation in accordance with SFAS 123(R).
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Connectivity and network costs consist of expenses associated with the maintenance and usage of our network as well as email delivery costs. Such costs include email delivery costs, Internet connection charges, hosting facility costs and personnel costs.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage (Decrease) | |||||||||||
Three months ended March 31, | $ | 210 | 7.1 | % | $ | 211 | 5.5 | % | (0.5 | %) |
Connectivity and network costs in the remaining quarters of 2006 are expected to be similar to amounts recorded in the current quarter.
Research and development expenses primarily consist of personnel costs related to maintaining and enhancing the features, content and functionality of our Web sites, network and related systems.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage Increase | |||||||||||
Three months ended March 31, | $ | 190 | 6.4 | % | $ | 167 | 4.3 | % | 13.8 | % |
This increase in research and development expense was primarily due to increases in labor costs, including amounts for equity-based compensation. The increase in labor costs is a result of annual pay increases and the recognition of equity-based compensation amounts. Research and development expense in the remaining quarters of 2006 are expected to be slightly higher than amounts recorded in the current quarter.
General and administrative expenses primarily consist of management, financial and administrative personnel expenses and related costs, business taxes and professional service fees.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage Increase | |||||||||||
Three months ended March 31, | $ | 630 | 21.3 | % | $ | 558 | 14.5 | % | 12.9 | % |
The increase in general and administrative expense was due to approximately a $160,000 increase in audit costs related to the completion of the 2005 annual audit and approximately a $115,000 decrease in costs associated with returning to the Nasdaq National Market in 2005. General and administrative expenses for the remaining quarters of 2006 are expected to be lower as than the current quarter audit fees are not expected to be as significant in the remaining quarters.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on leased and owned computer equipment, software, office equipment and furniture and amortization on intellectual property and purchased email lists.
(In thousands, except percentages) | 2006 | % of revenue | 2005 | % of revenue | Percentage Increase | |||||||||||
Three months ended March 31, | $ | 99 | 3.3 | % | $ | 65 | 1.7 | % | 52.3 | % |
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Depreciation and amortization in the current quarter has increased compared to the same period of the prior year. Although older assets have become fully depreciated recent acquisition of new computer equipment and software has resulted in depreciation and amortization expenses increasing. Depreciation and amortization is expected to be even higher in future quarters compared to the current quarter as a result of additional computer hardware and software purchases being made in the current year.
Interest income results from earnings on our available cash reserves and short-term investments. Interest income totaled $105,000 in the quarter ended March 31, 2006 and $21,000 in the same quarter of 2005. The increase in interest income is primarily a result of increased cash resulting from the receipt of approximately six million dollars from a private equity financing that was closed in March of 2005. Additionally there has been an increase in the average interest rate received. Interest income in future quarters is expected to be similar to amounts earned in the current quarter.
No current or deferred federal income tax expense or benefit has been provided for any of the periods presented as we have incurred net tax losses from inception through the quarter ended March 31, 2006. Aptimus has provided full valuation allowances on the related net deferred tax assets because of the uncertainty regarding their realizability.
Since we began operating as an independent company in July 1997, we have financed our operations primarily through the issuance of equity securities. Net proceeds from the issuance of stock through March 31, 2006 totaled $73.3 million. As of March 31, 2006, we had approximately $10.2 million in cash and cash equivalents and short-term investments, providing working capital of $11.3 million. No off-balance sheet assets or liabilities existed at March 31, 2006, other than deferred tax assets that have been fully reserved.
Net cash provided by (used in) operating activities was $(267,000) and $174,000 for the three months ended March 31, 2006 and 2005, respectively. Cash used in operations during the three months ended March 31, 2006 and 2005 consisted of:
Three months ended March 31, | |||||||
2006 | 2005 | ||||||
Cash received from customers | $ | 3,359 | $ | 4,130 | |||
Cash paid to employees and vendors | (3,642 | ) | (3,977 | ) | |||
Interest received | 16 | 21 | |||||
Interest paid | — | — | |||||
Net cash provided by (used in) operations | $ | (267 | ) | $ | 174 |
Net cash used in investing activities was $3.1 million and $159,000 in the three months ended March 31, 2006 and 2005, respectively. In the three months ended March 31, 2006, $59,000 was used for the purchase of additional computer equipment and software and $6.1 million was used for the purchase of short-term investments offset by proceeds of $3.1 million form the maturity of short-term investments. In the three months ended March 31, 2005, $159,000 was used for the purchase of additional software, equipment and intangible assets.
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Net cash provided by financing activities was $22,000 and $5.8 million in the three months ended March 31, 2006 and 2005, respectively. In the three months ended March 31, 2006, net cash provided by financing activities resulted from $22,000 of proceeds from the issuance of common stock. In the three months ended March 31, 2005, net cash provided by financing activities resulted from $5.8 million of net proceeds from the issuance of common stock, primarily from a private placement in March 2005.
We believe our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. This is based on the balance of cash, cash equivalents and short-term investments at March 31, 2006 and cash generated by operations during the year ended December 31, 2005. We currently anticipate spending an additional $450,000 to $550,000 on capital expenditures in 2006 in order to expand and improve our network infrastructure. Should our goal of maintaining returning to positive cash flow not be met, we may need to raise additional capital to meet our long-term operating requirements.
Our cash requirements depend on several factors, including the rate of market acceptance of our services and the extent to which we use cash for acquisitions and strategic investments. At this moment in time, no material acquisitions or major strategic investments are definitively planned. However, unanticipated expenses, poor financial results or opportunities requiring financial commitments could give rise to earlier financing requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced, and these securities might have rights, preferences or privileges senior to those of our common stock. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict our operations.
OFF-BALANCE SHEET ARRANGEMENTS
No off-balance sheet arrangements existed as of March 31, 2006 except for the Company’s operating leases for operating facilities.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the financial statements included in Item 8 of the Annual Report on Form 10-K, filed with the SEC on March 16, 2006. We believe those areas subject to the greatest level of uncertainty are the allowance for doubtful accounts, the valuation allowance on deferred tax assets, equity-based compensation and depreciation of fixed and intangible assets. In addition to those areas subject to the greatest level of uncertainty revenue recognition is also considered a critical accounting policy.
Revenue earned for lead generation through the Aptimus network is based on a fee per lead and is recognized when the lead information is delivered to the client.
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Revenues generated through network publishers and are recorded on a gross basis in accordance with Emerging Issues Task Force consensus 99-19 (EITF consensus 99-19). Fees paid to network publishers related to these revenues are shown as Cost of Revenue on the Statement of Operations. Aptimus shares a portion of the amounts it bills its advertiser clients with the third-party website owners or “publishers” on whose web properties Aptimus distributes the advertisements. While this “revenue share” approach is Aptimus’ primary payment model, it will as an alternative occasionally pay website owners either a fixed fee for each completed user transaction or a fee for each impression of an advertisement served on the website.
The Company has evaluated the guidance provided by EITF consensus 99-19 as it relates to determining whether revenue should be recorded gross or net for the payments made to network publishers and opt-in email list owners. The Company has determined the recording of revenues gross is appropriate based upon the following factors:
· | Aptimus acts as a principal in these transactions; |
· | Aptimus and its customer are the only companies identified in the signed contracts; |
· | Aptimus and its customer are the parties who determine pricing for the services; |
· | Aptimus is solely responsible to the client for fulfillment of the contract; |
· | Aptimus bears the risk of loss related to collections |
· | Aptimus determines how the offer will be presented across the network; and |
· | Amounts earned are based on leads delivered and are not based on amounts paid to publishers. |
Valuation Allowance for Deferred Tax Assets
SFAS 109, “Accounting for Income Taxes,” requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. At March 31, 2006, our net deferred tax assets are approximately $23 million. Currently, a valuation allowance equal to the balance of the deferred tax assets has been recorded. This valuation allowance has been recorded, as the ability of the Company to utilize the deferred tax assets has not been assessed as being more likely than not.
Any change in the assessment of whether it is more likely than not that the deferred tax assets will be utilized will have a significant impact on the estimate of the valuation allowance. We believe the impact of the section 382 changes in control limitations may result in an inability to fully remove the valuation allowance. Should the ability of the company to utilize the deferred tax assets not be assessed as more likely than not, no reduction in the valuation allowance would be made.
Allowance for Doubtful Accounts
The estimate of allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical collection and write-off experience. As trends in historical collection and write-offs change, the percentages applied against the aging categories are updated. Except were specific information indicates otherwise, the following rates were applied against the total balance due from the client when they had an amount in the applicable aging category as of the date the reserve analysis was performed:
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As of March 31, | |||||||
2006 | 2005 | ||||||
Current | 0 | % | 0 | % | |||
Past due 1-30 days | 0 | % | 0 | % | |||
Past due 31-60 days | 25 | % | 25 | % | |||
Past due 61-90 days | 50 | % | 50 | % | |||
Past due greater than 90 days | 100 | % | 100 | % |
Additional metrics related to the allowance for doubtful accounts are as follow:
As of March 31, | |||||||
2006 | 2005 | ||||||
Reserve balance | $ | 205,000 | $ | 140,000 | |||
% Of overall AR reserved | 9.0 | % | 5.2 | % | |||
Days sales outstanding (1) | 65 | 61 |
(1) Days sales outstanding is calculated by dividing net accounts receivable by revenue for the preceding quarter divided by the number of days in the preceding quarter.
As of March 31, 2006 and 2005, reserves were based on applying the standard rates to the aging categories as no specific accounts were identified as needing to be reserved.
We expect our overall reserve balance will stabilize around a range of 4-6%. As a result of our focus on credit and collections we believe a range of 4-6% range is an accurate expectation of reserve balances, although they could be reduced further or increase again should future information indicate a need to do so. Any increase in the rates used to calculate the reserve would result in the recognition of additional bad debts expense and reduce the net accounts receivable balance.
Equity-based Compensation
Aptimus accounts for equity-based compensation in accordance with the fair value recognition provisions of SFAS 123(R). The Company uses the Black Scholes Merton option valuation model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them “expected term”, the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate and consequently, the related amount recognized on the consolidated statements of earning. An increase in the estimated fair values used would result in additional equity-based compensation being included in the applicable line item of the statement of operations and an increase in additional paid-in capital.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss for the three months ended March 31, 2006 is $235,000 lower than if it had continued to account for share-based compensation under APB 25. The $235,000 of share-based compensation is comprised of the following components. On March 9, 2006 the Company re-priced 364,275 outstanding stock options that had an original exercise price between $14.43 and $17.59 per share. These options have been re priced to change the exercise price of these shares to $7.00 per share. This re pricing resulted in stock based compensation expense of $153,000 for the quarter. In addition, $55,000 of the share based compensation expense is related to existing options at the beginning of the year that had not yet vested and $23,000 of the expense is for additional option grant issuances during the quarter. In addition, there is $4,000 of stock based compensation recorded as a result of the company’s ESPP plan.
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Share based compensation included in the statement of operation is as follows:
Three months ended March 31, 2006 | ||||
Sales and marketing | $212 | |||
Internet and network | 6 | |||
Research and development | 10 | |||
General and administrative | 7 | |||
Total Equity-based compensation | $235 |
Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized on a straight-line method over their estimated useful lives or the term of the related lease, whichever is shorter. Equipment under capital leases, which all contain bargain purchase options, is recorded at the present value of minimum lease payments and is amortized using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives are as follows:
Office furniture and equipment | Five years |
Computer hardware and software | Three years |
Leasehold improvements | Three to Five years |
Intangible assets are stated at cost less accumulated amortization and are amortized using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
Email names | Two years |
Aptimus patents and trademarks | Three years |
The cost of normal maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized. Gains or losses on the disposition of assets in the normal course of business are reflected in operating expenses as part of the results of operations at the time of disposal.
Changes in circumstances such as technological advances or changes to the Company’s business model can result in the actual useful lives differing from the Company’s estimates. In the event the Company determines that the useful life of a capital asset should be shortened the Company would depreciate the net book value in excess of the estimated salvage value, over its remaining useful life thereby increasing depreciation expense. Long-lived assets, including fixed assets and intangible assets other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. A review for impairment involves developing an estimate of undiscounted cash flow and comparing this estimate to the carrying value of the asset. The estimate of cash flow is based on, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, and changes to our business model or changes in our operating performance.
21
In November 2005, the FASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We continue to evaluate the impact that the adoption of this FSP could have on our financial statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
All of the Company’s cash equivalents are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. As of March 31, 2006, however, the Company’s cash equivalents mature within one month. As of March 31, 2006, the Company believes the reported amounts of cash equivalents to be reasonable approximations of their fair values. As a result, the Company believes that the market risk and interest risk arising from its holding of financial instruments is minimal.
CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LEGAL PROCEEDINGS |
As of the date hereof, there is no material litigation pending against the Company. From time to time, the Company may be a party to litigation and claims incident to the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
DEFAULTS UPON SENIOR SECURITIES |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS AND REPORTS |
EXHIBITS INDEX
Exhibit Number | Description |
3.1* | Second Amended and Restated Articles of Incorporation of registrant. |
3.1.1(2) | Articles of Amendment filed September 16, 2000. |
3.1.2(6) | Articles of Amendment filed March 29, 2002. |
3.2* | Amended and Restated Bylaws of registrant. |
4.1* | Specimen Stock Certificate. |
4.3(3) | Rights Agreement dated as of March 12, 2002 between registrant and Mellon Investor Services LLC, as rights agent. |
10.1*(7) | Form of Indemnification Agreement between the registrant and each of its directors. |
10.2*(7) | 1997 Stock Option Plan, as amended. |
10.3*(7) | Form of Stock Option Agreement. |
10.4(1)(7) | Aptimus, Inc. 2001 Stock Plan. |
10.4.1(2)(7) | Form of Stock Option Agreement. |
10.4.2(2)(7) | Form of Restricted Stock Agreement (for grants). |
10.4.3(2)(7) | Form of Restricted Stock Agreement (for rights to purchase). |
10.5(4)(7) | Change in Control Agreement, dated as of December 6, 2002, by and between registrant and Timothy C. Choate |
10.6(4)(7) | Form of Change in Control Agreement, dated as of December 6, 2002, by and between registrant and each of certain executive managers of registrant |
10.7(5) | Form of Convertible Note Purchase Agreement, dated as of July 1, 2003, by and between the Company and certain investors. |
10.8(5) | Form of Convertible Secured Promissory Note, dated July 2003, executed by and between the Company and payable to the order of certain investors. |
10.9(5) | Form of Common Stock Warrant, dated July 2003, by and between the Company and certain investors. |
10.10(5) | Form of Security Agreement, dated as of July 1, 2003, by and between the Company and certain investors. |
10.11(5) | Form of Registration Rights Agreement, dated as of July 1, 2003, by and between the Company and certain investors. |
10.12(11) | Agreement of Lease, dated as of November 18, 2003, by and between 100 Spear Street Owner’s Corp. and the Company. |
10.13(9) | Agreement of Lease, dated as of April 29, 2004, by and between Sixth and Virginia Properties and the Company. |
10.14(8) | Stock Purchase Agreement, dated as of December 4, 2003, by and between the Company and certain investors. |
10.15(10) | Stock Purchase Agreement, dated as of March 25, 2005, by and between the Company and certain investors. |
10.16(10) | Form of Common Stock Warrant, dated March 25 2005, by and between the Company and certain investors and service providers. |
10.17(7) | Form of Stock Resale Restriction Agreement, dated as of December 23, 2005, by and between registrant and each of certain executive managers and key employees of registrant. |
31.1 | Rule 13a-14(a) Certification of the Chief Executive Officer |
31.2 | Rule 13a-14(a) Certification of the Chief Financial Officer |
32.1 | Section 1350 Certification of the Chief Executive Officer |
32.2 | Section 1350 Certification of the Chief Financial Officer |
__________
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* | Incorporated by reference to the Company’s Registration Statement on Form S-1 (No. 333-81151). |
(1) | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A, dated May 17, 2001. |
(2) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, dated November 14, 2001. |
(3) | Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 12, 2002. |
(4) | Incorporated by reference to the Company’s Annual Report on Form 10-K, dated March 28, 2003. |
(5) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, dated August 14, 2003. |
(6) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, dated May 15, 2002. |
(7) | Management compensation plan or agreement. |
(8) | Incorporated by reference to the Company’s Annual Report on Form 10-K, dated March 30, 2004 |
(9) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, dated May 17, 2004. |
(10) | Incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-124403), dated April 28, 2005. |
(11) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, dated May 13, 2005. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
APTIMUS, INC. |
Date: May 10, 2006 | /s/ John A. Wade Name: John A. Wade Title: Chief Financial Officer, authorized officer and principal financial officer |
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