**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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Form 10-Q

**(Mark One)**

**x**           QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe Quarterly Period Ended March 31, 2005**

**o**            TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the transition periodfrom            to           **

 

**CommissionFile Number 0-30881**

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CLICK COMMERCE, INC.

(Exact name of registrantas 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,52nd FloorChicago, Illinois 60601**

(Address of principalexecutive offices)

**(312) 482-9006**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes o  No x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No x

As of May 13, 2005,there were 11,381,840 shares of the registrant’s common shares outstanding.

 

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**CLICKCOMMERCE, INC.INDEX**
|               | ** **                                                                                                                                 | ** ** | **Page No.** |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I.  | FINANCIAL INFORMATION                                                                                                                      |       |              |   |   |
| Item 1.       | Financial Statements                                                                                                                       |       |              |   |   |
|          | Condensed Consolidated  Balance Sheets as of March 31, 2005 (unaudited) and December 31,  2004                                   |       |              | 3 |   |
|          | Condensed  Consolidated Statements of Income and Comprehensive Income for the three  months ended March 31, 2005 and 2004 (unaudited) |       |              | 4 |   |
|          | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2005 and  2004 (unaudited)                      |       |              | 5 |   |
|          | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                          |       |              | 6 |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                |       |              | 15 |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                |       |              | 21 |   |
| Item 4.       | Controls and Procedures                                                                                                                    |       |              | 22 |   |
| PART II. | OTHER INFORMATION                                                                                                                          |       |              |   |   |
| Item 6.       | Exhibits  and Reports on Form 8-K                                                                                                     |       |              | 23 |   |
| SIGNATURES    |                                                                                                                                       |       | 24                |   |

 

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**CLICK COMMERCE, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS(Dollars in thousands, except share data)(unaudited)**
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                  |       |                         |       |                            |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                   |       |                         | $          | 11,859                          |       |   |   | $ | 13,382 |   |   |
| Trade accounts receivable, net                                                                                                                                                                                                                                                                              |       |                         | 12,267     |                            |       |   | 7,264 |   |   |
| Revenues earned on contracts in progress in excess  of billings                                                                                                                                                                                                                                             |       |                         | —     |                            |       |   | 276 |   |   |
| Prepaids and other current assets                                                                                                                                                                                                                                                                           |       |                         | 887        |                            |       |   | 389 |   |   |
| Total current assets                                                                                                                                                                                                                                                                                        |       |                         | 25,013     |                            |       |   | 21,311 |   |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                |       |                         | 2,516      |                            |       |   | 870 |   |   |
| Intangible  assets, net                                                                                                                                                                                                                                                                                     |       |                         | 20,832     |                            |       |   | 2,944 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                    |       |                         | 31,924     |                            |       |   | 6,874 |   |   |
| Other assets                                                                                                                                                                                                                                                                                                |       |                         | 900        |                            |       |   | 738 |   |   |
| Total assets                                                                                                                                                                                                                                                                                                |       |                         | $          | 81,185                          |       |   |   | $ | 32,737 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                               |       |                         |       |                            |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                        |       |                         |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                            |       |                         | $          | 972                             |       |   |   | $ | 573 |   |   |
| Billings in excess of revenues earned on contracts  in progress                                                                                                                                                                                                                                             |       |                         | 719        |                            |       |   | 68 |   |   |
| Deferred revenue                                                                                                                                                                                                                                                                                            |       |                         | 9,294      |                            |       |   | 5,174 |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                                        |       |                         | 2,286      |                            |       |   | 1,585 |   |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                                              |       |                         | 5,359      |                            |       |   | 2,177 |   |   |
| Total current liabilities                                                                                                                                                                                                                                                                                   |       |                         | 18,630     |                            |       |   | 9,577 |   |   |
| Long-term debt                                                                                                                                                                                                                                                                                              |       |                         | 4,500      |                            |       |   | — |   |   |
| Other liabilities                                                                                                                                                                                                                                                                                           |       |                         | 1,754      |                            |       |   | 6 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                           |       |                         | 24,884     |                            |       |   | 9,583 |   |   |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                  |       |                         |       |                            |       |   |   |   |   |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized, no shares issued and  outstanding                                                                                                                                                                                                          |       |                         | —     |                            |       |   | — |   |   |
| Common stock,  $0.001 par value, 75,000,000 shares authorized; 11,400,363 and  9,742,401 shares issued as of March 31, 2005 and December 31,  2004, respectively; 11,371,299 and 9,713,337 shares outstanding as of March 31,  2005 and December 31, 2004, respectively  |       |                         | 11         |                            |       |   | 10 |   |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                 |       |                         | 99,902     |                            |       |   | 69,386 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                     |       |                         | 153        |                            |       |   | 153 |   |   |
| Deferred  compensation                                                                                                                                                                                                                                                                                      |       |                         | —     |                            |       |   | — |   |   |
| Treasury stock,  at cost—29,064 shares                                                                                                                                                                                                                                                                 |       |                         | (117       | )                               |       |   | (117 | ) |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                        |       |                         | (43,648    | )                               |       |   | (46,278 | ) |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                                             |       |                         | 56,301     |                            |       |   | 23,154 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                                            |       |                         | $          | 81,185                          |       |   |   | $ | 32,737 |   |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**CLICK COMMERCE, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME(Dollars in thousands, except share and per share data)(Unaudited)**
| ** **                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                             | ** ** | **2004** | ** ** |
| Revenues:                                               |       |                                                 |       |   |   |
| Product license                                         |       | $                                                    | 1,963      |   | $ | 644 |   |
| Service:                                                |       |                                                 |       |   |   |
| Maintenance and hosting                                 |       | 3,814                                                |       | 1,728 |   |
| Consulting and implementation service                   |       | 3,497                                                |       | 2,332 |   |
| Subscription                                            |       | 1,651                                                |       | 568 |   |
| Total service                                           |       | 8,962                                                |       | 4,628 |   |
| Total revenues                                          |       | 10,925                                               |       | 5,272 |   |
| Cost of revenues:                                       |       |                                                 |       |   |   |
| Product                                                 |       | 198                                                  |       | 43 |   |
| Service                                                 |       | 3,989                                                |       | 2,424 |   |
| Total cost of revenues                                  |       | 4,187                                                |       | 2,467 |   |
| Gross profit                                            |       | 6,738                                                |       | 2,805 |   |
| Operating expenses:                                     |       |                                                 |       |   |   |
| Sales and marketing                                     |       | 1,146                                                |       | 598 |   |
| Research and development                                |       | 1,209                                                |       | 411 |   |
| General and administrative                              |       | 1,006                                                |       | 915 |   |
| Amortization of stock-based compensation                |       | —                                               |       | 8 |   |
| Amortization of intangibles                             |       | 720                                                  |       | 40 |   |
| Total operating expenses                                |       | 4,081                                                |       | 1,972 |   |
| Operating income                                        |       | 2,657                                                |       | 833 |   |
| Other income  (expense), net                            |       | (27                                                  | )          | 18 |   |
| Income before  income taxes                             |       | 2,630                                                |       | 851 |   |
| Income tax  expense                                     |       | —                                               |       | — |   |
| Net income                                              |       | $                                                    | 2,630      |   | $ | 851 |   |
| Basic net income  per common share                      |       | $                                                    | 0.25       |   | $ | 0.10 |   |
| Diluted net  income per common share                    |       | $                                                    | 0.23       |   | $ | 0.10 |   |
| Weighted average common shares outstanding—basic   |       | 10,698,790                                           |       | 8,391,143 |   |
| Weighted average common shares outstanding—diluted |       | 11,412,852                                           |       | 8,863,265 |   |
| Comprehensive income:                                   |       |                                                 |       |   |   |
| Net income                                              |       | $                                                    | 2,630      |   | $ | 851 |   |
| Foreign currency translation adjustment                 |       | —                                               |       | 5 |   |
| Comprehensive  income                                   |       | $                                                    | 2,630      |   | $ | 856 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**CLICK COMMERCE, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)**
| ** **                                                                                    | ** ** | **Three months ended  March 31,**         | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| **Cash flows from operating  activities:**                                                    |       |                                                     |       |   |   |   |   |   |   |
| Net income                                                                                    |       |                                                     | $          | 2,630 |   |   |   | $ | 851 |   |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                                                     |       |   |   |   |   |   |   |
| Amortization of stock-based compensation                                                      |       |                                                     | —     |   |   |   | 8 |   |   |
| Depreciation                                                                                  |       |                                                     | 204        |   |   |   | 131 |   |   |
| Amortization of intangibles                                                                   |       |                                                     | 917        |   |   |   | 40 |   |   |
| Provision for doubtful accounts                                                               |       |                                                     | —     |   |   |   | 60 |   |   |
| Changes  in operating assets and liabilities, net of effect of acquisitions:                  |       |                                                     |       |   |   |   |   |   |   |
| Trade accounts receivable                                                                     |       |                                                     | 603        |   |   |   | (1,223 | ) |   |
| Prepaids and other current assets                                                             |       |                                                     | 130        |   |   |   | 282 |   |   |
| Accounts payable                                                                              |       |                                                     | (1,303     | ) |   |   | 142 |   |   |
| Billings in excess of revenues earned on contracts in  progress                               |       |                                                     | 2          |   |   |   | (5 | ) |   |
| Deferred revenue                                                                              |       |                                                     | (880       | ) |   |   | (477 | ) |   |
| Accrued compensation                                                                          |       |                                                     | (2,668     | ) |   |   | (45 | ) |   |
| Accrued expenses and other current liabilities                                                |       |                                                     | 415        |   |   |   | 71 |   |   |
| Other, net                                                                                    |       |                                                     | 243        |   |   |   | (57 | ) |   |
| Net cash provided by (used in) operating activities                                           |       |                                                     | 293        |   |   |   | (222 | ) |   |
| **Cash flows from investing  activities:**                                                    |       |                                                     |       |   |   |   |   |   |   |
| Purchases of property and equipment)                                                          |       |                                                     | (156       | ) |   |   | (81 | ) |   |
| Acquisition of ChannelWave, net of transaction costs**(a)**                                   |       |                                                     | (1,000     | ) |   |   | — |   |   |
| Acquisition of Optum, net of transaction costs and  cash acquired**(a)**                      |       |                                                     | (986       | ) |   |   | — |   |   |
| Net cash (used in) investing activities                                                       |       |                                                     | (2,142     | ) |   |   | (81 | ) |   |
| **Cash flows from financing  activities:**                                                    |       |                                                     |       |   |   |   |   |   |   |
| Proceeds from exercise of stock options                                                       |       |                                                     | 114        |   |   |   | 58 |   |   |
| Proceeds from long-term debt                                                                  |       |                                                     | 4,500      |   |   |   | — |   |   |
| Payments on capital lease obligations                                                         |       |                                                     | (3         | ) |   |   | — |   |   |
| Payments of short-term debt obligations                                                       |       |                                                     | (1,761     | ) |   |   | — |   |   |
| Payments of long-term debt obligations                                                        |       |                                                     | (2,524     | ) |   |   | (66 | ) |   |
| Net cash provided by (used in) financing activities                                           |       |                                                     | 326        |   |   |   | (8 | ) |   |
| Effect of foreign exchange rates on cash and cash  equivalents                                |       |                                                     | —     |   |   |   | 5 |   |   |
| Net decrease in cash and cash equivalents                                                     |       |                                                     | (1,523     | ) |   |   | (306 | ) |   |
| Cash and cash equivalents at beginning of period                                              |       |                                                     | 13,382     |   |   |   | 11,863 |   |   |
| Cash and cash equivalents at end of period                                                    |       |                                                     | $          | 11,859 |   |   |   | $ | 11,557 |   |   |
| **Supplemental  disclosures:**                                                                |       |                                                     |       |   |   |   |   |   |   |
| Cash  paid in the period for:                                                                 |       |                                                     |       |   |   |   |   |   |   |
| Interest                                                                                      |       |                                                     | $          | 35 |   |   |   | $ | — |   |   |
| Income taxes                                                                                  |       |                                                     | $          | — |   |   |   | $ | — |   |   |
| Noncash  investing activities:                                                                |       |                                                     |       |   |   |   |   |   |   |
| Common stock issued for acquisition activities                                                |       |                                                     | $          | 30,404 |   |   |   | $ | — |   |   |

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**(a)****               **Assets and liabilities were recorded as follows inconnection with the cash payments for the ChannelWave, Inc. and Optumacquisitions:
| ** **                                    | ** ** | **ChannelWave,  Inc.** | ** ** | **Optum,  Inc.** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------|------------|
| Intangible assets acquired                    |       |                   | $          | 2,500            |       |   | $ | 16,302 |   |
| Goodwill                                      |       |                   | 3,713      |             |       | 21,337 |   |
| Other assets acquired                         |       |                   | 496        |             |       | 6,928 |   |
| Total assets acquired (net of cash acquired)  |       |                   | 6,709      |             |       | 44,567 |   |
| Less: Liabilities acquired                    |       |                   | 1,504      |             |       | 17,457 |   |
| Net assets acquired                           |       |                   | 5,205      |             |       | 27,110 |   |
| Less: Value of shares issued for acquisitions |       |                   | 4,280      |             |       | 26,124 |   |
| Plus: Acquisition costs paid                  |       |                   | 75         |             |       | — |   |
| Total cash paid                               |       |                   | $          | 1,000            |       |   | $ | 986 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**CLICK COMMERCE, INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1. BASIS OF PRESENTATION**

The unaudited condensedconsolidated 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. Theresults of operations for the three months ended March 31, 2005 includethe results of operations of ChannelWave, Inc. (see note 4) from February 3,2005 through the end of the period and the results of operations of Optum, Inc.(see note 4) from February 8, 2005 through the end of the period. Theresults of operations for the interim periods presented are not necessarilyindicative of the results to be expected for any subsequent quarter or for theentire fiscal year ending December 31, 2005. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted in accordance with the Securities andExchange Commission’s rules and regulations. The unaudited condensedconsolidated financial statements and notes included herein should be read inconjunction with the Company’s audited consolidated financial statements andnotes included in the Company’s Annual Report on Form 10-K and otherdocuments that have been filed with the Securities and Exchange Commission.

**2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Revenue Recognition**

Substantially all of the Company’s revenues arederived from four primary sources: (i) licensing software, (ii) providingtechnical support and product updates, otherwise known as maintenance, (iii) applicationhosting, and (iv) providing professional services, includingimplementation and training services. The Company’s software is generally soldthrough a perpetual license or a limited term license (a subscription). TheCompany licenses its software in multiple-element arrangements in which thecustomer typically purchases a combination of: (i) software products, (ii) amaintenance arrangement, which is generally priced as a percentage of thesoftware license fees and provides for technical support and updates over aperiod of generally one year, (iii) hosting services, and/or (iv) aprofessional services arrangement.

The Company recognizes revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2 “SoftwareRevenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9,“Software Revenue Recognition with Respect to Certain Arrangements.” Under theresidual method, revenue is recognized in a multiple-element arrangement whencompany-specific objective evidence of fair value exists for all of theundelivered elements in the arrangement, but does not exist for one or more ofthe delivered elements in the arrangement. The Company allocates revenue toeach element in a multiple-element arrangement based on its respective fairvalue, with the fair value determined by the price charged when that element issold separately. The Company defers revenue for the fair value of itsundelivered elements (e.g. professional services and maintenance) andrecognizes revenue for the remainder of the arrangement fee attributable to thedelivered elements (i.e. software product) when the criteria in SOP 97-2have been met. If evidence of fair value of the undelivered elements of thearrangement does not exist, all revenue from the arrangement is deferred untilsuch time evidence of fair value does exist, or until all elements of thearrangement are delivered.

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License revenue from contracts in which the Company’sservices are not considered essential to the functionality of the software arerecognized upon delivery, assuming the above criteria for revenue recognitionare met under SOP 97-2. Services are not considered essential if thesoftware is ready for use by the customer upon receipt and, therefore,implementation services do not involve significant customization to, ormodification or development of, the underlying software code.

Revenue from contracts in which the Company’s servicesare essential to the functionality of the other elements of the contract isrecognized using the percentage-of-completion method under contract accountingas services are performed as the Company delivers, customizes and installs thesoftware. The percentage completed is measured by the percentage of labor hoursincurred to date in relation to estimated total labor hours required to fulfillthe contract. In contracts with revenue recognized under thepercentage-of-completion method based on labor hour inputs, revenues arepresented as product license revenue to the extent that the underlyingcontracts are for software licenses based on equal application of discountsacross all elements of the larger arrangement. For arrangements in whichpercentage-of-completion accounting is used, the Company records cash receiptsfrom customers and billed amounts due from customers in excess of recognizedrevenue as billings in excess of revenues earned on contracts in progress. Thetiming and amount of cash receipts from customers can vary significantlydepending on specific contract terms and can, therefore, have a significantimpact on the amount of billings in excess of revenues earned on contracts inprogress at the end of any given period.

The Company provides hosting services to customers thathave licensed the Company’s software under a limited-term software license (asubscription). Software subscriptions have been accounted for under revenuerecognition principles in accordance with the guidance provided by StaffAccounting Bulletin (“SAB”) No. 104, “*RevenueRecognition.”* The fees related to multiple-element arrangements are allocatedto the individual elements in accordance with Emerging Issues Task Force (“EITF”)00-21 “*Revenue Arrangements with MultipleDeliverables,”* based upon verifiable, objective evidence of the fairvalues of each accounting unit. The Company’s subscription arrangements withcustomers generally include several elements, including (1) a limited-termsoftware license (a subscription), (2) strategic consulting services, (3) set-upand software subscription services, and (4) hosting services. The Companyrequires customers in these limited term arrangements to use its hostingservices, which in accordance with EITF 00-3, “*Application of AICPA Statement of Position 97-2 to ArrangementsThat Include the Right to Use Software Stored on Another Entity’s Hardware,”*results in all arrangement revenue being deferred and recognized ratably overthe term of the agreement analogous to a service arrangement. If thearrangement includes consulting services, these services are presented asconsulting and implementation service revenues and are deferred and recognizedratably over the term of the arrangement, which is normally 12-24 months.Under SAB No. 104 “Revenue Recognition,” costs associated with set-up andimplementation of the subscriptions may be expensed as incurred or deferred andrecognized over the term of the related arrangement. The Company has elected todefer such costs. The software subscription service typically begins uponcustomer acceptance.

The Company also provides hosting services tocustomers that have licensed the Company’s software on a perpetual basis. Insuch cases and in accordance with EITF 00-3, the hosting revenue isconsidered a separate contractual element of the arrangement and is recognizedaccording to SOP 97-2. Fair value of the hosting services is typicallybased on the stated renewal rate of the hosting services, which is deemedsubstantive by management.

The Company determines the fair value of themaintenance portion of the arrangement based on the stated renewal rate foradditional maintenance terms based on renewal rates charged separately to othercompanies. The Company’s customers typically prepay maintenance for the firstyear in connection with new software licenses and the related revenue isdeferred and recognized ratably over the term of the initial maintenancecontract. Maintenance is renewable by the customer on an annual basisthereafter. Rates for maintenance, including subsequent renewal rates, aretypically established based upon a 

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specified percentage ofnet license fees as set forth in the arrangement and are deemed to besubstantive by management.

Professional service revenues primarily consists ofimplementation services related to the installation of the Company’s softwareproducts and training revenues. The fair value of the professional servicesportion of the arrangement is based on the daily rates the Company charges forthese services when sold independently from a software license.

In accordance with EITF No. 01-14,the Company classifies the reimbursement of out-of-pocket expenses from its customersas consulting and implementation revenue in the statement of income.

**Cash,Cash Equivalents and Short-Term Investments**

The Company considers allhighly liquid investments with original maturity dates of three months or lessto be cash equivalents. Cash equivalents are carried at cost, whichapproximates fair market value.

**Long-term Investments**

The Company has investedin a long-term investment fund. Under terms of the investment, the Company hasa total commitment of $2.0 million of which $920,000 has been contributed to datefor a pro rata ownership interest of less than 2%.

**Stock-Based Compensation**

The Company accounts for its stock options inaccordance with the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123,*“Accounting for Stock-BasedCompensation,”* which permits entities to recognize as expense overthe vesting period the fair value of all stock-based awards on the date ofgrant. Alternatively, SFAS No. 123 also allows entities to continue toapply the provisions of Accounting Principles Board Opinion No. 25,*“Accounting for Stock Issued to Employees”*(“APB 25”) and related interpretations. The Company continues to apply theprovisions of APB 25 and provides the pro forma disclosures required by SFAS No. 123,as amended by SFAS No. 148,*“Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123.”* As such, compensation expense would berecorded only if the fair value of the underlying stock exceeded the exerciseprice on the grant date.

TheCompany has applied APB No. 25 and related interpretations in accountingfor the Employee Stock Option Plan and the Directors’ Stock Option Plan.Accordingly, no compensation expense has been recognized on stock options forwhich the exercise price equaled the fair value at the date of grant. Had theCompany determined compensation expense based on the method required by SFAS No. 123,the Company’s net income and net income per common share for the three monthsended March 31, 2005 and 2004 would approximate the pro forma amountsbelow.
| ** **                                                  | ** ** | **Three months ended  March 31,**         | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                                  | ** ** |
| Stock-based employee  compensation expense attributable to: |       |                                                     |       |   |   |   |   |   |   |
| Cost of revenues                                            |       |                                                     | —     |   |   |   | 2 |   |   |
| Sales and marketing                                         |       |                                                     | —     |   |   |   | 6 |   |   |
| Research and development                                    |       |                                                     | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                     | $          | — |   |   |   | $ | 8 |   |   |
|                                                             |            |                                                          |            |  |  |  |  |  |  |  |  |

 

Prior to its IPO,the Company granted certain stock options at exercise prices less than theirdeemed fair value; accordingly, the Company recorded deferred compensation of$4,636,000. Such deferred 

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compensationwas amortized on a straight-line basis over the vesting period of eachindividual award, resulting in $8,000 of stock-based compensation expense forthe three months ended March 31, 2004. The following table contains theamortization expense attributable to each noted expense caption, as applicableon the Condensed Consolidated Statements of Operations.

Thefair value of each stock option granted is estimated on the date of grant usingthe Black-Scholes option-pricing model, with the following weighted averageassumptions for the three months ended March 31, 2005 and the three monthsended March 31, 2004, respectively: expected life of 4.25 years foreach period; expected volatility of 147% and 99%; risk-free interest rate of2.7% for each period; and 0% dividend yield for each period.
| ** **                                                                                                                     | ** ** | **Three months ended  March 31,**                     | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| ** **                                                                                                                     | ** ** | **(in thousands, except  per share data)**       | ** ** |
| Net income, as  reported                                                                                                       |       |                                                                 | $          | 2,630 |   |   |   | $ | 851 |   |   |
| Stock-based employee compensation expense included  in the determination of net income as reported, net of related tax effects |       |                                                                 | —     |   |   |   | 8 |   |   |
| Total fair value method employee stock-based  compensation expense, net of related tax effects                                 |       |                                                                 | (199       | ) |   |   | (268 | ) |   |
| Pro forma net income                                                                                                           |       |                                                                 | $          | 2,431 |   |   |   | $ | 591 |   |   |
| Basic income per  share:                                                                                                       |       |                                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                                    |       |                                                                 | $          | 0.25 |   |   |   | $ | 0.10 |   |   |
| Pro forma                                                                                                                      |       |                                                                 | $          | 0.23 |   |   |   | $ | 0.07 |   |   |
| Diluted income  per share:                                                                                                     |       |                                                                 |       |   |   |   |   |   |   |
| As reported                                                                                                                    |       |                                                                 | $          | 0.23 |   |   |   | $ | 0.10 |   |   |
| Pro forma                                                                                                                      |       |                                                                 | $          | 0.21 |   |   |   | $ | 0.07 |   |   |

 

**3. NET INCOME PER SHARE**

Netincome per share was computed as follows:
| ** **                                                  | ** ** | **Three months ended  March 31,**               | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **    2005    **       | ** ** | **     2004     ** | ** ** |
| ** **                                                  | ** ** | **(in thousands, except  per share data)** | ** ** |
| **Basic  income per share:**                                |       |                                                           |       |   |   |   |   |
| Net income                                                  |       | $                                                              | 2,630      |   |   | $ | 851 |   |   |
| Weighted average common shares outstanding                  |       | 10,699                                                         |       |   | 8,391 |   |   |
| Per share amount                                            |       | $                                                              | 0.25       |   |   | $ | 0.10 |   |   |
| **Diluted income per share:**                               |       |                                                           |       |   |   |   |   |
| Net income                                                  |       | $                                                              | 2,630      |   |   | $ | 851 |   |   |
| Weighted average common shares outstanding                  |       | 10,699                                                         |       |   | 8,391 |   |   |
| Add: Effect of dilutive securities—stock options       |       | 714                                                            |       |   | 472 |   |   |
| Diluted weighted average and equivalent shares  outstanding |       | 11,413                                                         |       |   | 8,863 |   |   |
| Per share amount                                            |       | $                                                              | 0.23       |   |   | $ | 0.10 |   |   |

 

For the three months endedMarch 31, 2005 and 2004, 67,210 and 101,177 shares, respectively,attributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive.

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**4. BUSINESS COMBINATIONS**

On April 21, 2004, the Company entered into anAsset Purchase Agreement (the “Purchase Agreement”) with Webridge, Inc. (“Webridge”),a privately held Delaware corporation based in Beaverton, Oregon. Pursuant tothe Purchase Agreement, dated as of March 17, 2004 and amended March 30,2004, Click-Webridge, Inc., a wholly owned subsidiary of the Company,purchased substantially all of the operating assets of Webridge. Click-Webridge, Inc.acquired the operating assets of Webridge based on a valuation of Webridge as agoing-concern, for consideration consisting of 615,303 shares of ClickCommerce, Inc. common stock, valued at $5.766 per share, including sharesissued for working capital adjustments.

On July 1, 2004, The Company entered into anAgreement and Plan of Merger dated as of June 17, 2004 to acquire bTrade, Inc.(“bTrade”), a privately held Texas corporation based in Irving, Texas. Pursuantto this Agreement and Plan of Merger, bTrade became a wholly owned indirectsubsidiary of the Company. The Company acquired bTrade, based on a valuation ofbTrade as a going-concern, for consideration consisting of approximately669,367 shares (adjusted for working capital settlements), valued at $4.795 pershare, of Company common stock, $0.2 million of cash, and the repayment ofapproximately $1.3 million of existing bTrade indebtedness.

On February 2, 2005, the Company entered into anAsset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”). Pursuant to the Purchase Agreement, the Company acquiredcertain assets from ChannelWave, including substantially all assets relating toChannelWave’s Partner Relationship Management System and Service InformationSystem businesses, for consideration comprised of $1.0 million of cash and225,807 shares valued at $18.954 per share of the Company’s common stock (ofwhich 29,033 shares are being held by the Company in escrow for certainpotential additional liabilities of ChannelWave pursuant to the PurchaseAgreement). The shares of the Company’s common stock are expected to beregistered for resale on a Registration Statement on Form S-3.

On February 7, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”)and its stockholders, pursuant to which the Company acquired Optum. Inconsideration for the merger, the Company paid $325,467 in cash, issued1,405,780 shares valued at $18.583 per share of the Company’s common stockto the stockholders of Optum (of which $65,093 in cash and 281,156 sharesof the Company’s common stock are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement),assumed approximately $4.3 million of Optum indebtedness, and incurredvarious transaction-related expenses. The shares of the Company’s common stockare expected to be registered for resale on a Registration Statement on Form S-3.

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Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective dates of the ChannelWave and Optumacquisitions. The Company incurred approximately $75,000 and $250,000 of directexpenses related to the closing of the ChannelWave and Optum acquisitions,respectively. Due to the timing of the acquisitions, the final allocations ofthe purchase prices are subject to change as the Company completes the valuationof the acquired assets and assumed liabilities.
| ** **                     | ** ** | **ChannelWave  February 2, 2005** | ** ** | **Optum  February 7,2005** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **(in thousands)**                     | ** ** |
| Assets:                        |       |                                        |       |                            |       |   |   |   |   |
| Cash and cash equivalents      |       |                                        | $          | —                          |       |   |   | $ | 817 |   |   |
| Trade accounts receivable, net |       |                                        | 446        |                            |       |   | 4,235 |   |   |
| Other current assets           |       |                                        | —     |                            |       |   | 628 |   |   |
| Total current assets           |       |                                        | 446        |                            |       |   | 5,680 |   |   |
| Property and equipment         |       |                                        | 50         |                            |       |   | 1,644 |   |   |
| Intangible assets              |       |                                        | 2,500      |                            |       |   | 16,302 |   |   |
| Goodwill                       |       |                                        | 3,713      |                            |       |   | 21,337 |   |   |
| Other assets                   |       |                                        | —     |                            |       |   | 421 |   |   |
| Total assets                   |       |                                        | 6,709      |                            |       |   | 45,384 |   |   |
| Liabilities:                   |       |                                        |       |                            |       |   |   |   |   |
| Accounts payable               |       |                                        | —     |                            |       |   | 1,705 |   |   |
| Accrued liabilities            |       |                                        | 75         |                            |       |   | 4,363 |   |   |
| Accrued compensation           |       |                                        | —     |                            |       |   | 3,369 |   |   |
| Deferred revenue               |       |                                        | 1,429      |                            |       |   | 3,570 |   |   |
| Short-term lease obligation    |       |                                        | —     |                            |       |   | 165 |   |   |
| Short-term debt obligations    |       |                                        | —     |                            |       |   | 1,761 |   |   |
| Long-term debt obligation      |       |                                        | —     |                            |       |   | 2,524 |   |   |
| Total liabilities              |       |                                        | 1,504      |                            |       |   | 17,457 |   |   |
| Net assets  acquired           |       |                                        | $          | 5,205                           |       |   |   | $ | 27,927 |   |   |

 

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The following table setsforth the allocation, to date, of intangible assets to customer relationships,developed technology, trade names and order backlog, as well as the in-processR&D charge recorded from the acquisition of bTrade. These intangible assets,as well as the goodwill recorded by the Company, will be evaluated, asrequired, to determine that the fair values of such assets do not exceed theirrecorded values. If an impairment exists, the carrying values of such assetswill be reduced to their fair value.
| ** **                                               | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In process  R&D(5)** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|-----------|------------|
| Optum(6)                                                 |       |                           | $          | 11,165                       |       |                |       | $                     | 3,424      |                            |       |      | $          | — |   |   |   | $ | 1,713 |   |   |   | $ | — |   |   | $ | 16,302 |   |
| ChannelWave(6)                                           |       |                           | 1,750      |                         |       |                | 750        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 2,500 |   |
| bTrade                                                   |       |                           | 1,195      |                         |       |                | 274        |                  |       |                            | —     |      |       |   | 143 |   |   |   | 6 |   |   | 1,618 |   |
| Webridge                                                 |       |                           | 560        |                         |       |                | 910        |                  |       |                            | 150        |      |       |   | — |   |   |   | — |   |   | 1,620 |   |
| Allegis                                                  |       |                           | 466        |                         |       |                | —     |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 466 |   |
| Gross intangible assets and in-process R&D           |       |                           | 15,136     |                         |       |                | 5,358      |                  |       |                            | 150        |      |       |   | 1,856 |   |   |   | 6 |   |   | 22,506 |   |
| Accumulated amortization to date                         |       |                           | (868       | )                            |       |                | (344       | )                     |       |                            | (92        | )         |       |   | (364 | ) |   |   | (6 | ) |   | (1,674 | ) |
| Balance at March 31, 2005                           |       |                           | $          | 14,268                       |       |                |       | $                     | 5,014      |                            |       |      | $          | 58 |   |   |   | $ | 1,492 |   |   |   | $ | — |   |   | $ | 20,832 |   |
| Amortization expense                                     |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Three months  ended March 31, 2005                  |       |                           | 401        |                         |       |                | 168        |                  |       |                            | 57         |      |       |   | 291 |   |   |   |   |   |   | 917 |   |
| Three months  ended March 31, 2004                  |       |                           | 40         |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   | 40 |   |
| Estimated  amortization expense for the 12 months ended: |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31,  2005                                  |       |                           | 2,210      |                         |       |                | 1,035      |                  |       |                            | 50         |      |       |   | 1,611 |   |   |   |   |   |   | 4,906 |   |
| December 31,  2006                                  |       |                           | 2,345      |                         |       |                | 1,117      |                  |       |                            | 50         |      |       |   | 173 |   |   |   |   |   |   | 3,685 |   |
| December 31,  2007                                  |       |                           | 2,238      |                         |       |                | 1,117      |                  |       |                            | 15         |      |       |   |   |   |   |   |   |   |   | 3,370 |   |
| December 31,  2008                                  |       |                           | 2,238      |                         |       |                | 959        |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   | 3,197 |   |
| December 31,  2009                                  |       |                           | 2,040      |                         |       |                | 862        |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   | 2,903 |   |

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(1)          Customer relationshipsare amortized over 7 years for Optum, 6 years for ChannelWave, 5 years forbTrade and Webridge, and 3 years for Allegis.

(2)          Developed technology isamortized over 5 years for Optum, ChannelWave and bTrade and 4 years forWebridge and is reflected in the cost of product license revenue on theconsolidated statement of income and comprehensive income (loss).

(3)          Trade names areamortized over 3 years.

(4)          Order backlogs areamortized over 1 year for Optum and bTrade.

(5)          In-process R&D ischarged immediately to amortization of intangible assets on the statement ofincome and comprehensive income.

(6)          Pending final valuationby independent firm.

The following unauditedpro forma financial information for the three months ended March 31, 2005and 2004 presents the consolidated operations of the Company as if all of theacquisitions had been made on January 1, 2004, after giving effect tocertain adjustments for the pro forma acquisition as of the assumed January 1,2004 acquisition date. Under the provisions of SFAS No. 142, goodwillacquired in 

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transactionscompleted after June 30, 2001 is not amortized. As all of the Company’sacquisitions occurred subsequent to that date, these pro forma results do notreflect any goodwill amortization expense. The unaudited pro forma financialinformation is provided for informational purposes only, it should not beconstrued to be indicative of the Company’s consolidated results of operationshad the acquisitions been consummated on these earlier dates and do not projectthe Company’s results of operations for any future period:
| ** **                    | ** ** | **Three months ended  March 31,**                                 | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| ** **                    | ** ** | **(in thousands except  share amount)**                           | ** ** |
| Revenues                      |       |                                                                             | $          | 13,027 |   |   |   | $ | 15,503 |   |   |
| Net income (loss)             |       |                                                                             | 2,646      |   |   |   |   (4,209 | ) |   |
| Basic net income  per share   |       |                                                                             | $          | 0.23 |   |   |   | $ | (0.42 | ) |   |
| Diluted net income per  share |       |                                                                             | $          | 0.22 |   |   |   | $ | N/A |   |   |

 

**5. RESTRUCTURING**

In the second quarter of 2003, the Company implementeda restructuring plan following the acquisition of Allegis. As part of thisplan, certain redundant costs were eliminated including rents for excess officespace in Chicago and Boston.

As of March31, 2005, the Company’s restructuring accrual covered remaining leasecommitments on excess office space in Boston. Due to the length of this leaseagreement, payments against the restructuring accrual will be made through thequarter ending December 31, 2005. The following table contains thesignificant components of the restructuring charge and current year-to-dateactivity relating to those components.
| ** **                | ** ** | **Accrual at  December 31,  2004** | ** ** | **2005 YTD  cash  payments** | ** ** | **Balance at  March 31,  2005** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------|------------|
| Facilities  related costs |       |                                         | $          | 79                                |       |                                      |       | $ | (18 | ) |   |   | $ | 61 |   |   |
|                           |            |                                              |            |                                   |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

**6. FINANCING ARRANGEMENTS**

On March 31, 2005, theCompany entered into a $10.0 million revolving line of credit maturing on April1, 2008. The borrowing under the line of credit carries an interest rate basedon the LIBOR average rate with a weighted average interest rate of 5.75% in thequarter ended March 31, 2005. The unused portion has a fee of 0.3%. On March31, 2005, the Company borrowed $4.5 million to pay off the debt and certainliabilities assumed in the Optum acquisition. Of the remaining $5.5 million, upto $2.0 million may be used for the Company’s letters of credit. The line ofcredit contains terms that, among other provisions, require the Company tomaintain certain minimum net worth and other financial ratios and specificlimits or restrictions on additional indebtedness, liens and continuity ofbusiness. Provisions under this line of credit are not considered restrictiveto normal operations.

**7. COMMITMENTS AND CONTINGENCIES**

In November 2002, the FASB issued FIN 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of others*.”Under the Company’s standard software license agreements, the Company agrees toindemnify, defend and hold harmless its licensees’ use of Company software fromand against certain losses, damages and costs arising from claims alleging thelicensees’ use of Company software infringes on the intellectual propertyrights of a third party. The indemnification is contingent upon (a) thecustomer providing the Company with prompt written notice of 

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such claims; (b) thecustomer providing reasonable cooperation to the Company in the defense andsettlement of such claim, at the Company’s expense; and (c) the Companyhaving sole authority to defend or settle the claim. Historically, the Companyhas not been required to pay material amounts in connection with claimsasserted under these provisions, and accordingly, the Company has not recordeda liability relating to such provisions.

In the fourth quarter of 2004, the Company received aletter from the tax authorities in the Netherlands that proposed taxdeficiencies, penalties and interest based on audits of the years 2000, 2001and 2002 in the amount of EURO 2.3 million, or approximately $3.2 million.The asserted tax deficiencies relate to certain wage tax amounts, includingamounts related to vested employee stock options that the tax inspectorbelieves should have been withheld by the Company on behalf of severalemployees. The Company believes that it has meritorious legal defenses to asignificant portion of these alleged deficiencies. The Company recorded anaccrual of $650,000 in the fourth quarter of the year ended December 31,2004 for its assessment of the most probable outcome of this matter. Thisreserve is recorded in accrued expenses and other current liabilities on the March 31,2005 and December 31, 2004 consolidated balance sheets.

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**Item2.        Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

The following discussionshould be read in conjunction with the Company’s consolidated condensedfinancial statements and notes elsewhere in this quarterly report.

**Overview**

Click Commerce, Inc. (the “Company”) providessoftware designed to help companies streamline their trading partnerinteractions and automate compliance-related activities. Using our software,companies can optimize business processes, improve financial performance, lowercosts for partners and customers, increase brand loyalty, improve customerservice and reduce risk. The Company’s collaborative commerce and supply chainsolutions enable companies to streamline their trading partner interactions todrive business value and competitive advantage. The Company’s complianceautomation solutions enable institutions to automate their regulatorycompliance processes and manage research project approvals. Each of the company’sproduct lines applies similar underlying technology to effect secure Internetcommunications as a replacement for handwritten forms, telephone and faxcommunications and other electronic data systems.

The Company commenced operations on August 20,1996. During the period from inception until early 1998, the Company wasprimarily engaged in developing software for channel management solutions. TheCompany implemented the first Channel Management Solution in the second quarterof 1997.

Effective March 24, 2003, the Company completedits acquisition of all of the capital stock of Allegis Corporation (“Allegis”),a privately-held California corporation engaged in licensing partnerrelationship management software and providing professional implementationservices, hosting and maintenance services related to its software. Results ofAllegis’ operations have been included in the Company’s consolidated financialstatements since March 24, 2003. Under the terms and conditions of theAgreement and Plan of Merger, Allegis became a wholly owned subsidiary of theCompany, and the holders of Allegis’ preferred stock received cashconsideration in an aggregate amount of approximately $10,200. The Companyfunded the acquisition using available cash on hand.

Effective April 21, 2004, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with Webridge, Inc.(“Webridge”), a privately held Delaware corporation based in Beaverton, Oregon.Pursuant to the Purchase Agreement, dated as of March 17, 2004 and amendedMarch 30, 2004, Click-Webridge, Inc., a wholly owned subsidiary ofthe Company, purchased substantially all of the operating assets of Webridge. Click-Webridge, Inc.acquired the operating assets of Webridge based on a valuation of Webridge as agoing-concern, for consideration consisting of 615,303 shares of ClickCommerce, Inc. common stock, valued at $5.766 per share, including sharesissued for working capital adjustments. The Company incurred $0.2 million of transaction costs.

On July 1, 2004, the Company entered into anAgreement and Plan of Merger dated as of June 17, 2004 to acquire all ofthe capital stock of bTrade, Inc. (“bTrade”), a privately-held Texascorporation based in Irving, Texas. Pursuant to this Agreement and Plan ofMerger, bTrade became a wholly owned indirect subsidiary of the Company. TheCompany acquired bTrade, based on a valuation of bTrade as a going-concern, forconsideration consisting of approximately 669,367 shares (adjusted for workingcapital settlements), valued at $4.795 per share, of Company common stock, $0.2million of cash, and the assumption of and repayment of approximately $1.3million of existing bTrade indebtedness. The Company incurred $0.2 million oftransaction costs.

On February 2, 2005, the Company entered into anAsset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”), pursuant to which the Company acquired certain assets fromChannelWave, including substantially all assets relating to ChannelWave’sPartner Relationship Management System and Service Information Systembusinesses, for consideration 

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comprising$1.0 million of cash and 225,807 shares valued at $18.954 per share of theCompany’s common stock (of which 29,033 shares are being held by the Company inescrow for certain potential additional liabilities of ChannelWave pursuant tothe Purchase Agreement). The shares of the Company’s common stock are expectedto be registered for resale on a Registration Statement on Form S-3.

On February 7, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”)and its stockholders, pursuant to which the Company acquired Optum. Inconsideration for the merger, the Company paid $325,467 in cash, and issued1,405,780 shares valued at $18.583 per share of the Company’s common stockto the stockholders of Optum (of which $65,093 in cash and 281,156 sharesof the Company’s common stock are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement),assumed approximately $4.3 million of Optum indebtedness. The shares ofthe Company’s common stock are expected to be registered for resale on aRegistration Statement on Form S-3.

The Company focused its efforts in 2004 and the firstquarter of 2005 on maintaining and improving profitability. In 2004 and throughthe first quarter of 2005, the Company reported increasing profits. Managementplans to continue investing in new and improved product offerings and inincreasing the exposure of the Company’s products and services through itstargeted marketing programs. Management further believes that each investmentmust be prudently made and justified by the expected return on such investment.

The Company offers several licensing and serviceoptions for its software products. Customers can either purchase a perpetualsoftware license or enter into a subscription license contract. Customers mayalso choose to use the Company’s hosting services for their perpetual softwarelicense or install the software on servers within their own internalenvironment. Subscription licenses are only available to customers who also useour hosting services.

Perpetual license revenues and professional servicesare typically recognized as the software or service is delivered, assuming allother revenue recognition criteria are met and do not provide a contractual,predictable future revenue stream. The recurring revenue opportunities comefrom subscriptions or maintenance and hosting services. While the Company mayhave better visibility of future revenue from subscription licenses, customersmake the final decision on the form of their software license. The Companyencourages all of its customers to use its hosting services.

The Company depends on several factors to increaserevenue and maintain profitability: adding new customers, maintaining itscurrent base of subscription, increasing hosting and maintenance revenues, andimproving the gross margin on professional services. Adding new customers isthe primary responsibility of the sales department. Maintaining the otherrevenue streams is the responsibility of the Company’s professional servicesdepartment. The Company has developed compensation structures for thesedepartments that it believes provides appropriate incentives for achievement oftheir respective goals.

The Company’s revenue is principally derived fromsales of perpetual licenses or subscriptions to its software. The ClickCommerce software suite consists of the Partner Portal platform and frameworkand its applications provide the basis for controlling workflow, reporting,opportunity management, product information management, sales order management,after sales service management and supply chain management. The Company alsorecognizes revenue from services, including business consulting,implementation, maintenance, training and managed hosting services.

Cost of product license revenues includes productionand shipping expenses, which are expensed as incurred, amortization ofdeveloped technology (acquired in the Webridge, bTrade, ChannelWave and Optumacquisitions), and the costs of licensing third party software incorporatedinto or required by the Company’s products. These third party license costs areexpensed as the products are delivered under perpetual licenses andsubscriptions or over the maintenance period to the extent that the third party

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license costs relate tothose product offerings. Cost of service revenues include salaries and relatedexpenses for professional services and technical support personnel who provideconsulting and implementation services, maintenance and hosting services, aswell as an allocation of data processing and direct overhead costs which areexpensed as incurred.

Operating expenses are classified into five generalcategories: sales and marketing, research and development, general andadministrative, amortization of stock-based compensation and amortization ofintangible assets. Sales and marketing expenses consist primarily of salariesand other related costs for sales and marketing personnel, sales commissions,travel, public relations and marketing materials. Research and developmentexpenses consist primarily of personnel costs to support product development.General and administrative expenses consist primarily of salaries and otherrelated costs for executive management, finance and administrative employees,legal and accounting services, and corporate liability insurance. Amortizationof stock-based compensation represents the amortization over the relatedservice period of the difference between the exercise price of options grantedand the deemed fair market value of the underlying common stock on the date ofgrant. Amortization of intangible assets represents amortization expense forcertain intangible assets with finite useful lives, which were recorded inconnection with the acquisitions of Allegis Corporation during the firstquarter of 2003, Webridge on April 21, 2004, bTrade on July 1, 2004,ChannelWave, on February 2, 2005 and Optum, on February 7, 2005. Theintangible assets are identified, valued and classified into separatecategories. The categories are customer relationships, developed technologies,order backlog, trade names and in-process research and development. Theamortization of developed technologies is recorded in the cost of productlicense line item on the consolidated statement of income and comprehensiveincome.

The Company believes thatperiod-to-period comparisons of operating results should not be relied upon aspredictive of future performance. The Company’s prospects must be considered inlight of the risks, expenses and difficulties encountered by similarly sizedsoftware and technology companies, particularly companies in new, rapidlyevolving markets. The Company may not be successful in addressing such risksand difficulties.

**Critical AccountingPolicies**

The Company’s consolidated financial statements areprepared in accordance with accounting principles generally accepted in theUnited States of America. As such, the Company makes certain estimates,judgments and assumptions that it believes are reasonable based upon theinformation available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. TheCompany’s critical accounting policies include revenue recognition and anyresulting deferral of revenues and related costs, the estimation of creditlosses on accounts receivable, the application of purchase accounting and thevaluation of deferred tax assets. There has been no change to these policies.For a discussion of these critical accounting policies, see “CriticalAccounting Policies and Estimates” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004, filed with the Securities andExchange Commission.

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**Results of Operations**

Thefollowing table sets forth selected unaudited financial data for the periodsindicated in dollars and as a percentage of total revenue.
| ** **                               | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                             | ** ** | **2004** | ** ** |
| ** **                               | ** ** | ** **                                           | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                               | ** ** | **(in 000’s)**                             | ** ** | **Revenue** | ** ** | **(in 000’s)** | ** ** | **Revenue** | ** ** |
| Revenues                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product license                          |       | $                                                    | 1,963      |   |   | 18.0 | % |   |   | $ | 644 |   |   |   | 12.2 | % |   |
| Service                                  |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Maintenance and hosting                  |       | 3,814                                                |       |   | 34.9 | % |   |   | 1,728 |   |   |   | 32.8 | % |   |
| Consulting and implementation service    |       | 3,497                                                |       |   | 32.0 | % |   |   | 2,332 |   |   |   | 44.2 | % |   |
| Subscription                             |       | 1,651                                                |       |   | 15.1 | % |   |   | 568 |   |   |   | 10.8 | % |   |
| Total Service                            |       | 8,962                                                |       |   | 82.0 | % |   |   | 4,628 |   |   |   | 87.8 | % |   |
| Total Revenues                           |       | 10,925                                               |       |   | 100.0 | % |   |   | 5,272 |   |   |   | 100.0 | % |   |
| Cost of Revenues                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                  |       | 198                                                  |       |   | 1.8 | % |   |   | 43 |   |   |   | 0.8 | % |   |
| Consulting and implementation service    |       | 3,989                                                |       |   | 36.5 | % |   |   | 2,424 |   |   |   | 46.0 | % |   |
| Total cost of revenues                   |       | 4,187                                                |       |   | 38.3 | % |   |   | 2,467 |   |   |   | 46.8 | % |   |
| Gross profit                             |       | 6,738                                                |       |   | 61.7 | % |   |   | 2,805 |   |   |   | 53.2 | % |   |
| Operating  Expenses:                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                      |       | 1,146                                                |       |   | 10.5 | % |   |   | 598 |   |   |   | 11.3 | % |   |
| Research and development                 |       | 1,209                                                |       |   | 11.1 | % |   |   | 411 |   |   |   | 7.8 | % |   |
| General and administrative               |       | 1,006                                                |       |   | 9.2 | % |   |   | 915 |   |   |   | 17.4 | % |   |
| Amortization of stock-based compensation |       | —                                               |       |   | 0.0 | % |   |   | 8 |   |   |   | 0.2 | % |   |
| Amortization of intangibles assets       |       | 720                                                  |       |   | 6.6 | % |   |   | 40 |   |   |   | 0.8 | % |   |
| Total operating  expenses                |       | 4,081                                                |       |   | 37.4 | % |   |   | 1,972 |   |   |   | 37.4 | % |   |
| Operating income                         |       | $                                                    | 2,657      |   |   | 24.3 | % |   |   | $ | 833 |   |   |   | 15.8 | % |   |

 

**Comparison of the three months ended March 31,2005 to the three months ended March 31, 2004**

*Revenue*

Total revenue increased$5.7 million, or 107.2%, to $10.9 million for the three months ended March 31,2005 from $5.3 million for the three months ended March 31, 2004. Productlicense revenue consists of revenue from separate product-only agreements andfrom multiple element agreements accounted for under thepercentage-of-completion method using hours of input in relation to theestimate of total hours to complete the engagements. Product license revenueincreased by $1.3 million, or 204.8%, to $2.0 million, as a result of theacquisitions of Webridge, bTrade and Optum. These acquisitions accounted for89.6% of license revenue. Maintenance and hosting revenues increased by $2.1million or 120.7% to $3.8 million for the three months ended March 31,2005. The increase is primarily attributable to the acquisitions of Webridge,bTrade and Optum, which made up 52.2% of the Company’s maintenance and hostingrevenue for the three months ended March 31, 2005. Consulting andimplementation service revenues are largely comprised of fees related to timeand materials projects, other service agreements, maintenance, hosting,training and needs analyses, as well as multiple element agreements accountedfor under the percentage-of-completion method using hours of input in relationto the estimate of total hours to complete the engagements. Consulting andimplementation service revenues increased by $1.2 million, or 50.0%, to $3.5million, over the prior year quarter arising from the Webridge, bTrade andOptum consulting and implementation service revenues. Webridge, bTrade andOptum made up 69.5% of 

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consultingand implementation service revenues for the three months ended March 31,2005. Consulting and implementation service revenues increases are generallyrelated to new license transactions or as follow-on service contracts. Servicerevenues are generated in situations when a customer purchases a license fromthe Company and uses the Company’s service staff to install and integrate thelicensed software. Subscription revenue increased by $1.1 million or 190.7%, to$1.7 million. This increase is a direct result of the bTrade, ChannelWave andOptum acquisitions.

*Cost of Revenue*

Total cost of revenueincreased by $1.7 million, or 49.2% to $4.2 million for the three months ended March 31,2005. This cost of revenue increase is a result of an increase in employeecompensation directly related to the acquisitions of Webridge, bTrade,ChannelWave and Optum. Cost of product revenue increased by $0.2 million, or360.5%, to $0.2 million, due to the amortization of developed technology. Theamortization of developed technology results from the allocation of purchaseprice to developed technologies in the acquisitions of bTrade, Optum andWebridge. Gross profit margins increased to 61.7% for the three months ended March 31,2005, compared to 53.2% for the three months ended March 31, 2004. Thegross margin percentage increase is due to an improvement in the utilizationrate of professional service staff and the increase in higher marginsubscription and license revenue. Product revenue represented 18.0% of totalrevenues for the three months ended March 31, 2005 versus 12.2% for thethree months ended March 31, 2004.

*Operating Expenses*

*Sales and Marketing  *Salesand marketing expenses increased by approximately $0.5 million, or 91.6%, to$1.1 million for the three months ended March 31, 2005 from $0.6 millionfor the three months ended March 31, 2004. The increase in sales andmarketing expense was directly attributable to the acquisition of bTrade,Webridge, and Optum, which increased the Company’s sales force headcount byapproximately 200%.

*Research and Development  *Researchand development expenses increased by approximately $0.8 million, or194.2%, to $1.2 million for the three months ended March 31, 2005,compared to $0.4 million for the comparable prior year three-month period.This increase was almost entirely attributable to an increase in employeecompensation and related costs. The Webridge and Optum acquisitions resulted inan increase in the Company’s employee compensation expense by $0.7 million or57.3% of the total expenses. To date, all software development costs have beenexpensed as incurred.

*General and Administrative  *Generaland administrative expenses increased by approximately $0.1 million, or9.9%, to $1.0 million for the three months ended March 31, 2005 from $0.9million for the three months ended March 31, 2004. The increase isattributable to a 4% increase in employee compensation and related costs. Theacquisitions had no significant impact on general and administrative expensesas the Company immediately eliminated substantially all such expenses of theacquired companies. In addition, a portion of the increase can be attributed toconsulting fees related to Sarbanes Oxley compliance.

*Amortizationof Intangible Assets  *The increase in amortization ofintangibles relates to the intangible assets acquired in the acquisitions ofWebridge, bTrade, ChannelWave and Optum. These intangible assets have usefullives that range from one to seven years and accounted for the $0.7 millionincrease in amortization expense for the quarter ended March 31, 2005.

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**Liquidity and Capital Resources**

At March 31, 2005, the Company had$11.9 million of cash and cash equivalents.

Net cash provided by operating activities was$0.3 million for the three months ended March 31, 2005. The $0.3million was the product of net income plus depreciation and amortization,partially offset by increases resulting from changes in working capital andother accounts. Sources of cash from operations include $2.6 million in netincome, $1.1 million in depreciation and amortization, a source of cash from adecrease in receivables and prepaids and other current assets (net of $5.3million of receivables, prepaids and other current assets acquired) of $0.7million, an increase in accruals of $0.4 million and a source of cash fromother working capital accounts of $0.2 million. The cash sources related toreceivables resulted from a number of large payments from existing customersfrom transactions booked in the fourth quarter of 2004. Cash sources werepartially offset by uses of cash of $4.0 million relating to decreases incompensation accruals, and decreases in accounts payable. Of the $2.7 millionof cash uses related to compensation accruals, $1.7 million related to thepayout of fiscal year 2004 bonuses in February of 2005. In addition,another $1.0 million in cash was used in the payment of severance to formeremployees of Optum. In addition, there was a cash use of $1.3 million relatingto accounts payable. The Company made significant payments immediately afterthe acquisition of Optum. Finally, there was a decrease in deferred revenuethat resulted in a cash use of $0.9 million.

The Company used $2.1 million in cash for investingactivities in the first quarter ended March 31, 2005. Of the $2.1 million,$2.0 million was used for the acquisitions of ChannelWave and Optum. Theremaining $0.2 million was used to purchase fixed assets.

Net cash provided in financing activities was $0.3million. The Company drew $4.5 million against its newly created revolvingcredit facility with a bank to pay off $4.3 million of debt ($1.8 million inshort-term debt and $2.5 million in long-term) assumed in the acquisition ofOptum. The Company also generated a source of cash of $0.1 million from stockoptions that were exercised in the first quarter of 2005.

On March 31, 2005, the Company entered into a$10.0 million revolving line of credit maturing on April 1, 2008. Theborrowing under the line of credit carries an interest rate based on the LIBORaverage rate with a weighted average interest rate of 5.75% in the quarterended March 31, 2005. The unused portion has a fee of 0.3%. On March 31,2005, the Company had $4.5 million outstanding under the revolving line of credit.The $4.5 million was used to pay off debt and certain liabilities assumed inthe Optum acquisition. Of the remaining $5.5 million, up to $2.0 million may beused for the Company’s letters of credit. The line of credit contains termsthat, among other provisions, require maintaining certain minimum net worth andother financial ratios and specific limits or restrictions on additionalindebtedness, liens and continuity of business. Provisions under this line ofcredit are not considered restrictive to normal operations.

The Company continues to evaluate strategicalternatives, including opportunities to strategically grow the business, enterinto strategic relationships, make acquisitions or enter into businesscombinations. The Company can provide no assurance that any such strategicalternatives will come to fruition and may elect to terminate such evaluationsat any time.

The Company believes thatits cash resources are sufficient for the long-term operation of its existingbusiness and, therefore, has no current plans to raise additional equityfinancing during the next twelve months. The Company may, however, require additionalcash to fund investments in complementary businesses or technologies. TheCompany’s cash needs could also be affected by changes in business or marketconditions. If the Company finds it necessary to obtain additional equity ordebt financing, there can be no assurance that the Company will be able toraise it on acceptable terms or at all.

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

Statements in this Form 10-Qthat are not historical facts and refer to the Company’s future prospects are “forward-lookingstatements” under the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are generally identified by words such as “expect,” “anticipate,”“intend,” “believe,” “hope,” “assume,” “estimate” and other similar words andexpressions. The statements are subject to risks and uncertainties and actualresults may differ materially from those indicated by these forward-lookingstatements as a result of various factors, including but not limited to theextent of customer acceptance and utilization of the Company’s channelmanagement solutions, the impact of competitive products and services, theCompany’s ability to develop new and enhanced versions of its products andservices, the effect of economic and business conditions, the volume and timingof customer contracts and related approval processes, capital and intellectualproperty spending of the Company’s target customers, changes in technology,deployment delays or errors associated with the Company’s products, the abilityof the Company to integrate acquired businesses or products and the Company’sability to protect its intellectual property rights. For a discussion of theseand other risk factors that could affect the Company’s business, see “RiskFactors” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004, which is on file with the Securities and ExchangeCommission.

**Item 3.**                        Qualitativeand Quantitative Disclosures About Market Risk

The following discussesthe Company’s exposure to market risk related to changes in foreign currencyexchange rates and interest rates. This discussion contains forward-lookingstatements that are subject to risks and uncertainties. Actual results couldvary materially as a result of a number of factors including those set forth inPart I of the Company’s Annual Report on Form 10-K under “RiskFactors.”

*Foreign CurrencyExchange Rate Risk*

To date, substantially allof the Company’s recognized revenues have been denominated in U.S. dollars andprimarily from customers in the United States and the exposure to foreigncurrency exchange rate changes has been immaterial. The Company expects,however, that future product license and professional service revenues may alsobe derived from international markets and may be denominated in the currency ofthe applicable market. As a result, operating results may become subject tosignificant fluctuations based upon changes in the exchange rates of certaincurrencies in relation to the U.S. dollar. Furthermore, to the extent theCompany engages in international sales denominated in U.S. dollars, an increasein the value of the U.S. dollar relative to foreign currencies could make theCompany’s products less competitive in international markets. Although theCompany will continue to monitor its exposure to currency fluctuations, and,when appropriate, may use financial hedging techniques in the future tominimize the effect of these fluctuations, there is no assurance that exchangerate fluctuations will not adversely affect financial results in the future.

*Interest Rate Risk*

As of March 31, 2005,the Company had cash and cash equivalents of $11.9 million and debt of$4.5 million. Rising interest rates will increase interest income fromshort-term investments and interest expense on the Company’s debt. Based uponthe balance of cash and cash equivalents at March 31, 2005, a change ininterest rates of 0.5% would cause a corresponding change in annual interestincome of less than $0.1 million. Based on the Company’s long-term debt atMarch 31, 2005, at change in interest rates of 1.0% would cause a correspondingchange in interest expense of less than $0.1 million.

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**Item 4.**                        Controlsand Procedures

(a)    Evaluationof Disclosure Controls and Procedures

As ofthe end of the period covered by this report, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed by the Company in the reports filed or submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

(b)   Change inInternal Controls

There have been no changes in the Company’s internalcontrols over financial reporting during the period being reported on, whichcould materially affect, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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**PART II.   OTHER INFORMATION**

**Item 6.**                        Exhibitsand Reports on Form 8-K

(a)                     **Exhibits:**

Thefollowing exhibits are filed as part of this Form 10-Q.
| Exhibit  Number | ** ** | ** **                                                                                                  | ** ** | **Description** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.3*            |       | Optum Merger Agreement                                                                                      |
| 2.4**           |       | ChannelWave Asset Purchase Agreement                                                                        |
| 31.1            |       | Certification of Michael W. Ferro, Jr. pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2            |       | Certification of Michael W. Nelson pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002          |
| 32.1            |       | Certification of Michael W. Ferro, Jr. pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2            |       | Certification of Michael W. Nelson pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002          |

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*                    Incorporatedby reference to the Company’s Current Report on Form 8-K, dated February 10,2005

**             Incorporated byreference to the Company’s Current Report on Form 8-K, dated February 8,2005

(b)                **Reports on Form 8-K**

The Company filed a Current Report on Form 8 K dated05/06/05 to report results from operations for the quarter ended March 31,2005.

The Company filed a Current Report on Form 8-Kdated 04/21/05 to report that BDO Seidman, LLP had been engaged as the Company’sindependent registered public accounting firm for the fiscal year ending December 31,2005.

The Company filed a Current Report on Form 8 K dated04/26/05 to report that it would not be able to meet the required deadline tofile a Current Report on Form 8 K/A to publish the audited financial statementsof Optum, Inc..

The Company filed a Current Report on Form 8-Kdated 04/06/05 to report that KPMG LLP had resigned as the Company’sindependent registered public accounting firm.

The Company filed a Current Report on Form 8-Kdated 03/25/05 to define terms and definitions used in a live webcast.

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**SIGNATURES**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                         | Click Commerce, Inc. |
|-------------------------|---------------------------|
|                    | By:                       | /s/  MICHAEL w. NELSON |
|                    | * *                  | Michael W. Nelson |
|                    | * *                  | * Chief Financial Officer and Treasurer  (Principal Financial and Accounting Officer)* |
| Date: May 16, 2005 | * *                  | * * |

 

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