SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------------------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-30827
---------------------------------------------------------------------------
ClickSoftware Technologies Ltd.
(Exact name of Registrant as specified in its charter)
ISRAEL Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
34 Habarzel Street
Tel Aviv, Israel
(Address of principal executive offices)
(972-3) 765-9400
(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
--- ---
As of June 30, 2002, there were 26,338,373 shares of the Registrant's
ordinary shares, par value 0.02 NIS, outstanding.
EXPLANATORY NOTE
THIS FORM 10-Q/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND RESTATING ITEMS
1, 2 AND 3 OF PART I OF FORM 10-Q (EXCLUDING "FACTORS THAT MAY AFFECT FUTURE
RESULTS") SOLELY TO THE EXTENT NECESSARY TO REFLECT THE RESTATEMENT OF OUR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED JUNE
30, 2002 AND 2001 AND DECEMBER 31, 2001, TO MAKE REVISIONS TO "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES" AND TO INCLUDE THE CERTIFICATIONS REQUIRED BY
THE SARBANES-OXLEY ACT OF 2002. WE HAVE MADE NO FURTHER CHANGES TO THE
PREVIOUSLY FILED 10-Q. ALL INFORMATION IN THIS FORM 10-Q/A IS AS OF JUNE 3O,
2002 AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE
RESTATEMENT.
ClickSoftware Technologies Ltd.
FORM 10-Q/A
FOR THE QUARTER ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................ 3
(b) Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and June 30, 2001.......................................................... 4
(c) Condensed Consolidated Statements of Cash Flows................................................ 6
(d) Notes to Condensed Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 32
Item 2. Changes in Securities and Use of Proceeds..................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders........................................... 32
Item 6. Exhibits and Reports on Form 8-K.............................................................. 32
Signatures............................................................................................ 33
Exhibit 99.1.......................................................................................... 36
Exhibit 99.2 ......................................................................................... 37
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
---------------------------------------
(AS RESTATAD (AS RESTATAD
SEE NOTE 2) SEE NOTE 2)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,789 $ 8,125
Short-term investments 4,107 1,846
Trade receivables, net 3,343 5,607
Other receivables and prepaid expenses 1,543 1,485
---------------------------------------
Total current assets 13,782 17,063
Property and equipment, net 2,810 2,985
Severance pay deposits 737 652
---------------------------------------
Total assets $ 17,329 $ 20,700
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 33 $ 140
Accounts payable and accrued expenses 2,976 2,664
Deferred revenues 460 68
------------------- -------------------
Total current liabilities 3,469 2,872
------------------- -------------------
LONG-TERM LIABILITIES
Long-term loans - 21
Accrued severance pay 1,416 1,379
------------------- -------------------
Total long-term liabilities 1,416 1,400
------------------- -------------------
Total liabilities 4,885 4,272
------------------- -------------------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 0.02 par value:
Authorized -- 100,000,000 as of June 30, 2002 and December 31, 2001;
Issued -- 26,377,373 shares as of of June 30, 2002 and 26,285,464 as of
December 31, 2002.
Outstanding -- 26,338,373 shares as of June 30, 2002 and 26,246,464
shares as of December 31, 2001.
102 101
Additional paid-in capital 69,186 69,143
Deferred stock compensation (251) (401)
Accumulated deficit (56,550) (52,372)
Treasury stock, at cost: 39,000 shares (43) (43)
------------------- -------------------
Total shareholders' equity 12,444 16,428
------------------- -------------------
Total liabilities and shareholders' equity $ 17,329 $ 20,700
=================== ===================
The accompanying notes are an integral part of these condensed consolidated financial statements
3
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
2002 2001
-----------------------------------------
(As Restated and (As Restated and
Reclassified - Reclassified -
see Note 2) see Note 2)
Revenues:
Software license $ 1,356 $ 1,943
Services 2,105 2,161
-----------------------------------------
Total revenues 3,461 4,104
-----------------------------------------
Cost of revenues:
Software license 281 182
Services 1,404 1,638
-----------------------------------------
Total cost of revenues 1,685 1,820
-----------------------------------------
Gross profit 1,776 2,284
-----------------------------------------
Operating expenses:
Research and development expenses, net 590 685
Selling and marketing expenses 2,708 3,448
General and administrative expenses 403 962
Amortization of deferred Stock-based compensation (1) 75 16
-----------------------------------------
Total operating expenses 3,776 5,111
-----------------------------------------
Operating loss (2,000) (2,827)
Interest and other income, net 172 137
-----------------------------------------
Net loss $ (1,828) $ (2,690)
-----------------------------------------
Basic and diluted net loss per share $ (0.07) $ (0.11)
-----------------------------------------
Shares used in computing basic and diluted net loss per share 25,299,148 25,096,522
-----------------------------------------
(1) Amortization of deferred stock-based compensation would be further classified as follows:
THREE MONTHS ENDED
JUNE 30,
----------------------------------------
2002 2001
---------------------- -----------------
Cost of revenues $ 5 $ 1
Research and development expenses 11 2
Selling and marketing expenses 3 2
General and administrative expenses 56 11
---------------------- -----------------
Total $ 75 $16
---------------------- -----------------
The accompanying notes are an integral part of these condensed consolidated financial statements
4
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2002 2001
-----------------------------------------
(As Restated and (As Restated and
Reclassified - Reclassified -
see Note 2) see Note 2)
---------------------
Revenues:
Software license $ 2,376 $ 4,947
Services 4,191 3,487
-----------------------------------------
Total revenues 6,567 8,434
-----------------------------------------
Cost of revenues:
Software license 317 424
Services 2,791 3087
-----------------------------------------
Total cost of revenues 3,108 3,511
-----------------------------------------
Gross profit 3,459 4,923
-----------------------------------------
Operating expenses:
Research and development expenses, net 1,407 1,659
Selling and marketing expenses 5,380 6,824
General and administrative expenses 892 1,734
Reorganization expenses - 294
Amortization of deferred stock-based compensation (1) 150 187
-----------------------------------------
Total operating expenses 7,829 10,698
-----------------------------------------
Operating loss (4,370) (5,775)
Interest and other income, net 192 470
-----------------------------------------
Net loss $ (4,178) $ (5,305)
-----------------------------------------
Basic and diluted net loss per share $ (0.17) $ (0.21)
-----------------------------------------
Shares used in computing basic and diluted net loss per share 25,105,598 25,037,092
-----------------------------------------
1) Amortization of deferred Stock-based compensation would be further classified as follows:
SIX MONTHS ENDED JUNE 30,
2002 2001
----------------------------------------
Cost of revenues $10 $8
Research and development expenses 22 24
Selling and marketing expenses 6 24
General and administrative expenses 112 131
----------------------------------------
Total 150 187
----------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
June 30
2002 2001
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (As Restated - (As Restated -
See Note 2) See Note 2)
Net loss $ (4,178) $ (5,305)
Adjustments to reconcile net loss to net cash used in operating activities
Expenses not affecting operating cash flows:
Depreciation 406 385
Amortization of deferred compensation 150 187
Unrealized gain from investments 104 319
Severance pay, net (48) (17)
Changes in operating assets and liabilities:
Trade receivables 2,264 (1,294)
Other receivables and other prepaid
expenses (58) (422)
Accounts payable and accrued expenses 312 244
Deferred revenues 392 (25)
Change in investments, net (2,365) 11,190
-----------------------------------------
Net cash provided by (used in) operating activities (3,021) 5,262
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (231) (385)
-----------------------------------------
Net cash (used in) investing activities (231) (385)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term loans (107) (67)
Repayment of long-term loans (21) (39)
Employee options exercised 44 178
-----------------------------------------
Net cash provided by (used in) financing activities (84) 72
-----------------------------------------
Increase (decrease) in cash and cash equivalents (3,336) 4,949
Cash and cash equivalents at beginning of period 8,125 4,438
-----------------------------------------
Cash and cash equivalents at end of period $ 4,789 $ 9,387
=========================================
Supplemental cash flow information:
Cash paid for interest 5 4
=========================================
The accompanying notes are an integral part of these condensed consolidated financial statements
6
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2002 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 AND JUNE 30, 2001)
(IN THOUSANDS EXCEPT SHARE DATA AND SHARE NUMBERS)
1. BASIS OF PRESENTATION
The accompanying condensed unaudited interim consolidated financial
statements have been prepared by ClickSoftware Technologies Ltd.
("ClickSoftware" or the "Company") in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. These financial statements reflect all adjustments, consisting of
normal recurring adjustments and accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position of
the Company as of June 30, 2002 and the results of operations and cash
flows for the interim periods indicated in conformity with generally
accepted accounting principles applicable to interim periods. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the audited financial
statements and notes thereto of ClickSoftware for the year ended December
31, 2001 that are included in ClickSoftware's Form 10-K/A filed with the
Securities and Exchange Commission on January 24, 2003. The results of
operations presented are not necessarily indicative of the results to be
expected for future quarters or for the year ending December 31, 2002. The
balance sheet at December 31, 2001 has been derived from the audited
financial statements as of and for the year ended December 31, 2001, but
does not include all the information and footnotes required by generally
accepted accounting principles for annual financial statements. \
2. RESTATEMENT
During the third quarter of 2002, the Company's audit committee, with the
assistance of outside advisors, conducted a review of its financial
statements for 2000 and 2001 and for the first six months of 2002. On
October 21, 2002, the Company announced that it would restate its financial
statements for 2000 and 2001 and for the first six months of 2002.
Following the reaudit of the Company's financial statements, the Company is
restating its financial statements for the announced periods and for the
year ended December 31, 1999. The restatement results primarily from the
recognition of revenue from sales to reseller customers and other
customers, where revenue has been recognized prematurely or should not have
been recognized at all. The Company has also determined to reclassify
royalty expenses related to grants received from the Chief Scientist Office
from Selling and Marketing expenses to Cost of Revenues expenses.
This restatement is further discussed in note 3 of the notes to the
consolidated financial statements of the Company that are included on the
Company's Form 10-K/A for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on January 24, 2003.
The Company applied in these financial statements the SEC staff guidance to
classify royalty expenses related to grants received from Chief Scientist
Office as part of cost of revenues. Accordingly, the Company reclassified
the following amounts from Selling and Marketing expenses to Cost of
Revenues expenses: $297,000 and $168,000 for the six and three months ended
June 30, 2002, respectively and $386,000 and $141,000 for the six and three
months ended June 30, 2001, respectively.
7
The impact of the adjustments on the financial statements of the Company is
set forth below.
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE SHEET:
DECEMBER 31, EFFECT OF DECEMBER 31,
2001 RESTATEMENT 2001
---------------------------------------------------------------
(AS PREVIOUSLY (AS RESTATED)
ASSETS REPORTED)
CURRENT ASSETS:
Cash and cash equivalents $8,125 $8,125
Short-term investments 1,846 1,846
Trade receivables, net 6,623 (1,016) 5,607
Other receivables and prepaid expenses 1,671 (186) 1,485
---------------------------------------------------------------
Total current assets 18,265 (1,202) 17,063
Property and equipment, net 3,450 (465) 2,985
Severance pay deposits 652 652
---------------------------------------------------------------
Total assets $22,367 $(1,667) $20,700
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $140 $140
Accounts payable and accrued expenses 2,785 (121) 2,664
Deferred revenues 68 68
---------------------------------------------------------------
Total current liabilities 2,993 (121) 2,872
---------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term loans 21 21
Accrued severance pay 1,379 1,379
---------------------------------------------------------------
Total long-term liabilities 1,400 1,400
---------------------------------------------------------------
Total liabilities 4,393 (121) 4,272
---------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 0.02 par value: 101 101
Additional paid-in capital 69,143 69,143
Deferred stock compensation (401) (401)
Accumulated deficit (50,826) (1,546) (52,372)
Treasury stock, at cost:39,000 shares (43) (43)
---------------------------------------------------------------
Total shareholders' equity 17,974 (1,546) 16,428
---------------------------------------------------------------
Total liabilities and shareholders' equity $22,367 $(1,667) $20,700
===============================================================
8
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE SHEET:
JUNE 30, EFFECT OF JUNE 30,
2002 RESTATEMENT 2002
---------------------------------------------------------------
(AS PREVIOUSLY (AS RESTATED)
ASSETS REPORTED)
CURRENT ASSETS:
Cash and cash equivalents $4,789 $4,789
Short-term investments 4,107 4,107
Trade receivables, net 5,189 (1,846) 3,343
Other receivables and prepaid expenses 1,543 1,543
---------------------------------------------------------------
Total current assets 15,628 (1,846) 13,782
Property and equipment, net 3,161 (351) 2,810
Severance pay deposits 737 737
---------------------------------------------------------------
Total assets $19,526 $(2,197) $ 17,329
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $33 $33
Accounts payable and accrued expenses 3,156 (180) 2,976
Deferred revenues 460 460
---------------------------------------------------------------
Total current liabilities 3,649 (180) 3,469
---------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term loans - -
Accrued severance pay 1,416 1,416
---------------------------------------------------------------
Total long-term liabilities 1,416 1,416
---------------------------------------------------------------
Total liabilities 5,065 (180) 4,885
---------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 0.02 par value: 102 102
Additional paid-in capital 69,186 69,186
Deferred stock compensation (251) (251)
Accumulated deficit (54,533) (2,017) (56,550)
Treasury stock, at cost: 39,000 shares (43) (43)
---------------------------------------------------------------
Total shareholders' equity 14,461 (2,017) 12,444
---------------------------------------------------------------
Total liabilities and shareholders' equity $19,526 $(2,197) $17,329
===============================================================
9
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR PERIOD ENDED JUNE 30, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
STATEMENT OF OPERATIONS:
2002 2002 2002 2002
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
Revenues: REPORTED) RESTATEMENT) RECLASSFICATION) RECLASSIFIED)
Software license fees $2,476 (1,120) $1,356
Services 2,105 2,105
------------------------------------------------------------------------------------
Total revenues 4,581 (1,120) 3,461
------------------------------------------------------------------------------------
Cost of revenues:
Software license 229 (39) 91 281
Services 1,327 77 1,404
------------------------------------------------------------------------------------
Total cost of revenues 1,556 (39) 168 1,685
------------------------------------------------------------------------------------
Gross profit 3,025 (1,081) (168) 1,776
------------------------------------------------------------------------------------
Operating expenses:
Research and development expenses,
net 590 590
Selling and marketing expenses 2,933 (57) (168) 2,708
General and administrative
expenses 965 (562) 403
Amortization of deferred
Stock-based compensation 75 75
------------------------------------------------------------------------------------
Total operating expenses 4,563 (619) (168) 3,776
------------------------------------------------------------------------------------
Operating loss (1,538) (462) - (2,000)
Interest and other income, net 172 172
------------------------------------------------------------------------------------
Net loss $(1,366) (462) $(1,828)
------------------------------------------------------------------------------------
Basic and diluted net loss per share $(0.05) $(0.07)
------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,299,148 25,299,148
------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS: SIX MONTHS ENDED JUNE 30,
2002 2002 2002 2002
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
Revenues: REPORTED) RESTATEMENT) RECLASSFICATION) RECLASSIFIED)
Software license fees $4,081 $(1,705) $2,376
Services 4,191 4,191
-------------------------------------------------------------------------------------
Total revenues 8,272 (1,705) 6,567
-------------------------------------------------------------------------------------
Cost of revenues:
Software license 229 (59) 147 317
Services 2,641 150 2,791
-------------------------------------------------------------------------------------
Total cost of revenues 2,870 (59) 297 3,108
-------------------------------------------------------------------------------------
Gross profit 5,402 (1,646) (297) 3,459
-------------------------------------------------------------------------------------
Operating expenses:
Research and development expenses,
net 1,407 1,407
Selling and marketing expenses 5,791 (114) (297) 5,380
General and administrative
expenses 1,953 (1,061) 892
Amortization of deferred
Stock-based compensation 150 150
-------------------------------------------------------------------------------------
Total operating expenses 9,301 (1,175) (297) 7,829
-------------------------------------------------------------------------------------
Operating loss (3,899) (471) - (4,370)
Interest and other income, net 192 192
-------------------------------------------------------------------------------------
Net loss $(3,707) (471) $(4,178)
-------------------------------------------------------------------------------------
Basic and diluted net loss per share $(0.15) $(0.17)
-------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,105,598 25,105,598
-------------------------------------------------------------------------------------
10
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR PERIOD ENDED JUNE 30, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
STATEMENT OF OPERATIONS:
2001 2001 2001 2001
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
Revenues: REPORTED) RESTATEMENT) RECLASSFICATION)) RECLASSIFIED)
Software license fees $2,883 (940) $1,943
Services 2,161 2,161
------------------------------------------------------------------------------------
Total revenues 5,044 (940) 4,104
------------------------------------------------------------------------------------
Cost of revenues:
Software license 138 (37) 81 182
Services 1,578 60 1,638
------------------------------------------------------------------------------------
Total cost of revenues 1,716 (37) 141 1,820
------------------------------------------------------------------------------------
Gross profit 3,328 (903) (141) 2,284
------------------------------------------------------------------------------------
Operating expenses:
Research and development expenses,
net 685 685
Selling and marketing expenses 3,646 (57) (141) 3,448
General and administrative
expenses 962 962
Amortization of deferred
Stock-based compensation 16 16
------------------------------------------------------------------------------------
Total operating expenses 5,309 (57) (141) 5,111
------------------------------------------------------------------------------------
Operating loss (1,981) (846) - (2,827)
Interest and other income, net 137 137
------------------------------------------------------------------------------------
Net loss $(1,844) (846) $(2,690)
------------------------------------------------------------------------------------
Basic and diluted net loss per share $(0.07) $(0.11)
------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,096,522 25,096,522
------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS: SIX MONTHS ENDED JUNE 30,
2001 2001 2001 2001
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
Revenues: REPORTED) RESTATEMENT) RECLASSFICATION)) RECLASSIFIED)
Software license fees $5,986 $(1,039) $4,947
Services 3,574 (87) 3,487
-------------------------------------------------------------------------------------
Total revenues 9,560 (1,126) 8,434
-------------------------------------------------------------------------------------
Cost of revenues:
Software license 212 (37) 249 424
Services 2,950 137 3,087
-------------------------------------------------------------------------------------
Total cost of revenues 3,162 (37) 386 3,511
-------------------------------------------------------------------------------------
Gross profit 6,398 (1,089) (386) 4,923
-------------------------------------------------------------------------------------
Operating expenses:
Research and development expenses,
net 1,659 1,659
Selling and marketing expenses 7,312 (102) (386) 6,824
General and administrative
expenses 1,789 (55) 1,734
Reorganization expenses 294 294
Amortization of deferred
Stock-based compensation 187 187
-------------------------------------------------------------------------------------
Total operating expenses 11,241 (157) (386) 10,698
-------------------------------------------------------------------------------------
Operating loss (4,843) (932) - (5,775)
Interest and other income, net 470 470
-------------------------------------------------------------------------------------
Net loss $(4,373) (932) $(5,305)
-------------------------------------------------------------------------------------
Basic and diluted net loss per share $(0.17) $(0.21)
-------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,037,092 25,037,092
-------------------------------------------------------------------------------------
11
3. REVENUE RECOGNITION
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 97-2,
Software Revenue Recognition, as amended.
In accordance with SOP 97-2, revenues from software license fees are
recognized when persuasive evidence of an arrangement exists, the software
product covered by written agreement or a purchase order signed by the
customer has been delivered, the license fees are fixed and determinable
and collection of the license fees is considered probable. Revenues from
software product license agreements, which require significant
customization and modification of the software product are deferred and
recognized using the percentage-of-completion method of contract accounting
in accordance with AICPA Statement of Position 81-1. When software
arrangements involve multiple elements the Company allocates revenue to
each element based on the relative fair values of the elements. The
Company's determination of fair value of each element in multiple element
arrangements is based on vendor-specific objective evidence (VSOE). The
Company limits its assessment of VSOE for each element to the price charged
when the same element is sold separately. If vendor specific objective
evidence of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered elements of
the arrangement, revenue is deferred until such evidence exist for the
undelivered elements, or until all elements are delivered, whichever is
earlier.
If the fee due from the customer is not fixed or determinable, revenue is
recognized as payments become due from the customer, assuming all other
revenue recognition criteria have been met. Generally, we consider all
arrangements with extended payment terms greater than nine months not to be
fixed or determinable.
We also enter into license arrangements with resellers whereby revenues are
recognized upon sale through to the end user by the reseller.
Service revenues include consulting services, post-contract customer
support and training. Consulting revenues are generally recognized on a
time and material basis. However, revenues from certain fixed-price
contracts are recognized on the percentage of completion basis.
Post-contract customer support agreements provide technical support and the
right to unspecified updates on an if-and-when-available basis.
Post-contract customer support revenues are recognized ratably over the
term of the support period (generally one year) and training and other
service revenues are recognized as the related services are provided.
4. NET LOSS PER SHARE.
ClickSoftware computes net loss per share of ordinary shares in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Under the provisions of SFAS No. 128 basic an
diluted net loss per share ("Basic EPS") is computed by dividing net loss
by the weighted average number of shares of common stock outstanding,
excluding ordinary shares held by a trustee reserved for allocation against
employee options granted but not yet exercised. Diluted net loss per
ordinary share is the same as basic net loss per ordinary share for all
periods presented, as the effects of the Company's potential ordinary
shares were antidilutive
A total of 4,105,992 and 3,266,161 incremental shares were excluded from
the calculation of diluted net loss per ordinary share for the six months
ended June 30,2002 and June 30, 2001,respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to us that are based on the
beliefs of our management as well as assumptions made by and information
currently available to our management, including statements related to products,
markets, and future results of operations and profitability, and may include
implied statements concerning market acceptance of our products, and our growing
leadership role in the marketplace. In addition, when used in this report, the
words "likely," "will," "suggests," "may," "would," "could," "anticipate,"
"believe," "estimate," "expect," "intend," "plan, "predict" and similar
expressions and their variants, as they relate to us or our management, may
identify forward-looking statements. Such statements reflect our judgment as of
the date of this annual report on Form 10-K with respect to future events, the
outcome of which is subject to certain risks, including the risk factors set
forth herein, which may have a significant impact on our business, operating
results or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein. We undertake no obligation to update forward-looking statements, whether
as a result of new information, future events or otherwise.
OVERVIEW
Since late 1996, we have focused on providing service optimization software
products based on our W-6 Service Scheduler and TechMate technologies. We have
also invested significant resources in developing products based on these
technologies including, until 2001, increasing the number of our employees
involved in research and development, selling and marketing, and professional
services. During 2001 and the first nine months of 2002, the number of our
employees decreased due to cost cutting measures.
We believe that in today's economy successful businesses must constantly
increase the performance of existing service resources. Our products emphasize
the use of optimization tools for performance enhancement in the service
environment. In September 1999, we began marketing our product lines under new
names, CLICKSCHEDULE and CLICKFIX and in May 2000, we changed our company name
to ClickSoftware Technologies Ltd. Currently our product offering for service
optimization applications includes: CLICKSCHEDULE, CLICKFIX, CLICKANALYZE,
CLICKPLAN, CLICKMOBILE, AND CLICKFORECAST.
We derive revenues from software licensing and services. Our operating history
shows that a significant percentage of our quarterly revenues comes from orders
placed toward the end of a quarter. Software license revenues are comprised of
perpetual software license fees primarily derived from contracts with our direct
sales clients and our indirect distribution channels. We recognize revenues in
accordance with the AICPA Statement of Position 97-2, "SOFTWARE REVENUE
RECOGNITION," or SOP 97-2, as amended (see note 3 of the notes to our interim
consolidated financial statements).
Service revenues are comprised of revenues from consulting, training, and
post-contract customer support. Consulting services are billed at an agreed-upon
rate plus incurred expenses. Clients licensing our products generally purchase
consulting agreements from us. Post-contract customer support arrangements
provide technical support and the right to unspecified upgrades on an if-and
when-available basis. Post-contract customer support revenues are charged as a
percentage of license fees depending upon the level of support coverage
requested by the customer. Our products are marketed worldwide through a
combination of a direct sales force, consultants and various business
relationships we have with implementation and technology companies and
resellers.
Cost of revenues consists of cost of software license revenues and cost of
services.. Cost of software license revenues consists of expenses related to
media duplication and packaging of our products, costs of software purchased or
licensed for resale and royalties payments to the Chief Scientist. Cost of
services consists of expenses related to salaries and expenses of our
13
professional services organizations, costs related to third-party consultants,
and equipment costs and royalties payments to the Chief Scientist.
Operating expenses are categorized into research and development expenses, sales
and marketing expenses, general and administrative expenses, and stock-based
compensation.
Research and development expenses consist primarily of personnel costs to
support product development, net of grants received from the Chief Scientist. In
return for some of these grants, we are obligated to pay the Israeli Government
royalties as described below which are included in cost of services expenses.
Software research and development costs incurred prior to the establishment of
technology feasibility are included in research and development expenses as
incurred.
Selling and marketing expenses consist primarily of personnel and related costs
for marketing and sales functions, including related travel, direct advertising
costs, expenditures on trade shows, market research and promotional printing.
General and administrative expenses consist primarily of personnel and related
costs for corporate functions, including information services, finance,
accounting, human resources, facilities, provision for doubtful accounts, legal
and costs related to activity as public company.
Amortization of stock- based compensation represents the aggregate difference,
at the date of grant, between the respective exercise price of stock options and
the deemed fair market value of the underlying stock. Deferred Stock-based
compensation is amortized over the vesting period of the underlying options,
generally four years.
Interest and other income include interest income earned on our cash, cash
equivalents and short-term investments, offset by interest expense, and also
includes the effects of foreign currency translations.
The functional currency of our operations is the U.S. dollar, which is the
primary currency in the economic environment in which we conduct our business. A
significant portion of our research and development expenses is incurred in New
Israeli Shekels ("NIS") and a portion of our revenues and expenses are incurred
in British Pounds and the European Community Euro. The results of our operations
are subject to fluctuations in these exchange rates which are influenced by
various global economic factors.
The effects of foreign currency exchange rates on our results of operations for
the years ended December 31, 1999, 2000 and the six months of 2001 were
immaterial.
Our tax rate will mainly reflect a mix of the U.S. statutory tax rate on our
U.S. income, the U.K statutory tax rate on our U.K income, the Belgium statutory
tax rate on our Belgium income, the Australian statutory tax rate and the
Israeli tax rate discussed below. Israeli companies are generally subject to
income tax at the rate of 36% of taxable income. The majority of our income,
however, is derived from our company's capital investment program with "Approved
Enterprise" status under the Law for the Encouragement of Capital Investments,
and is eligible therefore for tax benefits. As a result of these benefits, we
will have a tax exemption on income derived during the first two years in which
this investment program produces taxable income, and a reduced tax rate of
15-25% for the next 5 to 8 years. In the event of a distribution of a cash
dividend out of retained earnings that were exempt from tax due to its Approved
Enterprise status, we would be required to pay 25% corporate income tax on
income from which the dividend was distributed. All of these tax benefits are
subject to various conditions and restrictions. There can be no assurance that
we will obtain approval for additional Approved Enterprise Programs, or that the
provisions of the law will not change.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
14
liabilities. These estimates are evaluated by us on an on-going basis. We base
our estimates on our historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our recognition of revenue requires judgments and estimates which may
significantly impact our consolidated financial statements.
Revenue results are difficult to predict, and any shortfall in revenues or delay
in recognizing revenues could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses. In
addition, the timing of our revenue recognition influences the timing of certain
expenses, such as commissions and royalties. We follow very specific and
detailed guidelines in measuring revenues, however, certain judgments affect the
application of our revenue policy.
Our revenues are principally derived from the licensing of our software and the
provision of related services. We recognize revenues in accordance with SOP
97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product has been delivered, the
license fees are fixed and determinable, and collection of the license fees is
considered probable. License fees from software arrangements which involve
multiple elements, such as post-contract customer support, consulting and
training, are allocated to each element of the arrangement based on the relative
fair values of the elements. We determine the fair value of each element in
multiple-element arrangements based on vendor specific objective evidence, or
VSOE. We determine the VSOE for each element according to the price charged when
the element is sold separately. In judging the probability of collection of
software license fees we continuously monitor collection and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. In connection with customers with whom we have no previous
experience, we may utilize independent resources to evaluate the
creditworthiness of those customers. For some customers, typically those with
whom we have long-term relationships, we may grant extended payment terms. We
perform on-going credit evaluations of our customers. If the financial situation
of any of our customers were to deteriorate, resulting in an impairment of their
ability to pay the indebtedness they incur with us, additional allowances may be
required.
Our software products generally do not require significant customization or
modification. However, when such customization or modification is necessary, the
revenue generated by those activities is deferred and recognized using the
percentage of completion method.
Service revenues include post-contract customer support, consulting and
training. Post-contract customer support arrangements provide for technical
support and the right to unspecified updates on an if-and-when-available basis.
Revenues from those arrangements are recognized ratably over the term of the
arrangement, usually one year. Consulting services are recognized on a time and
material basis, or in a fixed price contract, on a percentage of completion
basis. Revenues from training are recognized as the services are provided.
In recognizing revenues based on the rate of completion method, we estimate time
to completion with revisions to estimates reflected in the period in which
changes become known. If we do not accurately estimate the resources required or
the scope of work to be performed, or do not manage our projects properly within
the planned periods of time or satisfy our obligations under the contracts, then
future services margins may be significantly and negatively affected or losses
on existing contracts may need to be recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). This statement is effective for fiscal years beginning after May
15, 2002. SFAS 145 rescinds Statement 4, which required all gains and losses
from extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
15
criteria in Opinion 30 will now be used to classify those gains and losses. SFAS
145 also amends Statement 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions. The adoption of this statement
did not have a material impact on our results of operations, financial position
or cash flows.
RESULTS OF OPERATIONS
Our operating results for each of the three months and six months ended June 30,
2002 and 2001, expressed as a percentage of revenues are as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-----------------------------------------------------------------------
2002 2001 2002 2001
(AS RESTATED (AS RESTATED (AS RESTATED (AS RESTATED
AND AND AND AND
RECLASSIFIED) RECLASSIFIED) RECLASSIFIED) RECLASSIFIED)
-----------------------------------------------------------------------
Revenues:
Software license 39% 47% 36% 59%
Services 61% 53% 64% 41%
-----------------------------------------------------------------------
Total revenues 100% 100% 100% 100%
Cost of revenues:
Software license 8% 4% 5% 5%
Services 41% 40% 43% 37%
-----------------------------------------------------------------------
Total cost of revenues 49% 44% 48% 42%
-----------------------------------------------------------------------
Gross profit 51% 56% 52% 58%
-----------------------------------------------------------------------
Operating expenses:
Research and development expenses, net 17% 17% 21% 20%
Selling and marketing expenses 78% 84% 82% 81%
General and administrative expenses 12% 24% 14% 20%
Reorganization expenses - - - 3%
Share-based compensation 2% - 2% 2%
-----------------------------------------------------------------------
Total operating expenses 109% 125% 119% 126%
-----------------------------------------------------------------------
Operating loss (58%) (69%) (67%) (68%)
Interest and other income, net 5% 3% 3% 5%
-----------------------------------------------------------------------
Net loss (53%) (66%) (64%) (63%)
=======================================================================
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(As restated and reclassified)
During the third quarter of 2002, our audit committee, with the assistance of
outside advisors, conducted a review of our financial statements for 2000 and
2001 and for the first six months of 2002. On October 21, 2002, we announced
that we would restate our financial statements for 2000 and 2001 and for the
first six months of 2002. In addition, we announced that our audit committee
decided to recommend to our shareholders that we terminate our relationship with
Luboshitz Kasierer, formerly a member firm of Arthur Andersen, as our auditors
and to appoint new auditors. At a shareholders' meeting held on December 31,
2002, our shareholders authorized the engagement of Brightman Almagor, a member
of Deloitte Touche Tohmatsu.
Following the reaudit of our financial statements, we are restating our
financial statements for the announced periods and for the year ended December
31, 1999. The restatement results primarily from the recognition of revenue from
sales to reseller customers and other customers,
16
where revenue has been recognized prematurely or should not have been recognized
at all. We have also determined to reclassify royalty expenses related to grants
received from Chief Scientist Office from Selling and Marketing expenses to Cost
of Revenues expenses.
The Company applied in these financial statements the SEC staff guidance to
classify royalty expenses related to grants received from Chief Scientist Office
as part of cost of revenues. Accordingly, the Company reclassified the following
amounts from Selling and Marketing expenses to Cost of Revenues expenses:
$297,000 and $168,000 for the six and three months ended June 30, 2002,
respectively and $386,000 and $141,000 for the six and three months ended June
30, 2001, respectively.
REVENUES: Company revenues decreased by $0.6 million or 16% to $3.5 million for
the three months ended June 30, 2002 from $4.1 million for the three months
ended June 30, 2001. This decrease was the result of the general economic
conditions. Specifically, increased scrutiny of capital budgets has resulted in
unexpected delays in the larger opportunities and smaller than expected initial
orders on the deals that did successfully close.
SOFTWARE LICENSE REVENUES: Software license revenues were $1.4 million or 39% of
total revenues for the three months ended June 30, 2002, and $1.9 million or 47%
of total revenues for the three months ended June 30, 2001. The decrease in
software license revenues was the result of the general economic conditions
during the second quarter of 2002.
SERVICES Service revenues were $2.1 million or 61% of revenues for the three
months ended June 30, 2002, and $2.2 million or 53% of total revenue in the
three months ended June 30, 2001. The decrease in services on an absolute basis
was primarily due to a decrease in license revenues in the first quarter of
2002.
COST OF REVENUES: Cost of revenues were $1.7 million or 49% of revenues for the
three months ended June 30, 2002, and $1.8 million or 44% of revenues for the
three months ended June 30, 2001. The decrease in the cost of revenues on an
absolute basis was primarily due to a decrease in service deployment costs
partially offset by an increase in third party licensing and deployment costs.
COST OF SOFTWARE LICENSES: Cost of software license revenues were $281,000 or 8%
of revenues for the three months ended June 30, 2002, and $182,000 or 4% of
revenue for the three months ended June 30, 2001. The increase in the cost of
software licenses was due to an increase in new third parties' licenses and
adaptors sold to new customers in the second quarter of 2002.
COST OF SERVICES: Cost of services was $1.4 million or 41% of revenues for the
three months ended June 30, 2002, and $1.6 million or 40% of revenues for the
three months ended June 30, 2001. The decrease in the cost of service and
maintenance on an absolute basis was primarily due to lower license revenue
generated in the first quarter of 2002 as well as service improvements reducing
implementation time associated with our products.
GROSS PROFIT: Gross profit as a percentage of revenues was $1.8 million, or 51%
for the three months ended June 30, 2002 and $2.3 million, or 56% for the three
months ended June 30, 2001. The decrease in the gross profit by $0.5 million or
22% was primarily due to lower revenues in the three months ended June 30, 2002.
OPERATING EXPENSES: Total operating expenses were $3.8 million or 109% of
revenues for the three months ended June 30, 2002, and $5.1 million or 125% of
revenues for the three months ended June 30, 2001. The decrease in operating
expenses was primarily due to the decreases in selling and marketing costs and
in General and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $590,000 or 17% of revenues for the three months ended
June 30, 2002, and $685,000 or 17% of revenues for the three months ended June
30, 2001.The decrease in research and development expenses on an absolute basis
is due to cost controls implemented during the past twelve months.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $2.7 million
or 78% of revenues for the three months ended June 30, 2002, and $3.4 million or
84% of revenues for the
17
three months ended June 30, 2001. The decrease in selling and marketing expenses
was due to cost controls implemented during the year as well as the decrease in
revenues that reduced related variable expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$403,000 or 12% of revenues for the three months ended June 30, 2002, and
$962,000 or 24% of revenues for the three months ended June 30, 2001. The
decrease in general and administrative expenses was due primarily to a decrease
in bad debt expenses by $263,000 and a significant decrease in other general and
administrative expenses.
AMORTIZATION OF STOCK-BASED COMPENSATION: Stock-based compensation for the three
months ended June 30, 2002 amounted to $75,000 of previously recorded deferred
compensation. Stock-based compensation for the three months ended June 30, 2001
amounted to $16,000.
During the quarter, the U.S. dollar amount of expenses incurred in NIS decreased
as a result of depreciation of the NIS by 17% in the second quarter of 2002
compared to the second quarter of 2001.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(As restated and reclassified)
REVENUES: Company revenues decreased $1.8 million or 22% to $6.6 million for the
six months ended June 30, 2002 from $8.4 million for the six months ended June
30, 2001. This decrease was the result of the general economic downturn.
Specifically, increased scrutiny of capital budgets has resulted in unexpected
delays in larger opportunities and smaller than expected initial orders on the
deals that did successfully close.
SOFTWARE LICENSE REVENUES: Software license revenues were $2.4 million or 36% of
total revenues for the six months ended June 30, 2002, and $4.9 million or 59%
of total revenues for the six months ended June 30, 2001. The decrease in
software license revenues was primarily the result of the general economic
downturn.
SERVICES: Service revenues were $4.2 million or 64% of revenues for the six
months ended June 30, 2002, and $3.5 million or 41% of total revenue in the six
months ended June 30, 2001. The increase in service revenues was primarily due
to an increase in post-contract support agreements during the first two quarters
of 2002.
COST OF REVENUES: Cost of revenues were $3.1 million or 48% of revenues for the
six months ended June 30, 2002, and $3.5 million or 42% of revenues for the six
months ended June 30, 2001. The decrease in the cost of revenues on an absolute
basis was primarily due to a decrease in service deployment costs resulting from
operational efficiencies and a decrease in royalty expenses.
COST OF SOFTWARE LICENSES: Cost of software license revenues were $317,000 or 5%
of revenue for the six months ended June 30, 2002, and $424,000 or 5% of revenue
for the six months ended June 30, 2001. The decrease in the cost of software
licenses was due to decrease in royalty expenses.
COST OF SERVICES: Cost of services revenues was $2.8 million or 43% of revenues
for the six months ended June 30, 2002, and $3.1 million or 37% of revenues for
the six months ended June 30, 2001. The decrease in the cost of services was
primarily due to service improvements reducing implementation time associated
with our products.
Gross profit as a percentage of revenues was $3.5 million, or 52% for the six
months ended June 30, 2002 and $4.9 million, or 58% for the six months ended
June 30, 2001. The decrease in the
18
gross profit by $1.5 million or 30% was primarily due to lower revenues in the
six months ended June 30, 2002, partially upset by $0.4 million decrease in cost
of revenues.
OPERATING EXPENSES: Total operating expenses were $7.8 million or 119% of
revenues for the six months ended June 30, 2002, and $10.7 million or 126% of
revenues for the six months ended June 30, 2001. The decrease in operating
expenses was primarily due to the decreases in selling and marketing costs,
decrease in bad debt expenses and one-time reorganization expenses incurred in
the first quarter of 2001.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $1.4 million or 21% of revenues for the six months ended
June 30, 2002, and $1.7 million or 20% of revenues for the six months ended June
30, 2001. The decrease in research and development expenses on an absolute basis
is due to cost controls implemented during the past few quarters.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $5.4 million
or 82% of revenues for the six months ended June 30, 2002, and $6.8 million or
81% of revenues for the six months ended June 30, 2001. The decrease in selling
and marketing expenses was due to cost controls implemented during the year of
2001 as well as the decrease in revenues that reduced related variable expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$0.9 million or 14% of revenues for the six months ended June 30, 2002, and $1.7
million or 20% of revenues for the six months ended June 30, 2001. The decrease
in general and administrative expenses was due primarily to a decrease in bad
debt expenses by $472,000 and a significant decrease in other general and
administrative expenses.
REORGANIZATION COSTS: Reorganization costs were 0.3 or 3% of revenues for the
six months ended June 30,2001. These expenses were primarily costs associated
with severance payments to terminated employees. There were no reorganization
costs in the six months ended June 30,2002.
AMORTIZATION OF STOCK-BASED COMPENSATION: Stock-based compensation for the six
months ended June 30, 2002 amounted to $150,000 of previously recorded deferred
compensation. Stock-based compensation for the six months ended June 30, 2001
amounted to $187,000. The decrease in stock-based compensation is attributed to
the fact that the amortization of the Deferred stock-based compensation
progressively decreases over the four-year amortization period.
During the first six months of 2002, the U.S. dollar amount of expenses incurred
in NIS decreased as a result of depreciation of the NIS by 15% in the six months
ended June 30, 2002 compared to the six months ended June 30,2001.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002 we had cash and cash equivalents of $4.8 million and
short-term investments of $4.1 million totaling of $8.9 million.
From inception through our IPO on June 22, 2000, we financed our operations
primarily through the private placement of equity securities, which through
December 31, 1999 totaled approximately $32.0 million, net of issuance costs.
Our initial public stock offering of ordinary shares realized $28.3 million, net
of underwriter discount and other issuance costs.
Net cash provided (used) in the company's operating activities primarily
consisted of net losses for the period and changes in short term investment
before non-cash expenses primarily consisting of deferred compensation and
depreciation, in addition to net changes in trade receivables, prepaid expenses
and changes in accounts payable. For the six months ended June 30, 2002, cash
used in operations was $3.0 million, comprised of our net loss of $4.2 million,
a decrease in trade receivables of $2.3 million, an increase in other
receivables of $58,000, an increase in accounts payable of $312, 000, an
increase in deferred revenue of $392,000, partially offset by non-cash charges
of $612,000 and an increase in short term investments of $2.4 million. For the
six months ended June 30, 2001, net cash provided by operations was $5.3
million, comprised of our net loss of $5.3 million, an increase in trade
receivables of $1.3 million, an increase in other receivables of $422,000, an
increase in accounts payable of
19
$244, 000, a decrease in deferred revenue of $25,000, a decrease in short term
investments of $11.2 million partially offset by non-cash charges of $874,000.
Net cash used in investing activities for the six months ended June 30, 2002 was
$ $231,000 and was invested primarily in purchases of equipment and systems,
including computer equipment and fixtures and furniture. Net cash provided from
investing activities for the six months ended June 30, 2001 was $385,000 and was
invested primarily in leasehold improvements and purchases of equipment and
systems, including computer equipment and fixtures and furniture.
As of June 30, 2002 we had outstanding trade receivables of approximately $3.3
million. Our trade receivables typically have 30 to 60 day terms, although we
have also negotiated longer payment plans with some of our clients. Current
economic conditions have increased the difficulties in collecting accounts
receivables and the typical collection period has lengthened. For the six months
ended June 30, 2002 our DSO (Day Sales Outstanding) was 87 days, an increase of
14 days from 73 for the six months ended June 30, 2001.
Since inception, we have received aggregate payments from the Government of the
State of Israel in the amount of $5.9 million related to research and
development. As of June 30, 2002, we have paid or accrued royalties related to
these funds in the amount of $2.2 million.
The Company also has an aggregate of $33,000 in term loans relating to
borrowings for working capital.
We have a $1.0 million unsecured line of credit with an Israeli bank. Our bank
in Israel has issued two standby letters of credit on our behalf. One is for
$125,000 for tenant improvements related to our facilities in Israel. This
letter of credit will mature in September 2003. The other is for $817,000 and
secures our performance pursuant to projects with the Government of Israel.
Portions of this letter will mature between August 2002 and February 2003 and
are subject to renewal. Silicon Valley Bank has issued a letter of credit on our
behalf in the amount of $205,560 to assure performance under the terms of our
Campbell, CA lease. This letter of credit will mature on the earlier of
ClickSoftware achieving four profitable quarters, or June 30, 2007.
Additionally, Bank Leumi in the Silicon Valley has issued a letter of credit on
our behalf in the amount of $1.7 million to secure our performance of a project
in Australia. This letter of credit will mature between October 2002 and August
2003. We have an arrangement with Bank Leumi for us to deposit funds to secure
this letter of credit of 100%-115% of the credit amount. The deposit under this
arrangement totaled $2 million as of June 30,2002.
Our capital requirements depend on numerous factors, including market acceptance
of our products, the resources we devote to developing, marketing, selling and
supporting our products, the timing and extent of establishing additional
international operations and other factors. We intend to continue investing
significant resources in our sales and marketing and research and development
operations in the future. We believe that our current cash balance will be
sufficient to fund our expenses until we reach profitability.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following factors and other information in
this statement before you decide to invest in our ordinary shares. If any of the
negative events referred to below occur, our business, financial condition and
results of operations could suffer. In any such case, the trading price of our
ordinary shares could decline, and you may lose all or part of your investment.
20
RISKS RELATED TO OUR BUSINESS
THE ECONOMIC OUTLOOK MAY ADVERSELY AFFECT THE DEMAND FOR OUR CURRENT PRODUCTS
AND THE COMPANY'S RESULTS OF OPERATIONS. Current predictions for the general
economy continue to indicate uncertain economic conditions. Weak economic
conditions may cause continued reductions in information technology spending
generally. We experienced and may continue to experience an adverse impact on
the demand for our products, which would adversely affect our results of
operations. We may not accurately gauge the effect of the general economy on our
business. As a result, we may not react to such changing conditions in a timely
manner, which may result in an adverse impact on our results of operations. Any
such adverse impacts to our results of operations from a changing economy may
cause the price of our ordinary shares to decline.
WE HAVE NOT ACHIEVED PROFITABILITY. We expect to continue to incur significant
sales and marketing and research and development expenses. Some of our expenses,
such as administrative and management payroll and rent and utilities, are fixed
in the short term and cannot be quickly reduced to respond to decreases in
revenues. As a result, we will need to generate significant revenues to achieve
and maintain profitability, which we may not be able to do.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE. Our quarterly operating results are difficult to predict and are not a
good measure for comparison. Our operating history shows that a significant
percentage of our quarterly revenues come from orders placed toward the end of a
quarter. From time to time, we anticipate a sale of significant size to a single
customer. A delay in the completion of any sale past the end of a particular
quarter could negatively impact results for that quarter, and such negative
impact could be significant for the delay of a sale of significant size. Even
without the delay of a significant sale, our future quarterly operating results
may fluctuate significantly and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our ordinary shares may
decrease. The factors that may cause fluctuations in our quarterly operating
results include the following:
o the volume and timing of customer orders;
o internal budget constraints and approval processes of our current and
prospective clients;
o the length and unpredictability of our sales cycle;
o the mix of revenue generated by product licenses and professional
services;
o the mix of revenue between domestic and foreign sources;
o announcements or introductions of new products or product enhancements
by us or our competitors;
o changes in prices of and the adoption of different pricing strategies
for our products and those of our competitors;
o timing and amount of sales and marketing expenses;
o changes in our business and partner relationships;
o technical difficulties or "bugs" affecting the operation of our
software;
o foreign currency exchange rate fluctuations; and
o general economic conditions.
FAILURE OF THE MARKET TO ACCEPT OUR PRODUCTS WOULD ADVERSELY AFFECT OUR
PROFITABILITY. Historically, all of our operating revenue has come from sales
of, and services related to, our ClickSchedule product and our ClickFix product,
to clients seeking application software that enables efficient provisioning of
services in enterprise environments. During the year ended December 31, 2000, we
introduced three products that, together with our existing products, constitute
a suite of products that offers a more comprehensive solution to our customers.
On November 28, 2001 we released version 7.0 of our Service Optimization Suite
that utilizes dynamic load balancing architecture, which dynamically redirects
requests among a group of ClickSoftware servers running our product
applications. This increases the scalability of our products by enabling our
customers to optimize additional resources by adding hardware to this group of
ClickSoftware servers. The growth of our company depends in part on the
development of market acceptance of these products. We have no guarantee that
the sales of these products will
21
develop as quickly as we anticipate, or at all. Lack of long-term demand for our
new products would have a material adverse effect on our business and operating
results.
OUR SALES AND IMPLEMENTATION CYCLES DEPEND ON FACTORS OUTSIDE OUR CONTROL, WHICH
MAY CAUSE QUARTERLY LICENSE AND SERVICE FEES REVENUES TO VARY SIGNIFICANTLY FROM
PERIOD TO PERIOD. To date, our customers have taken typically from three months
to nine months to evaluate our offering before making their purchase decisions.
In addition, depending on the nature and specific needs of a client, the
implementation of our products typically takes two to six months. Sales of
licenses and implementation schedules are subject to a number of risks over
which we have little or no control, including clients' budgetary constraints,
clients' internal acceptance reviews, the success and continued internal support
of clients' own development efforts, the efforts of businesses with which we
have relationships, the nature, size and specific needs of a client and the
possibility of cancellation of projects by clients. The uncertain outcome of our
sales efforts and the length of our sales cycles could result in substantial
fluctuations in license revenues. Historically, a significant portion of our
sales in any given quarter occur in the last two weeks of the quarter; if sales
forecasted from a specific client for a particular quarter are not realized in
that quarter, we are unlikely to be able to generate revenues from alternate
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of some orders, a lost or delayed sale could have a
material adverse effect on our quarterly revenue and operating results.
Moreover, to the extent that significant sales occur earlier than expected,
revenue and operating results for subsequent quarters could be adversely
affected.
FAILURE TO EXPAND OUR SALES AND MARKETING ORGANIZATIONS COULD LIMIT OUR ABILITY
TO SELL ADDITIONAL PRODUCTS AND SERVICES, WHICH WOULD IMPAIR OUR ABILITY TO GROW
OUR BUSINESS AND INCREASE REVENUES. We are expanding our direct and indirect
sales operations to increase market awareness of our products and generate
increased revenues. We cannot be certain that we will be successful in these
efforts. In addition to normal turnover of personnel, we are attempting to
expand our direct sales force in Asia Pacific and Africa. As of June 30, 2002,
we employed 48 individuals in our sales and marketing organizations. Because 12
of these sales and marketing personnel joined us within the last twelve months,
we will be required to devote significant resources to the training of these new
sales personnel. In addition, we might not be able to hire or retain the kind
and number of sales and marketing personnel we are targeting because competition
for qualified sales and marketing personnel in our market is intense.
WE DEPEND ON KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL COULD AFFECT OUR
ABILITY TO COMPETE AND OUR ABILITY TO ATTRACT ADDITIONAL KEY PERSONNEL MAY BE
IMPAIRED. We believe our future success will depend on the continued service of
our executive officers and other key sales and marketing, product development
and professional services personnel. Dr. Moshe BenBassat, our Chief Executive
Officer, has individually participated in and has been responsible for
overseeing much of the research and development of our core technologies. The
services of Dr. BenBassat and other members of our senior management team and
key personnel would be very difficult to replace and the loss of any of these
employees could harm our business significantly. We have employment agreements
with, among others, Dr. Moshe BenBassat, Mr. Shimon Rojany our Chief Financial
Officer, and Mr. Corey Leibow, our Chief Operating Officer. Although these
agreements request sixty days notification prior to departure, relationships
with these officers and key employees are at will. The loss of any of our key
personnel could harm our ability to execute our business strategy and compete.
IF WE FAIL TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION, WE MAY NOT BE ABLE
TO SERVICE ADDITIONAL CLIENTS AND INSTALL ADDITIONAL LICENSES. We cannot be
certain that we can attract or retain a sufficient number of highly qualified
professional services personnel to meet our business needs. Clients that license
our software typically engage our professional services organization to assist
with the installation and operation of our software applications. Our
professional services organization also provides assistance to our clients
related to the maintenance, management and expansion of their software systems.
Growth in licenses of our software will depend in part on our ability to provide
our clients with these services. In addition, we will be required to expand our
professional services organization to enable us to continue to support our
existing installed base of customers. As a result, we plan to increase the
number of our service personnel in order to meet these needs. Competition for
qualified services personnel with the relevant knowledge and experience is
intense, and we may not be able to attract and retain necessary personnel. If we
were not able to grow our professional services organization, our ability to
expand our service business would be limited. In
22
addition, we could experience delays in recognizing revenue if our professional
services group fails to complete implementations in a timely manner.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED. In order for us to focus
more effectively on our core business of developing and licensing software
solutions, we need to continue to establish relationships with third parties
that can provide implementation and professional services to our clients.
Third-party implementation and consulting firms can also be influential in the
choice of resource optimization applications by new clients. If we are unable to
establish and maintain effective, long-term relationships with implementation
and professional services providers, or if these providers do not meet the needs
or expectations of our clients, we may be unable to grow our revenues and our
business could suffer. As a result of the limited resources and capacities of
many third-party implementation providers, we may be unable to attain sufficient
focus and resources from the third-party providers to meet all of our clients'
needs, even if we establish relationships with these third parties. If
sufficient resources are unavailable, we will be required to provide these
services internally, which could limit our ability to meet other demands. Even
if we are successful in developing relationships with third-party implementation
and professional services providers, we will be subject to significant risk, as
we cannot control the level and quality of service provided by third-party
implementation and professional services partners.
OUR MARKET IS HIGHLY COMPETITIVE AND ANY REDUCTION IN DEMAND FOR, OR PRICES OF,
OUR PRODUCTS COULD NEGATIVELY IMPACT OUR REVENUES, REDUCE OUR GROSS MARGINS AND
CAUSE OUR SHARE PRICE TO DECLINE. The market for our products is competitive and
rapidly changing. We expect competition to increase in the future as current
competitors expand their product offerings and new companies enter the market.
Because the market for service and delivery optimization software is evolving,
it is difficult to determine what portion of the market each competitor
currently controls. However, competition could result in price reductions, fewer
customer orders, reduced gross margin and loss of market share, any of which
could cause our business to suffer. We may not be able to compete successfully,
and competitive pressures may harm our business. Some of our current and
potential competitors have greater name recognition, longer operating histories,
larger customer bases and significantly greater financial, technical, marketing,
public relations, sales, distribution and other resources than us. In addition,
some of our potential competitors are among the largest and most well
capitalized software companies in the world.
FAILURE TO FULLY DEVELOP OR MAINTAIN KEY BUSINESS RELATIONSHIPS COULD LIMIT OUR
ABILITY TO SELL ADDITIONAL LICENSES THAT COULD DECREASE OUR REVENUES AND
INCREASE OUR SALES AND MARKETING COSTS. We believe that our success in
penetrating our target markets depends in part on our ability to develop and
maintain business relationships with software vendors, resellers, systems
integrators, distribution partners and customers. If we fail to continue
developing these relationships, our growth could be limited. We have entered
into agreements with third parties relating to the integration of our products
with their product offerings, distribution, reselling and consulting. We are
currently deriving revenues from these agreements but we may not be able to
derive significant revenues in the future from these agreements. In addition,
our growth may be limited if prospective clients do not accept the solutions
offered by our strategic partners.
OUR MARKET MAY EXPERIENCE RAPID TECHNOLOGICAL CHANGES THAT COULD CAUSE OUR
PRODUCTS TO FAIL OR REQUIRE US TO REDESIGN OUR PRODUCTS, WHICH WOULD RESULT IN
INCREASED RESEARCH AND DEVELOPMENT EXPENSES. Our market is characterized by
rapid technological change, dynamic client needs, and frequent introductions of
new products and product enhancements. If we fail to anticipate or respond
adequately to technology developments and client requirements, or if our product
development or introduction is delayed, we may have lower revenues. Client
product requirements can change rapidly as a result of computer hardware and
software innovations or changes in and the emergence, evolution and adoption of
new industry standards. For example, we offer Windows NT versions of our
products due to the market acceptance of Windows NT over the last several years.
While we interface smoothly with UNIX systems, we currently do not provide UNIX
versions of our software. The actual or anticipated introduction of new products
has resulted and will continue to result in some reformulation of our product
offerings. Technology and industry standards can make existing products obsolete
or unmarketable or result
23
in delays in the purchase of such products. As a result, the life cycles of our
products are difficult to estimate. We must respond to developments rapidly and
continue to make substantial product development investments. As is customary in
the software industry, we have previously experienced delays in introducing new
products and features, and we may experience such delays in the future that
could impair our revenue and operating results.
OUR PRODUCTS COULD BE SUSCEPTIBLE TO ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, LIABILITY OR DELAYED OR LIMITED MARKET ACCEPTANCE. Complex software
products such as ours often contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. In the past, some
of our products have contained errors and defects that have delayed
implementation or required us to expend additional resources to correct the
problems. Despite internal testing and testing by current and potential clients,
and despite the history of use by our installed base of customers, our current
and future products may contain as yet undetected serious defects or errors. Any
such defects or errors could result in lost revenues, liability or a delay in
market acceptance of these products, any of which would have a material adverse
effect on our business, operating results and financial condition.
The performance of our products also depends in part upon the accuracy and
continued availability of third-party data. We rely on third parties that
provide information such as street and address locations and mapping functions
that we incorporate into our products. If these parties do not provide accurate
information, or if we are unable to maintain our relationships with them, our
reputation and competitive position in our industry could suffer and we could be
unable to develop or enhance our products as required.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED. Our success and
ability to compete are substantially dependent upon our internally developed
technology, which we protect through a combination of copyright, trade secret
and trademark law. However, we may not be able to adequately protect our
intellectual property rights, which may significantly harm our business.
Specifically, we may not be able to protect our trademarks for our company name
and our product names, and unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Policing unauthorized use of our
products and technology is difficult, particularly in countries outside the
U.S., and we cannot be certain that the steps we have taken will prevent
infringement or misappropriation of our intellectual property rights.
Our end-user licenses are designed to prohibit unauthorized use, copying or
disclosure of our software and technology in the United States, Israel and other
foreign countries. However, these provisions may be unenforceable under the laws
of some jurisdictions and foreign countries. Unauthorized third parties may be
able to copy some portions of our products or reverse engineer or obtain and use
information and technology that we regard as proprietary. Third parties could
also independently develop competing technology or design around our technology.
If we are unable to successfully detect infringement and/or to enforce our
rights to our technology, we may lose competitive position in the market. We
cannot assure you that our means of protecting our intellectual property rights
in the United States, Israel or elsewhere will be adequate or that competing
companies will not independently develop similar technology. In addition, some
of our licensed users may allow additional unauthorized users to use our
software, and if we do not detect such use, we could lose potential license
fees.
OUR TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY MAY BE SUBJECT TO INFRINGEMENT
CLAIMS. Substantial litigation regarding technology rights and other
intellectual property rights exists in the software industry both in terms of
infringement and ownership issues. A successful claim of patent, copyright or
trademark infringement or conflicting ownership rights against us could require
us to make changes in our business or significantly harm our business. We
believe that our products do not infringe the intellectual property rights of
third parties. However, we cannot assure you that we will prevail in all future
intellectual property disputes.
We expect that software products may be increasingly subject to third-party
infringement or ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement or conflicting
ownership rights against us with respect to our products and technology. Any
claims, with or without merit, could:
24
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources; or
o cause product shipment delays.
Further, if an infringement or ownership claim is successfully brought against
us, we may have to pay damages or royalties, enter into a licensing agreement,
and/or stop selling the product or using the technology at issue. Any such
royalty or licensing agreements may not be available on commercially reasonable
terms, if at all. From time to time, we may encounter disputes over rights and
obligations concerning intellectual property. We also indemnify some of our
customers against claims that our products infringe the intellectual property
rights of others. We have only conducted a partial search for existing patents
and other intellectual property registrations, and we cannot assure you that our
products do not infringe any issued patents. In addition, because patent
applications in the United States and Israel are not publicly disclosed until
the patent is issued, applications may have been filed which would relate to our
products.
OUR BUSINESS MAY BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS. Significant portions of our operations occur
outside the United States. Our facilities are located in North America, Israel,
the European continent, and the United Kingdom, and our executive officers and
other key employees are dispersed throughout the world. This geographic
dispersion requires significant management resources that may place us at a
disadvantage compared to our locally based competitors. In addition, our
international operations are generally subject to a number of risks, including:
o foreign currency exchange rate fluctuations;
o longer sales cycles;
o multiple, conflicting and changing governmental laws and regulations;
o expenses associated with customizing products for foreign countries;
o protectionist laws and business practices that favor local
competition;
o difficulties in collecting accounts receivable; and
o political and economic instability.
We expect international revenues to continue to account for a significant
percentage of total revenues and we believe that we must continue to expand our
international sales and professional services activities in order to be
successful. Our international sales growth will be limited if we are unable to
expand our international sales management and professional services
organizations, hire additional personnel, customize our products for local
markets and establish relationships with additional international distributors,
consultants and other third parties. If we fail to manage our geographically
dispersed organization, we may fail to meet or exceed our business plan and our
revenues may decline.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS. Although not currently under
consideration, we may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies. We cannot make assurances that we will be able to identify future
suitable acquisition or investment candidates, or if we do identify suitable
candidates, that we will be able to make such acquisitions or investments on
commercially acceptable terms or at all. Our management has limited experience
in acquiring companies or technologies. If we acquire or invest in another
company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness to pay for any future acquisitions. As of
the date of this statement, we have neither begun discussions nor entered an
agreement to make any such material investment or acquisition transaction.
FUTURE ACQUISITIONS MAY RESULT IN DILUTION TO OUR CURRENT SHAREHOLDERS. In the
future we may acquire complementary business through the issuance of additional
ordinary shares. Additional issuances of ordinary shares could decrease the
value of our ordinary shares and reduce the net
25
tangible book value per share. Consequently, an acquisition in which we issue
additional shares could actually decrease the value of your investment in
ClickSoftware. As of the date of this statement, we have neither begun
discussions nor entered an agreement to make any material acquisition that would
result in the issuance of additional shares.
WE ARE INCORPORATED IN ISRAEL AND HAVE IMPORTANT FACILITIES AND RESOURCES
LOCATED IN ISRAEL, WHICH COULD BE NEGATIVELY AFFECTED DUE TO MILITARY OR
POLITICAL TENSIONS. We are incorporated under the laws of the State of Israel
and our research and development facilities as well as significant executive
offices are located in Israel. Although substantial portions of our sales
currently are to customers outside of Israel, political, economic and military
conditions in Israel could nevertheless directly affect our operations. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Since September 2000, a continuous armed conflict with the Palestinian
authority has been taking place. Despite our history of avoiding adverse
effects, in the future we could be adversely affected by any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, a significant increase in inflation, or a significant
downturn in the economic or financial condition of Israel. Despite past progress
towards peace between Israel and its Arab neighbors, the future of these peace
efforts is uncertain. Several Arab countries still restrict business with
Israeli companies, which may limit our ability to make sales in those countries.
We could be adversely affected by restrictive laws or policies directed towards
Israel or Israeli businesses.
CERTAIN OF OUR OFFICERS AND EMPLOYEES ARE REQUIRED TO SERVE IN THE ISRAEL
DEFENSE FORCES AND THIS COULD FORCE THEM TO BE ABSENT FROM OUR BUSINESS FOR
EXTENDED PERIODS. David Schapiro, our Executive Vice President, Markets and
Product, and Hannan Carmeli, our Senior Vice President, Product Services and
Operations, as well as other male employees located in Israel are currently
obligated to perform up to 39 days of annual reserve duty in the Israel Defense
Forces and are subject to being called for active military duty at any time. The
loss or extended absence of any of our officers and key personnel due to these
requirements could harm our business.
WE ARE SUBJECT TO A RECENTLY ADOPTED NEW COMPANIES LAW, WHICH HAS NOT YET BEEN
INTERPRETED. Because we are incorporated under the laws of the State of Israel,
the Companies Law of Israel, which became effective on February 1, 2000, governs
your rights as a shareholder. Certain obligations and fiduciary duties of
directors, officers and shareholders under the new Companies Law are new and
have not been interpreted or reviewed by the Israeli courts. In addition, not
all of the regulations have been promulgated to date. As a result, our
shareholders may have more difficulty and uncertainty in protecting their
interests in the case of actions by our directors, officers or controlling
shareholders or third parties than would shareholders of a corporation
incorporated in a state or other jurisdiction in the United States.
WE ARE SUBJECT TO A RECENTLY ADOPTED NEW TAX LAW, THE CONSEQUENCES OF WHICH ARE
NOT CLEAR. On July 24, 2002, the Israeli parliament, the Knesset, enacted the
Law for Amendment of the Income Tax Ordinance. The amendment substantially
changes Israeli taxation in Israel in several areas, including: (a) gradual
reduction of the direct tax burden on personal work income; (b) taxation of the
capital market and savings; (c) increased taxation of income outside of Israeli
residents outside Israel; (d) elimination of many exemptions and preferential
tax rates; and (e) encouragement of business and technological activities.
The Amendment is extensive and significantly changes part of the current tax
principles under Israeli tax law. In order to implement part of the amendment,
the Minister of Finance was authorized to promulgate regulations under the
amendment. Such regulations have not been promulgated yet. The amendment was
enacted and major parts of it will become effective on January 1, 2003. The
Company is currently reviewing the possible implications of the amendment.
However, it is not possible, at this stage, to estimate the effect of this
amendment on the financial statements.
THE RATE OF INFLATION IN ISRAEL MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS
THE RATE OF DEVALUATION OF THE NIS AGAINST THE DOLLAR. Substantially all of our
revenues are denominated in dollars or are dollar-linked, but a significant
portion of our research and development expense is incurred in New Israeli
Shekels ("NIS") and a portion of our revenues and expenses
26
is incurred in British Pounds and the European Community Euro. The results of
our operations are subject to fluctuations in these exchange rates which are
influenced by various global economic factors, including inflation rates and
economic growth within each nation. In 2000, 27%, and in 2001, 24% of our costs
were incurred in NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the dollar or that the timing of this devaluation will lag behind inflation
in Israel. In that event, the dollar cost of our operations in Israel will
increase and our dollar-measured results of operations will be adversely
affected.
WE ARE AN INTERNATIONAL COMPANY AND OUR INTERNATIONAL OPERATIONS ARE EXPANDING.
OUR RISK EXPOSURE TO FOREIGN CURRENCY FLUCTUATIONS IS INCREASING, AND WE MAY NOT
BE ABLE TO FULLY MITIGATE THE RISK. Our revenue from the UK has grown both on an
absolute dollar basis as well as a percentage of total revenues. We are
expanding operations in other areas of Europe, and income and expenses
recognized in the European Community Euro will increase. In 2001, 26% of our
costs were incurred in GBP and Euro. We incur a portion of our expenses,
principally salaries and related personnel expenses in Israel, in NIS. In 2001,
24% of our costs were incurred in NIS. We are also experiencing a growth in
revenue and expenses in Israel, and we anticipate recognizing revenue from other
international sources. Presently our risk to foreign currency fluctuations is
minimal, but if our foreign accounts receivable balances increase, the risk will
increase. We cannot assure that we will be able to adequately protect ourselves
against such risk.
THE GOVERNMENT PROGRAMS IN WHICH WE CURRENTLY PARTICIPATE AND TAX BENEFITS WHICH
WE CURRENTLY RECEIVE REQUIRE US TO SATISFY PRESCRIBED CONDITIONS AND MAY BE
DELAYED, TERMINATED OR REDUCED IN THE FUTURE. THIS WOULD INCREASE OUR COSTS AND
TAXES. We receive grants from the Government of the State of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade, or the
Chief Scientist, for the financing of a significant portion of our research and
development expenditures in Israel, and we may apply for additional grants in
the future. We cannot assure you that we will continue to receive grants at the
same rate or at all. The Chief Scientist budget has been subject to reductions
that may affect the availability of funds for Chief Scientist grants in the
future. The percentage of our research and development expenditures financed
using grants from the Chief Scientist may decline in the future, and the terms
of such grants may become less favorable. In connection with research and
development grants received from the Chief Scientist, we must make royalty
payments to the Chief Scientist on the revenues derived from the sale of
products, technologies and services developed with the grants from the Chief
Scientist. From time to time, the Government of Israel changes the rate of
royalties we must pay, so we are unable to accurately predict this rate. In
addition, our ability to manufacture products or transfer technology outside
Israel without the approval of the Chief Scientist is restricted under law. Any
manufacture of products or transfer of technology outside Israel will also
require the company to pay increased royalties to the Chief Scientist up to
300%. We currently conduct all of our manufacturing activities in Israel and
intend to continue doing so in the foreseeable future and therefore do not
believe there will be any increase in the amount of royalties we pay to the
Chief Scientist. Currently the office of the Chief Scientist does not consider
the licensing of our software in the ordinary course of business a transfer of
technology and we do not intend to transfer any technology outside of Israel.
Consequently, we do not anticipate having to pay increased royalties to the
Chief Scientist for the foreseeable future. In connection with our grant
applications, we have made representations and covenants to the Chief Scientist
regarding our research and development activities in Israel. The funding from
the Chief Scientist is subject to the accuracy of these representations and
covenants. If we fail to comply with any of these conditions, we could be
required to refund payments previously received together with interest and
penalties and would likely be denied receipt of these grants thereafter.
WE ANTICIPATE RECEIVING TAX BENEFITS FROM THE GOVERNMENT OF THE STATE OF ISRAEL,
HOWEVER THESE BENEFITS MAY BE DELAYED, REDUCED OR TERMINATED IN THE FUTURE.
Pursuant to the Law for the Encouragement of Capital Investments, the Government
of the State of Israel through the Investment Center has granted "Approved
Enterprise" status to three of our existing capital investment programs.
Consequently, we are eligible for certain tax benefits for the first several
years in which we generate taxable income. We have not, however, begun to
generate taxable income for purposes of this law and we do not expect to utilize
these tax benefits for the near future. Once we begin to generate taxable
income, our financial condition could suffer if our tax benefits were
significantly reduced. The benefits available to an approved enterprise are
dependent upon the fulfillment of certain conditions and criteria. If we fail to
27
comply with these conditions and criteria, the tax benefits that we receive
could be partially or fully canceled and we could be forced to refund the amount
of the benefits we received, adjusted for inflation and interest. From time to
time, the Government of Israel has discussed reducing or limiting the benefits.
We cannot assess whether these benefits will be continued in the future at their
current levels or at all.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND THE ISRAELI ACCOUNTANTS NAMED AS EXPERTS IN THIS STATEMENT OR TO
ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON SUBSTANTIALLY
ALL OF OUR OFFICERS AND DIRECTORS AND THESE ACCOUNTANTS. We are incorporated in
Israel and maintain significant operations in Israel. Some of our executive
officers and directors and the Israeli accountants named as experts in this
statement reside outside of the United States and a significant portion of our
assets and the assets of these persons are located outside the United States.
Therefore, it may be difficult for an investor, or any other person or entity,
to enforce a U.S. court judgment against us or any of those persons or to effect
service of process upon these persons in the United States, based upon the civil
liability provisions of the U.S. federal securities laws in an Israeli court.
Additionally, it may be difficult for an investor, or any other person or
entity, to enforce civil liabilities under U.S. federal securities laws in
original actions instituted in Israel. We have appointed ClickSoftware Inc., our
U.S. subsidiary, as our agent to receive service of process in any action
against us arising out of our original June 22, 2000 initial public offering. We
have not given our consent for our agent to accept service of process in
connection with any other claim. Furthermore, if a foreign judgment is enforced
by an Israeli court, it will be payable in NIS.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR
COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS. As of December
31, 2001, our executive officers, directors and entities affiliated with them
beneficially owned approximately 33.6% of our outstanding ordinary shares. These
shareholders, if acting together, would be able to significantly influence all
matters requiring approval by our shareholders, including the election of
directors. This concentration of ownership may also have the effect of delaying
or preventing a change of control of our company, which could have a material
adverse effect on our stock price. These actions may be taken even if our other
investors oppose them.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF US, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS. Provisions of Israeli corporate and tax law and of our articles of
association may have the effect of delaying, preventing or making more difficult
a merger or other acquisition of us, even if doing so would be beneficial to our
shareholders. In addition, any merger or acquisition of us will require the
prior consent of the Chief Scientist. Israeli law regulates mergers, votes
required to approve a merger, acquisition of shares through tender offers and
transactions involving significant shareholders. In addition, our articles of
association provide for a staggered board of directors and for restrictions on
business combinations with interested shareholders. Any of these provisions may
make it more difficult to acquire our company. Accordingly, an acquisition of us
could be delayed or prevented even if it would be beneficial to our
shareholders.
OTHER ORDINARY SHARES MAY BE SOLD IN THE FUTURE. THIS COULD DEPRESS THE MARKET
PRICE FOR OUR ORDINARY SHARES. As of June 30, 2002, we had 26,338,373 (net of
39,000 shares held in treasury), ordinary shares outstanding, including shares
held by a trustee for issuance under outstanding options. In addition, as of
June 30, 2002, we had 2,389,305 ordinary shares issuable upon exercise of
outstanding options, and 1,634,979 additional ordinary shares reserved for
issuance pursuant to our stock option plans and employee share purchase plan. If
our existing shareholders or we sell a large number of our ordinary shares, the
price of our ordinary shares could fall dramatically. Restrictions under the
securities laws limit the number of ordinary shares available for sale by our
shareholders in the public market. We have filed a Registration Statement on
Form S-8 to register for resale the ordinary shares reserved for issuance under
our stock option plans.
WE HAVE APPLIED TO MOVE OUR LISTING FROM THE NASDAQ NATIONAL MARKET TO THE
NASDAQ SMALLCAP MARKET, WHICH COULD ADVERSELY AFFECT THE ABILITY TO TRADE AND
THE PRICE OF OUR ORDINARY SHARES. On August 12, 2002, because we were unable to
meet the continued listing criteria for the Nasdaq National Market, we applied
to move our listing to the Nasdaq SmallCap Market. There are no assurances that
our application will be approved or that we will be able to meet the Nasdaq
SmallCap Market continued listing criteria in the future. As a result of this
proposed move to the Nasdaq SmallCap Market, because of certain secondary
trading restrictions, our ordinary
28
shares may become harder to buy and sell. We cannot predict how the trading
market for our ordinary shares will be affected by our proposed move to the
National SmallCap Market, but decreased trading volume may cause the price of
our ordinary shares to fall.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO RAISE
FURTHER FINANCING IF REQUIRED. We believe that our current cash balances will be
sufficient to fund our expenses until we reach profitability. However, we cannot
assure you that we will attain sufficient revenues to achieve or maintain
profitability, particularly given current economic conditions and potential
reductions in information technology spending by our current and prospective
customers. We may need to raise additional capital to finance our operations or
for strategic purposes, and we may do so by selling additional equity or debt
securities or by increasing the size of our credit facility. If additional funds
are raised through the issuance of equity or debt securities, these securities
could have rights; preferences and privileges senior to those of holders of
ordinary shares, and the terms of these securities could impose restrictions on
our operations. The sale of additional equity or convertible debt securities
could result in additional dilution to our shareholders. In addition, we cannot
be certain that additional financing will be available in amounts or on terms
acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition or operating results. If the economy continues to weaken or, for any
other reason, we are unable to meet our business goals, we may have to raise
additional funds to respond to business contingencies and may include the need
to:
o fund additional marketing expenditures;
o develop new or enhance existing products and services;
o enhance our operating infrastructure;
o hire additional personnel;
o respond to competitive pressures;
o acquire complementary businesses or necessary technologies; or
o fund more rapid expansion.
WE CANNOT ASSURE YOU THAT ADDITIONAL FINANCING WILL 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 operations, take
advantage of unanticipated opportunities, develop or enhance our products and
services or otherwise respond to competitive pressures would be significantly
limited. Additionally, prior to the issuance of additional equity or convertible
debt securities to entities outside of Israel, we will need to obtain approval
from the Chief Scientist of the State of Israel and there can be no assurance
that we will be able to obtain this consent in the future.
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR UNITED
STATES SHAREHOLDERS WILL BE SUBJECT TO ADVERSE TAX CONSEQUENCES. If, for any
taxable year, either, (1) 75% or more of our gross income is passive income or
(2) 50% or more of the fair market value of our assets, including cash (even if
held as working capital), produce or are held to produce passive income, we may
be characterized as a "passive foreign investment company" ("PFIC") for United
States federal income tax purposes. We do not believe that we currently are a
PFIC nor do we anticipate that we will be characterized a PFIC in the future,
but, if we do, our shareholders will be subject to adverse United States tax
consequences.
If we were to be treated as a PFIC, our shareholders will be required, in
certain circumstances, to pay an interest charge together with tax calculated at
maximum rates on certain "excess distributions" including any gain on the sale
of ordinary shares. In order to avoid this tax consequence, they (1) may be
permitted to make a "qualified electing fund" election (however the company does
not currently intend to take the action necessary for our shareholders to make a
"qualified electing fund" election, in which case, in lieu of such treatment
they would be required to include in their taxable income certain undistributed
amounts of our income or (2) may elect to mark-to-market the ordinary shares and
recognize ordinary income (or possible ordinary loss) each year with respect to
such investment and on the sale or other disposition of the ordinary shares.
Prospective investors should consult with their own tax advisors with respect to
the tax consequences applicable to them of investing in our ordinary shares.
29
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS. Our operations are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond our control. In particular, we have operations
in the San Francisco Bay Area, an area that is known to be susceptible to the
risk of earthquakes. We do not have a detailed disaster recovery plan. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power. In the
event these blackouts continue or increase in severity, they could disrupt the
operations of our affected facilities. In addition, we do not carry sufficient
business interruption insurance to compensate us for losses that may occur and
any losses or damages incurred by us could have a material adverse effect on our
business.
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE SUBSTANTIALLY. The stock
market has experienced significant price and volume fluctuations, and the market
prices of technology companies have been highly volatile. The price at which our
ordinary shares trades is likely to be volatile and may fluctuate substantially
due to factors such as:
o announcements of technological innovations;
o announcements relating to strategic relationships;
o conditions affecting the software and Internet industries;
o trends related to the fluctuations of stock prices of companies such
as ours;
o our historical and anticipated quarterly and annual operating results;
o variations between our actual results and the expectations of
investors or published reports or analyses of ClickSoftware;
o announcements by us or others affecting our business, systems or
expansion plans; and
o general conditions and trends in technology industries.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management's attention and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATE RISK. We develop products in Israel and sell them
primarily in North America and Europe. As a result, our financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. As most of our sales are currently
made in U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets. Our interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. We regularly assess these risks and
have established policies and business practices to protect against the adverse
effects of these and other potential exposures. However, due to the short-term
nature of our term investments, we have concluded that there is no material
market risk exposure and we do not anticipate material losses as a result of
foreign exchange rate fluctuations. Therefore, no quantitative tabular
disclosures are required. Additionally, although we do not presently participate
in hedging contracts related to foreign currency exchange rates, we may do so in
the future to protect against rate fluctuations affecting our foreign currency
accounts receivable balances. We do not participate in any speculative
investments.
INTEREST RATE RISK. As of June 30, 2002, we had cash, cash equivalents and
short-term investments of $8.9 million which consist of cash and highly liquid
short-term investments. Our short-term investments will decline in value by an
immaterial amount if market interest rates increase, and, therefore, our
exposure to interest rate changes has been immaterial. Declines of interest
rates over time will, however, reduce our interest income from our short-term
investments.
As of June 30, 2002, we had total short-term loans and current maturities of
$33,000. As of June 30,2002 we had $1.0 million unsecured line of credit.
The following table provides information about our investment portfolio, cash,
and long-term loans as of June 30, 2002 and presents principal cash flows and
related weighted averages interest rates by expected maturity dates.
30
YEAR OF MATURITY TOTAL CARRYING
2002 2003 AFTER 2003 VALUE
(in thousands of dollars)
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
- ------------------------------------------------------
Cash and equivalents $ 4,789 - - $ 4,789
Average interest rate 2.0% - - 2.0%
Commercial Papers $ 1,800 - - $ 1,800
Average interest rate 2.0% - - 2.0%
Bank Deposits - $ 2,000 - $ 2,000
Average interest rate - 2.2% - 2.2%
Corp Bonds $ 307 - - $ 307
Average interest rate 2.2% - - 2.2%
B) TERM DEBTS:
- --------------
N.I.S indexed loans $ 2 $ 2 - 4
Average interest rate 5.4% 5.4% - 5.4%
Leases US$ $ 12 $ 1 - $ 13
Average interest rate 7.1% 7.1% - 7.1%
Leases GBP $ 10 $ 6 - $ 16
Average interest rate 3.5% 3.5% - 3.5%
31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 4. Submission of matters to a vote of security holders
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Index
Exhibit Number Description
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8 - K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended June 30, 2002.
32
SIGNATURES
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.
CLICKSOFTWARE TECHNOLOGIES LTD.
(Registrant)
By: /s/ SHMUEL ARVATZ
----------------------
Name: Shmuel Arvatz
Title: Executive Vice President and
Chief Financial Officer
Date: February 27, 2003
33
CERTIFICATIONS
I, Moshe BenBassat, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of ClickSoftware
Technologies Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
February 27, 2003
By: /s/ Moshe BenBassat
------------------------
Moshe BenBassat
Chairman and Chief Executive Officer
34
I, Shmuel Arvatz, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of ClickSoftware
Technologies Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
February 27, 2003
By: /s/ Shmuel Arvatz
----------------------
Shmuel Arvatz
Executive Vice President and
Chief Financial Officer
35