---




---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-Q


Quarterly Report Under Section 13 or 15(d)


of


The Securities Exchange Act of 1934





For the Quarter Ended September 30,
2001





Commission File Number 0-30881





---




CLICK COMMERCE, INC.


(Exact name of
registrant as specified in its charter)





Delaware

36-4088644


(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification Number)





200 East Randolph Drive, Suite 4900


Chicago, Illinois 60601


(Address of principal executive offices)





(312) 482-9006


(Registrants telephone number, including area code)





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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


On November 13, 2001, 40,118,834 shares of the registrants common stock were issued and outstanding.





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---

CLICK COMMERCE, INC.





INDEX





Page No.PART I.     FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000


1Condensed Consolidated Statements of Operations and Comprehensive Loss for the three      and nine months ended September 30, 2001 and 2000


2Condensed Consolidated Statements of Cash Flows for the nine months ended      September 30, 2001 and 2000


3Notes to Condensed Consolidated Financial Statements


4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of      Operations


6Item 3.

Quantitative and Qualitative Disclosures About Market Risk


12PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings


14Item 2.

Changes in Securities and Use of Proceeds


14Item 3.

Defaults Upon Senior Securities


14Item 4.

Submission of Matters to a Vote of Security Holders


14Item 5.

Other Information


14Item 6.

Exhibits and Reports on Form 8-K


14SIGNATURES


15





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PART 1.    FINANCIAL INFORMATION





Item 1.    Financial
Statements





CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





(dollars in thousands)





September 30, 2001

December 31, 2000(unaudited)A S S E T SCurrent assets:Cash and cash equivalents


$43,747




$51,318Trade accounts receivable, net


8,781




9,276Revenue earned on contracts in progress in excess of billings


535




1,534Other current assets


3,183




2,018Total
current assets


56,246




64,146Property and equipment, net


3,853




1,931Other assets


10,435




3,679Total
assets


$70,534




$69,756L I A B I L I T I E S    A N D    S H A R E H O L D E R S     E Q U I T YCurrent liabilities:Accounts payable


$   1,230




$   2,096Billings in excess of revenue earned on contracts in progress


497




1,027Deferred revenue


3,748




1,531Accrued compensation


3,143




3,949Accrued expenses and other current liabilities


2,977




3,805Accrued restructuring


1,407




Current portion of capital lease obligations


604




298Total
current liabilities


13,606




12,706Capital lease obligations, less current portion


1,208




397Other liabilities


123




37Total
liabilities


14,937




13,140Shareholders equity:Preferred stock







Common stock


39




38Additional paid-in capital


86,773




83,960Accumulated other comprehensive income


117




119Deferred compensation


(3,767
)



(6,827
)Accumulated deficit


(27,565
)



(20,674
)Total
shareholders equity


55,597




56,616Total
liabilities and shareholders equity


$70,534




$69,756





See accompanying notes to condensed consolidated financial statements.




1


---

CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND


COMPREHENSIVE LOSS





(dollars in thousands, except per
share data)





(unaudited)





Three Months ended September 30,

Nine Months ended September 30,2001

2000

2001

2000RevenuesProduct license

$         4,911


$         6,669


$       18,709


$         8,380Service

6,105


3,402


17,589


13,869Total revenues

11,016


10,071


36,298


22,249Cost of revenuesProduct license

272


550


924


1,030Service (exclusive of $15 and $4 for the three months ended
           September 30, 2001 and 2000, respectively, and $43 and $28 for the            nine months ended September 30, 2001 and
2000, respectively, reported            below as amortization of stock-based compensation)

2,919


2,636


8,937


5,946Total cost of revenues

3,191


3,186


9,861


6,976Gross profit

7,825


6,885


26,437


15,273Operating expenses:Sales and marketing (exclusive of $442 and $650 for the three months
           ended September 30, 2001 and 2000, respectively, and $1,441 and            $1,398 for the nine months ended September
30, 2001 and 2000,            respectively, reported below as amortization of stock-based            compensation)

5,038


5,587


20,074


10,180Research and development (exclusive of $4 and $16 for the three months
           ended September 30, 2001 and 2000, respectively, and $14 and $40 for            the nine months ended September 30, 2001
and 2000, respectively,            reported below as amortization of stock-based compensation)

2,551


2,403


7,826


4,540General and administrative (exclusive of $87 and $122 for the three
           months ended September 30, 2001 and 2000, respectively, and $213 and            $371 for the nine months ended September
30, 2001 and 2000,            respectively, reported below as amortization of stock-based            compensation)

1,804


2,013


7,148


4,757Amortization of stock-based compensation

548


792


1,711


1,837Restructuring charge

1,827





1,827


Total operating expenses

11,768


10,795


38,586


21,314Operating loss

(3,943
)

(3,910
)

(12,149
)

(6,041
)Interest income

366


774


1,620


826Interest expense

(28
)

(20
)

(79
)

(32
)Other income (expense)




13


(100
)

13Other income, net

338


767


1,441


807Loss before income taxes

(3,605
)

(3,143
)

(10,708
)

(5,234
)Income tax benefit

(1,276
)

(971
)

(3,817
)

(1,523
)Net loss

(2,329
)

(2,172
)

(6,891
)

(3,711
)Accretion related to redeemable preferred stock










(8,093
)Net loss available to common shareholders

$         (2,329
)

$         (2,172
)

$         (6,891
)

$       (11,804
)Basic and diluted loss per share

$          (0.06
)

$          (0.06
)

$          (0.18
)

$          (0.42
)Weighted average shares outstandingbasic and diluted

39,294,563


38,162,080


38,735,658


28,069,768Comprehensive loss:Net loss

$         (2,329
)

$         (2,172
)

$         (6,891
)

$         (3,711
)Foreign currency translation adjustment

7





(2
)

Comprehensive loss

$         (2,322
)

$         (2,172
)

$         (6,893
)

$         (3,711
)





See accompanying notes to condensed consolidated financial statements.




2


---

CLICK COMMERCE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





(dollars in thousands)





(unaudited)





Nine Months ended September 30,2001

2000Cash flows from operating activities:Net loss

$  (6,891
)

$  (3,711
)Adjustments to reconcile net loss to net cash used in operating
activities:Amortization of stock-based compensation

1,711


1,837Depreciation and amortization

926


315Provision
for doubtful accounts

80


(12
)Deferred
income taxes

(3,747
)

(1,537
)Deferred
compensation

165


Restructuring charge

1,827


Gain on
disposal of property and equipment




(13
)Changes
in operating assets and liabilities:Trade accounts
receivable

415


(7,710
)Revenue earned on
contracts in progress in excess of billings

999


(699
)Other current assets

(868
)

(1,444
)Accounts payable

(841
)

1,861Billings in excess of
revenues earned on contracts in progress

(530
)

(313
)Deferred revenue

2,217


138Accrued compensation

(806
)

2,457Accrued expenses and
other current liabilities

(607
)

1,776Income taxes payable




(39
)Other assets and
liabilities

(101
)

97Net cash used in operating activities

(6,051
)

(6,997
)Cash flows from investing activities:Proceeds from sale of property and equipment




259Purchases of property and equipment

(1,211
)

(868
)Net maturities of short-term investments




2,968Purchase of intangible assets

(685
)

Net cash (used in) provided by investing activities

(1,896
)

2,359Cash flows from financing activities:Proceeds from initial public offering, net




52,633Proceeds from exercise of stock options

932


113Principal payments under capital lease obligations

(556
)

(112
)Net cash provided by financing activities

376


52,634Net change in cash and cash equivalents

(7,571
)

47,996Cash and cash equivalents at beginning of period

51,318


3,336Cash and cash equivalents at end of period

$43,747


$51,332Supplemental disclosures:Property and equipment acquired under capital leases

$   1,673


$       604Interest paid

$         79


$         24Income taxes paid

$         20


$         53





See accompanying notes to condensed consolidated financial statements.




3


---




CLICK COMMERCE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(Dollars in thousands, except per share data)





(unaudited)





1.    BASIS OF PRESENTATION





The unaudited condensed consolidated financial statements
include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the Company) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair
presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31,
2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the
Securities and Exchange Commissions rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Companys audited consolidated financial statements and
notes included in the Companys annual report on Form 10-K and other documents that have been filed with the Securities and Exchange Commission.





Certain prior year amounts have been reclassified to conform to the 2001 presentation.





2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue Recognition





The Company recognizes product
license revenue from licensing the rights to use its software. The Company generates service revenues from integrating its software, performing needs analyses for customers and through the sale of maintenance and training services. The Company
recognizes revenue in accordance with Statement of Position (SOP) No. 97-2 Software Revenue Recognition as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.For those contracts that either do not contain a services component or that have services which are not essential to the functionality of any other element of the contract, software
license revenue is recognized upon shipment of the Companys software provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. Revenue from
service contracts is typically recognized as the services are performed.





Revenue from contracts in which the Companys services are essential to the functionality of the other elements of the contract is recognized using the
percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers and integrates the software. The percentage completed is measured either by the percentage of labor hours
incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. Revenue from contracts recognized under the percentage-of-completion
method are presented as product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software
customization or other professional services, revenues are presented as service revenues.





Derivative Instruments and
Hedging Activities





Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activitiesas amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.These statements establish a




4


---

comprehensive standard for the recognition and measurement of derivative instruments and hedging activities. These pronouncements require the Company to recognize derivatives on the balance sheet
at fair value. In addition, changes in a derivatives fair value are required to be recognized in earnings unless specific hedge criteria are met. Currently, the pronouncements have no impact on the Company, as the Company has not utilized
derivative instruments or entered into any hedging transactions that are covered by these pronouncements.





3.    STOCK-BASED COMPENSATION





Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred
compensation of $4,636. Such deferred compensation is amortized on a straight-line basis over the vesting period of each individual award, resulting in $239 and $483 of stock-based compensation expense for the three months ended September 30, 2001
and 2000, respectively, and $784 and $1,322 for the nine months ended September 30, 2001 and 2000, respectively.





In April 2000, the Company issued a warrant to Accenture to purchase up to 818,226 shares of common stock at $12.22 per share. The warrant vests contingently upon the achievement
of certain milestones, primarily the generation of license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accentures failure to meet the agreed revenue target by the expiration date,
and, accordingly, the fair value of the warrant was measured at the date of grant in accordance with Emerging Issues Task Force Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately
$5,000, which was determined using the Black-Scholes option-pricing model. This amount is being amortized to expense on a straight-line basis over the vesting period of the warrant. The Company recognized amortization expense of $309 for each of the
three months ended September 30, 2001 and 2000 respectively, and $927 and $515 for the nine months ended September 30, 2001 and 2000, respectively.





4.    RESTRUCTURING





In the quarter ended September 30, 2001, the Company determined that, given current economic conditions, it was necessary to lower its overall cost structure. As a result, the
Company recorded a $1,827 restructuring charge for the quarter ended September 30, 2001. As part of the restructuring, the Company terminated approximately 17% of its workforce or approximately 50 personnel across all areas of the Company. The
following are significant components of the restructuring charge:





Employee severance, benefits and related costs

$1,396Stock-based compensation

297Facilities related costs

55Other

79Total

$1,827


The employee and related costs were attributable to personnel who were
involuntarily terminated at the end of the quarter. The stock-based compensation charge was a non-cash expense incurred for accelerated vesting under contracts with certain terminated employees. Facilities related costs represent the remaining lease
payments for the closing of one office.





At September 30, 2001, the
Company had a restructuring accrual of $1,530 of which $123 was long-term. Only stock-based compensation expense has been charged against the accrual at quarter end.




5


---




Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





Overview





The Company is a
provider of channel management software products and integration services for large, global companies with complex or specialized dealer, distributor and supplier networks. The Companys software products and integration services enable large,
global companies to effectively manage and engage in collaborative business-to-business electronic commerce throughout all levels of their product and services distribution channels.





The Companys revenue is derived from sales of licenses of its software, comprised of the Relationship Manager and a portfolio
of e-commerce applications, as well as from needs analyses, professional services, training, maintenance and support. The Companys software is generally licensed on a perpetual basis.





Beginning in the third quarter of 2000, the Company began to license its software products independent
of its integration services. For those contracts that either do not contain a services component or in which the services element is not essential to the functionality of any other element of the contract, software license revenue is recognized upon
shipment of the Companys software, provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. For contracts in which the services component
meets the requirements of a separate element of a contract, revenue is recognized as the services are performed. The revenue to be recognized from multiple-element software contracts is based on the fair value of each element. The Company
records deferred revenue on software contracts for which it has billed or collected amounts, but for which the requirements for revenue recognition have not been met. The Company records accounts receivable on software contracts for which the
requirements for revenue recognition have been met, but for which cash has not been received.





Revenue from contracts in which the Companys services are essential to the functionality of the other elements of the contract is recognized using the
percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers, customizes and installs the software. The percentage completed is measured either by the percentage of
labor hours incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting
is used, the Company records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of cash receipts from customers
can vary significantly depending on specific contract terms and can therefore have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.





Revenue from contracts recognized under the percentage-of-completion method are
presented as product revenue to the extent that the underlying milestones are related to software deliveries. To the extent that hours of input are used as the basis for percentage completed or that contract milestones relate to software
customization or other professional services, revenues are presented as service revenues.





Maintenance service is sold separately under contacts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance
service revenue ratably over the contract period, generally one year. Maintenance fees are generally billed annually in advance and are recorded as deferred revenue. As part of the sales process, the Company often performs a needs analysis for the
potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed. Training revenue is recognized as the services are provided.




6


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Costs of product license revenues
include production and shipping expenses, as well as costs of licensing third party software incorporated into the Companys products. Costs of service revenues includes salaries and related expenses for professional services and technical
support personnel who provide customization and installation and support services to customers, as well as an allocation of data processing and overhead costs.





Operating expenses are classified into four general categories: sales and marketing, research and development, general and administrative
and amortization of stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing programs and materials.
Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive management, finance and administrative
employees, legal and accounting services. Amortization of stock-based compensation represents the amortization over the related service period of the difference between the exercise price of options granted and the deemed fair market value of the
underlying common stock on the date of grant, as well as amortization of the warrant issued in connection with a joint marketing agreement with Accenture. In addition to the aforementioned operating expenses, the Company also recorded a
restructuring charge in the quarter ended September 30, 2001.





In
April 2000, the Company issued a warrant to Accenture to purchase up to 818,226 shares of common stock at an exercise price of $12.22 per share. The warrant vests contingently upon the achievement of certain milestones, primarily the generation of
license revenue for the Company, and expires on April 20, 2004. The warrant contains a significant cash penalty for Accentures failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant
was determined on the date of grant in accordance with Emerging Issues Task Force Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5.0 million, which was determined using the
Black-Scholes option pricing model. For the nine months ended September 30, 2001, the Company has recognized $0.9 million in amortization expense. The Company expects to recognize amortization expense of $0.3 million for the remainder of 2001, $1.2
million in 2002 and 2003, respectively, and $0.4 million in 2004.





The Companys full-time headcount at September 30, 2001 was 236.





On June 30, 2000, the Company completed an initial public offering (IPO) of common stock that resulted in the issuance of 5,000,000
shares of common stock with an IPO price of $10.00 per share. In connection with the IPO, the Company offered the underwriters the option to purchase an additional 750,000 shares of common stock (underwriters
over-allotment) at the offering price of $10.00 per share. This option was exercised on July 7, 2000. Proceeds to the Company from the IPO and exercise of the underwriters over-allotment amounted to approximately $52.0 million, net
of discounts, commissions and other costs of the offering. The net proceeds are being used for working capital and general corporate purposes, including expansion in sales and marketing both domestically and in Europe, broadening of business
development efforts, and continued investment in product technology.





The Company believes that period-to-period comparisons of operating results should not be relied upon as predictive of future performance because past increases in revenue may not
be sustainable. The Companys prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new, rapidly evolving markets. The Company may not
be successful in addressing such risks and difficulties. Although the Company has experienced significant percentage growth in revenues in past periods, the Company believes that prior growth rates may not be sustainable or indicative of future
operating results.




7


---




Results of Operations





The following table sets forth selected financial data for the periods indicated in dollars and as a
percentage of total revenue.





Three Months Ended September 30,

Nine Months Ended September 30,2001

2000

2001

2000in 000s

% of Revenue

in 000s

% of Revenue

in 000s

% of Revenue

in 000s

% of RevenueRevenuesProduct license

$    4,911


44.6
%

$    6,669


66.2
%

$18,709


51.5
%

$8,380


37.7
%Service

6,105


55.4


3,402


33.8


17,589


48.5


13,869


62.3Total revenues

11,016


100.0


10,071


100.0


36,298


100.0


22,249


100.0Cost of revenuesProduct license

272


2.5


550


5.5


924


2.5


1,030


4.6Service (a)

2,919


26.5


2,636


26.1


8,937


24.6


5,946


26.7Total cost of
revenues

3,191


29.0


3,186


31.6


9,861


27.2


6,976


31.3Gross profit

7,825


71.0


6,885


68.4


26,437


72.8


15,273


68.6Operating expenses:Sales and marketing (a)

5,038


45.7


5,587


55.5


20,074


55.3


10,180


45.8Research and development (a)

2,551


23.2


2,403


23.9


7,826


21.6


4,540


20.4General and administrative (a)

1,804


16.4


2,013


20.0


7,148


19.7


4,757


21.4Amortization of stock-based
             compensation

548


5.0


792


7.9


1,711


4.7


1,837


8.3Restructuring charge

1,827


16.6








1,827


5.0


Total operating expenses

11,768


106.8


10,795


107.2


38,586


106.3


21,314


95.8Operating loss

$   (3,943
)

(35.8
)%

$   (3,910
)

(38.8
)%

$(12,149
)

(33.5
)%

$(6,041
)

(27.2
)%


---

|(a) |  | Exclusive of amortization of stock-based compensation presented as a separate caption.
|--- |  | --------------------------------------------------------------------------------------




Comparison of the three months ended September 30, 2001, to the three months ended September 30, 2000





| | Revenue
| | -------




Total revenue increased approximately $0.9 million, or 9%, to $11.0 million for the three months ended September 30, 2001 from $10.1 million for the three months ended September
30, 2000. As a result of the Company beginning to license its software independent of its integration services, revenue is presented as either (i) product license revenue consisting of licensing the rights to use the Companys software or (ii)
service revenue generated from integrating the Companys software, performing needs analyses for customers and providing maintenance and training services. Product license revenue, comprised of revenue from separate product-only agreements and
from bundled agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, decreased by $1.8 million, or 26%, as a result of a decrease in the number of new contracts due to an economic
slowdown and the significant decline in information technology spending. Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, as well as bundled agreements accounted for under
a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, increased by $2.7 million, or 79%, over the prior year quarter. This increase was primarily a result of an increase
in revenue from time and materials contracts of $3.5 million and an increase of $1.6 million in maintenance revenue, offset by a decrease of $2.2 million from revenue recognized as service revenue under bundled contracts. The service revenue
increase from time and materials contracts is a result of the Company selling separate time and materials contracts beginning in the third quarter of 2000. Revenue from time and materials contracts will fluctuate as revenues from the implementation
of software are not necessarily recognized in the same period as the related license revenue. In any period, service revenue from time and materials contracts are dependent, among other things, on license transactions closed during the current and
preceding quarters and customer decisions regarding implementations of licensed software. The increase in maintenance revenue is a result of a larger number of customers.




8


---




| | Cost of Revenue
| | ---------------




Total cost of revenue remained flat at $3.2 million for the three months ended September 30, 2001 compared with the three months ended September 30, 2000. Gross profit margins
increased to 71.0% for the three months ended September 30, 2001, compared to 68.4% for the three months ended September 30, 2000. Cost of product revenue consisted of royalty fees for licensed third party software that is embedded in the
Companys products or incorporated in the Companys product offerings.





| | Operating Expenses
| | ------------------




Sales and Marketing.    Sales and marketing expenses decreased by approximately $0.6 million, or 10%, to $5.0 million for the three months ended
September 30, 2001 from $5.6 million for the three months ended September 30, 2000. In addition, sales and marketing expense as a percentage of sales also decreased to 45.7% for the quarter ended September 30, 2001, from 55.5% for the quarter ended
September 30, 2000. The decrease in sales and marketing expenses was primarily attributable to the Companys efforts to control and reduce operating expenses and to the postponement of Click Summit, the Companys executive conference,
which is scheduled to take place in the first quarter of 2002.





Research and Development.     Research and development expenses increased by approximately $0.2 million, or 6%, to $2.6 million for the three months
ended September 30, 2001, compared to $2.4 million for the prior year three month period. This increase was primarily attributable to higher third party contractor costs and employee compensation and related expenses due to an increase in the number
of product development personnel during the three months ended September 30, 2001. To date, all software development costs have been expensed as incurred.





General and Administrative.    General and administrative expenses decreased by approximately $0.2 million, or 10%, to $1.8
million for the three months ended September 30, 2001 from $2.0 million for the three months ended September, 2000. This decrease was primarily attributable to the Companys efforts to control and reduce operating expenses.





Amortization of stock-based compensation.    Prior to its
initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the
vesting periods of the applicable options, resulting in expense of $0.2 million and $0.5 million during the three months ended September 30, 2001 and 2000, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in
April 2000 is being amortized over the vesting period of the warrant. Accordingly, $0.3 million of amortization expense was recognized during each of the three months ended September 30, 2001 and 2000.





Restructuring.    In the quarter ended September 30, 2001, the Company
determined that, given current economic conditions, it was necessary to lower its overall cost structure. As a result, the Company recorded a $1.8 million restructuring charge for the quarter ended September 30, 2001. As a part of the restructuring,
the Company terminated approximately 17% of its workforce or approximately 50 personnel across all areas of the Company. The restructuring charge consisted primarily of employee and related costs attributable to personnel who were involuntarily
terminated at the end of the quarter. The restructuring charge also included stock-based compensation, facilities and other costs. The stock-based compensation charge was a non-cash expense incurred for accelerated vesting under contracts with
certain terminated employees. Facilities related costs represent the remaining lease payments for the closing of one office.





Comparison of the nine months ended September 30, 2001, to the nine months ended September 30, 2000





| | Revenue
| | -------




Total revenue increased approximately $14.0 million, or 63%, to $36.3 million for the nine months ended September 30, 2001 from $22.3 million for the nine months ended September
30, 2000. Product license revenue, comprised of revenue from separate product-only agreements and from bundled agreements accounted for under a percentage completed basis using milestones that specifically relate to product deliveries, increased by
$10.3 million, or 123%, due to an increase in the number of new contracts. Service revenue, comprised of fees related to time and materials service contracts, maintenance, training and needs analyses, as well as bundled agreements




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accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and customization services, increased by $3.7 million, or 27%, over the
prior year. The increase in services revenue was primarily a result of increased maintenance and education services and follow-on orders from existing customers from the prior year, and an increase in revenue from time and materials contracts of
$9.3 million, offset by a decrease of $8.7 million from revenue recognized as service revenue under bundled contracts. The service revenue increase from time and materials contracts is a result of the Company selling separate time and materials
contracts beginning in the third quarter of 2000. Revenue from time and materials contracts will fluctuate as revenues from the implementation of software are not necessarily recognized in the same period as the related license revenue. In any
period, service revenue from time and materials contracts are dependent, among other things, on license transactions closed during the current and preceding quarters and customer decisions regarding implementations of licensed software.





| | Cost of Revenue
| | ---------------




Total cost of revenue increased by approximately $2.9 million, or 41%, to $9.9 million for the nine months ended September 30, 2001 from $7.0 million for the nine months ended
September 30, 2000. Gross profit margins increased to 72.8% for the nine months ended September 30, 2001, compared to 68.6% for the nine months ended September 30, 2000. Cost of product revenue consisted primarily of royalty fees for licensed third
party software that is embedded in the Companys products or incorporated in the Companys product offerings. The increase in cost of services revenue was primarily attributable to an increase in compensation and related expenses due to an
increased number of professional services personnel and an increase in third party contractor costs during the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000.





| | Operating Expenses
| | ------------------




Sales and Marketing.    Sales and marketing expenses increased by approximately $9.9 million, or 97%, to $20.1 million for the nine months ended
September 30, 2001 from $10.2 million for the nine months ended September 30, 2000. The increase in sales and marketing expenses was primarily attributable to an increase in compensation and related expenses over the prior year due to an increase in
the number of sales and marketing personnel. The Company also incurred increased expenses for marketing events during the nine months ended September 30, 2001.





Research and Development.    Research and development expenses increased by approximately $3.3 million, or 72%,
to $7.8 million for the nine months ended September 30, 2001, from $4.5 million for the nine months ended September 30, 2000. This increase was primarily attributable to higher third party contractor costs and employee compensation and related
expenses due to an increase in the number of product development personnel during the nine months ended September 30, 2001. To date, all software development costs have been expensed as incurred.





General and Administrative.    General and administrative expenses increased
by approximately $2.4 million, or 50%, to $7.1 million for the nine months ended September 30, 2001 from $4.8 million for the nine months ended September 30, 2000. This increase was primarily attributable to an increase in compensation and related
expenses due to an increased number of operations, management and administrative personnel during the nine months ended September 30, 2001.





Amortization of stock-based compensation.    Prior to its initial public offering, the Company granted certain stock options at
exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting periods of the applicable options, resulting in expense of
$0.8 million and $1.3 million during the nine months ended September 30, 2001 and 2000, respectively. Additionally, the $5.0 million fair value of the warrant issued to Accenture in April 2000 is being amortized over the vesting period of the
warrant. Accordingly, $0.9 million and $0.5 million of amortization expense was recognized during the nine months ended September 30, 2001 and 2000, respectively.




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Restructuring.    In the quarter ended September 30, 2001, the Company determined that, given current economic conditions, it was necessary to lower its
overall cost structure. As a result, the Company recorded a $1.8 million restructuring charge for the quarter ended September 30, 2001. As part of restructuring, the Company terminated approximately 17% of its workforce or approximately 50 personnel
across all areas of the Company. The restructuring charge consisted primarily of employee and related costs attributable to personnel who were involuntarily terminated at the end of the quarter. The restructuring charge also included stock-based
compensation, facilities and other costs. The stock-based compensation charge was a non-cash expense incurred for accelerated vesting under contracts with certain terminated employees. Facilities related costs represent the remaining lease payments
for the closing of one office.





Liquidity and Capital Resources





At September 30, 2001, the Company had $43.7 million of cash and cash equivalents, consisting primarily
of proceeds from its initial public offering. Net cash used in operating activities was $6.0 million and $7.0 million for the nine months ended September 30, 2001 and 2000, respectively. The $6.0 million of cash used in the current nine month period
consisted of a loss before taxes, amortization of stock-based compensation, depreciation and amortization and a one-time resturcturing charge totaling approximately $6.2 million and a decrease in accounts payable and accrued compensation and
expenses of approximately $2.3 million, offset by an increase in deferred revenue of approximately $2.2 million.





Net cash used by investing activities was $1.9 million for the nine months ended September 30, 2001 consisting of purchases of property and equipment and the purchase of intangible
assets during the third quarter of 2001. The Companys capital expenditures consist of purchases of operating resources to manage operations, including computer hardware and software.





Net cash provided by financing activities was approximately $0.4 million for period ended September 30,
2001. The cash provided during the current year period reflects $0.9 million of proceeds from the exercise of stock options offset by $0.5 million in capital lease principal payments.





On March 31, 2001, the Company renewed its $3.0 million revolving credit facility. In January 2000, the
Company obtained a letter of credit under this facility totaling $0.5 million to secure a new office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and fourth anniversaries of the lease
and then declines to $38,130 on the fifth anniversary until the lease expires in August 2005. Accordingly, the letter of credit has declined to $0.4 million.





The Company may use cash resources to fund investments in complementary businesses or technologies. The Company believes that working capital will be
sufficient to meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current plans to raise additional equity during the next twelve months, although such plans are subject to business
and market conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the Company does not currently foresee a need for additional cash resources for long-term needs. In the event additional
financing is required, the Company may not be able to raise it on acceptable terms or at all.





Recent Accounting
Pronouncements





In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting
be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. Statement No. 142 requires that goodwill and certain intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives. Statement No. 142 is effective for
fiscal years beginning after December 15, 2001. The Company does not expect that the adoption of this statement will have a material impact on the Company.





In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value
of a liability for legal obligations associated with the retirement of tangible




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long-lived assets be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle
as a result of an existing or enacted law, statute, or ordinance, or written or oral contract. These associated asset retirement costs are capitalized as apart of the carrying amount of the long-lived asset. This statement is effective for fiscal
years beginning after June 15, 2002. The Company does not expect that the adoption of this statement will have a material impact on the Company.





In August 2001, the FASB issued Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assetswhich addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. While the statement supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,it
retains many of the fundamental provisions of that statement. Statement No. 144 also retains the requirement to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of by
sale, abandonment, or in distribution to owners of is classified as held for sale. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect that the adoption of this statement will have a
material impact on the Company.





Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended:





Statements in this Form 10-Q that are not historical facts and refer to the Companys future prospects are forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as expect, anticipate, intend, believe,
hope, assume, estimate and other similar words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those
indicated by these forward-looking statements as a result of various factors, including but not limited to, the ability of the Company to execute on its plan to enter into strategic alliances with system integrators and business consultants, the
extent of customer acceptance and utilization of the Companys channel management solutions, the impact of competitive products and services, the Companys ability to manage growth and to develop new and enhanced versions of its products
and services, the effect of economic and business conditions, the volume and timing of customer contracts, the Companys ability to expand overseas, changes in technology, deployment delays or errors associated with the Companys products
and the Companys ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Companys business, see Risk Factors in the Companys annual report on Form 10-K
for the year ended December 31, 2000, which is on file with the Securities and Exchange Commission.





Item 3.    Qualitative and Quantitative Disclosures About Market Risk





The following discusses the Companys exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in Part I of the Companys annual report on Form 10-K under
Risk Factors.





| | Foreign Currency Exchange Rate Risk
| | -----------------------------------




To date, predominately all of the Companys recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States
and the exposure to foreign currency exchange rate changes has been immaterial. The Company expects, however, that future product license and professional services revenues may also be derived from international markets and may be denominated in the
currency of the applicable market. As a result, operating results may become subject to significant fluctuations based upon changes in the exchange rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the




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Company engages in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make the Companys products less
competitive in international markets. Although the Company will continue to monitor its exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there
is no assurance that exchange rate fluctuations will not adversely affect financial results in the future.





| | Interest Rate Risk
| | ------------------




As of September 30, 2001, the Company had cash and cash equivalents of $43.7 million. Declines in interest rates will reduce interest income from short-term investments. Based upon
the balance of cash and cash equivalents at September 30, 2001, a change in interest rates of 0.5% would cause a corresponding change in annual interest income of approximately $0.2 million.




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PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





There are no material legal proceedings to which the Company is a party or of which any of its property is subject.





Item 2.    Changes in Securities and Use of Proceeds





On June 26, 2000, the Securities and Exchange Commission declared effective the Companys Registration Statement on Form S-1, File No. 333-30564, relating to the initial
public offering of the Companys common stock, par value $.001 per share. As of September 30, 2001, the Company had spent approximately $8.0 million of the net proceeds for working capital and general corporate purposes. The remaining proceeds
are invested in investment grade, interest bearing securities.





Item 3.    Defaults Upon Senior Securities





Not applicable.





Item 4.    Submission of Matters to a Vote of Security Holders





Not applicable.





Item 5.    Other Information





Not applicable.





Item 6.    Exhibits and Reports on Form 8-K





(a)    Exhibits:





The following exhibits are filed as part of this Form 10-Q:





Exhibit Number

Description10.1


Release and Severance Agreement between Randy A. Gray and the Company dated as of
     September 30, 200110.2


Release and Severance Agreement between Robert J. Markese and the Company dated as of
     September 30, 200110.3


Employment Agreement between William Conroy and the Company dated as of September 30,
     2001





(b)    Reports on Form 8-K





None.




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SIGNATURES





Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





| | CL | ICK COMMERCE, INC.
| | -- | ------------------




| | /S/    REBECCA S. MASKEY
| | ------------------------

| | By:
| | ---

| | Rebecca S. Maskey
| | -----------------

| | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
| | ------------------------------------------------------------------------------------------------------------




|Da | te: November 14, 2001
|-- | ---------------------



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