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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q    (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from ____________ to ____________ . Commission file number: 0-26811 NexPrise, Inc. (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0465496(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)
 5950 La Place Court, Suite 200
Carlsbad, CA 92008
760-804-1333
(Address, including zip code, and telephone
number, including area code, of Registrants principal
executive offices) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes o No x On June 30, 2004, 3,237,718 shares of the registrants common stock,
$.0002 par value per share, were issued and outstanding.




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NEXPRISE, INC.
FORM 10-Q TABLE OF CONTENTS  
 PagePART I FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements:Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003
    
    
    3Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Qualitative and Quantitative Disclosure about Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26SIGNATURE
    
    
    27EXHIBIT INDEX
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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NEXPRISE, INC 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share values) June 30,
    
    December 31,2004
    
    2003unaudited
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,114
    
    
    $
    991Short-term investments
    
    
    1,500
    
    
    
    5,000Accounts
receivable - net of reserves of $42 and $69 respectively
    
    
    250
    
    
    
    743Prepaid expenses
    
    
    192
    
    
    
    321Other current assets
    
    
    240
    
    
    
    362Total current assets
    
    
    4,296
    
    
    
    7,417Property and equipment, net
    
    
    77
    
    
    
    40Intangible assets, net
    
    
    69
    
    
    
    139Other long-term assets, net
    
    
    270
    
    
    
    317Total assets
    
    $
    4,712
    
    
    $
    7,913LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    104
    
    
    $
    94Accrued compensation
    
    
    402
    
    
    
    552Accrued expenses
    
    
    1,053
    
    
    
    1,158Deferred revenue
    
    
    1,523
    
    
    
    1,590Total current liabilities
    
    
    3,082
    
    
    
    3,394Notes payable
    
    
    11,843
    
    
    
    11,843Commitments and contingenciesStockholders deficit:Preferred stock, no par value:2,500 shares authorized: none
issued or outstanding
    
    
    
    
    
    
    Common stock, $.0002 par value; 20,000 shares authorized; 3,238
and 3,237 shares issued and outstanding
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    631,771
    
    
    
    631,774Deferred compensation
    
    
    (37
    )
    
    
    (143
    )Accumulated deficit
    
    
    (642,110
    )
    
    
    (639,118
    )Accumulated other comprehensive income
    
    
    153
    
    
    
    153Total stockholders deficit
    
    
    (10,213
    )
    
    
    (7,324
    )Total liabilities and stockholders deficit
    
    $
    4,712
    
    
    $
    7,913
  (1)
    
    Derived from December 31, 2003 audited consolidated financial statements.
See accompanying notes to consolidated financial statements. 3




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NEXPRISE, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    672
    
    
    $
    1,002
    
    
    $
    1,326
    
    
    $
    1,723Cost of product licenses and services
    
    
    242
    
    
    
    305
    
    
    
    554
    
    
    
    586Cost of amortization of purchased technology
    
    
    34
    
    
    
    491
    
    
    
    68
    
    
    
    982Research and development
    
    
    571
    
    
    
    556
    
    
    
    1,186
    
    
    
    1,350Sales and marketing
    
    
    407
    
    
    
    954
    
    
    
    1,002
    
    
    
    1,921General and administrative
    
    
    636
    
    
    
    917
    
    
    
    1,179
    
    
    
    1,616Restructuring & settlement benefit
    
    
    
    
    
    
    (493
    )
    
    
    
    
    
    
    (493
    )Total costs and expenses
    
    
    1,890
    
    
    
    2,730
    
    
    
    3,989
    
    
    
    5,962Operating loss
    
    
    (1,218
    )
    
    
    (1,728
    )
    
    
    (2,663
    )
    
    
    (4,239
    )Interest expense
    
    
    (189
    )
    
    
    (189
    )
    
    
    (378
    )
    
    
    (378
    )Interest income and other, net
    
    
    9
    
    
    
    128
    
    
    
    49
    
    
    
    161Investment losses
    
    
    
    
    
    
    (113
    )
    
    
    
    
    
    
    (113
    )Loss from continuing operations
    
    
    (1,398
    )
    
    
    (1,902
    )
    
    
    (2,992
    )
    
    
    (4,569
    )Gain from discontinued operations
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    334Net loss
    
    $
    (1,398
    )
    
    $
    (1,568
    )
    
    $
    (2,992
    )
    
    $
    (4,235
    )Basic and diluted loss per share from continuing operations
    
    $
    (0.43
    )
    
    $
    (0.59
    )
    
    $
    (0.92
    )
    
    $
    (1.42
    )Basic and diluted gain per share from discontinued operations
    
    $
    
    
    
    $
    0.10
    
    
    $
    
    
    
    $
    0.10Basic and diluted net loss per share
    
    $
    (0.43
    )
    
    $
    (0.49
    )
    
    $
    (0.92
    )
    
    $
    (1.32
    )Weighted average common shares outstanding
in computing basic and diluted net loss per share
    
    
    3,237
    
    
    
    3,226
    
    
    
    3,237
    
    
    
    3,226
 See accompanying notes to consolidated financial statements 4




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NEXPRISE, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Six MonthsEnded June 30,2004
    
    2003(In thousands)Operating ActivitiesNet loss
    
    $
    (2,992
    )
    
    $
    (4,235
    )Adjustments to reconcile net loss to net cash used in operating activities:- Depreciation
    
    
    13
    
    
    
    221- Amortization of other intangible assets
    
    
    70
    
    
    
    1,490- Amortization of deferred stock-based compensation
    
    
    100
    
    
    
    169- Restructuring and settlement benefit
    
    
    
    
    
    
    (493
    )- Investment losses
    
    
    
    
    
    
    113- Gain from retirement of convertible notes
    
    
    
    
    
    
    (100
    )Changes in operating assets and liabilities:- Accounts receivable
    
    
    493
    
    
    
    338- Prepaid expenses
    
    
    129
    
    
    
    494- Other current assets
    
    
    122
    
    
    
    510- Other long term assets
    
    
    47
    
    
    
    (37
    )- Accounts payable
    
    
    10
    
    
    
    (64
    )- Accrued compensation
    
    
    (150
    )
    
    
    (18
    )- Accrued expenses
    
    
    (105
    )
    
    
    (493
    )- Deferred revenue
    
    
    (67
    )
    
    
    530- Accrued liabilities relating to discontinued operations
    
    
    
    
    
    
    (336
    )Net cash used in operating activities
    
    
    (2,330
    )
    
    
    (1,911
    )Investing ActivitiesPurchase of property and equipment
    
    
    (50
    )
    
    
    (31
    )Proceeds from sale and maturities of short-term investments
    
    
    3,500
    
    
    
    Net cash provided by (used in) investing activities
    
    
    3,450
    
    
    
    (31
    )Financing ActivitiesNet proceeds from issuance of ESPP, and Stock Options
    
    
    3
    
    
    
    1Net cash provided in financing activities
    
    
    3
    
    
    
    1Net decrease in cash and cash equivalents
    
    
    1,123
    
    
    
    (1,941
    )Cash and cash equivalents at beginning of period
    
    
    991
    
    
    
    3,225Cash and cash equivalents at end of period
    
    $
    2,114
    
    
    $
    1,284Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    (337
    )
    
    $
    (337
    )
 See accompanying notes to consolidated financial statements 5




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NEXPRISE, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited  Note 1.
    
    Description of Business NexPrise, Inc. (the Company or NexPrise or we), formerly known as
Ventro Corporation and Chemdex Corporation, is a seller of business process
automation and management applications and collaborative solutions for program
management and quote management. Our revenue primarily consists of
subscriptions of bundled license, post contract support (PCS) and, in most
cases, hosting services. As of June 30, 2004, the Company had working capital of approximately $1.2
million and stockholders deficit of approximately $10.2 million. During the
three months ended June 30, 2004, the Company used cash and cash equivalents in
operating activities of approximately $1.1 million, a decrease of approximately
$42,000 from the $1.2 million used in the three months ended March 31, 2004.
Management believes it has sufficient cash, cash equivalents and short term
investments to support the Companys planned activities through at least 2004.
Management is committed to the successful execution of our operating plan and
will take further action as necessary to align our operations and reduce
expenses.  Note 2.
    
    Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated. While the quarterly financial information is unaudited, the
financial statements included in this Form 10-Q reflect all adjustments
(consisting of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the date of
the interim balance sheet. The results for the interim periods are not
necessarily indicative of the results for the entire year. The consolidated
balance sheet as of December 31, 2003 has been derived from the audited
consolidated balance sheet as of that date. The information included in this
report should be read in conjunction with the Companys Annual Report on Form
10-K for the year ended December 31, 2003. Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Revenue Recognition For all arrangements, we determine whether evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and collection
is probable. If any of these criteria are not met, revenue recognition is
deferred until such time as all of the criteria are met. Our revenue
recognition policy is in accordance with Statement of Position (SOP) No.
97-2, Software Revenue Recognition, as amended, SEC Staff Accounting Bulletin
104 and EITF 00-21, Revenue Arrangements with Multiple Deliverables. Term license revenue includes bundled term licenses, post contract support
and, in most cases, hosting services. The Company recognizes such revenue
using the subscription method, whereby the initial and renewal amounts are
recognized ratably over the period of the license during which the services are
expected to be provided. In instances where maintenance is bundled with
licenses of software products, such maintenance terms are typically one year. Perpetual license revenue is recognized using the residual method
described in SOP No. 98-9 for arrangements in which licenses are sold with
multiple elements. We allocate revenues on these licenses based upon the fair
value of each undelivered element (for example, undelivered maintenance and
support, training and consulting). The determination of fair value is based
upon vendor specific objective evidence (VSOE). VSOE of the fair value of
maintenance for license agreements with and without stated renewal rates is
based on the Companys price list. VSOE of the fair value of maintenance for
license agreements that do not include stated renewal rates is determined by
reference to the price paid by the Companys customers when maintenance is sold
separately. Past history has shown that the rate the Company charges for
maintenance on license agreements with a stated renewal rate is similar to the 6




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rate the Company charges for maintenance on license agreements without a
stated renewal rate. Revenue for training or consulting is based upon separate
sales of these services. When software services are considered essential or
the arrangement involves significant customization or modification of the
software, both the net license and service revenues under the arrangement are
recognized under the percentage of completion method of contract accounting,
based on input measures of hours, or completed contract method. Assuming all
other revenue recognition criteria are met, the difference between the total
arrangement fee and the amount deferred for each undelivered element is
recognized as license revenue. NexPrise did not establish VSOE for maintenance prior to March 31, 2003,
and therefore recognized the revenue from license agreements entered into prior
to March 31, 2003 ratably over the maintenance period. NexPrise established
VSOE on maintenance in the three months ended June 30, 2003. Revenue for training or consulting services is recognized based upon
contract completion or on a time and materials basis. Net Income (Loss) Per Share Net income (loss) per share is presented in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share,which requires dual presentation of basic earnings per
share (EPS) and diluted EPS. Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common shares and
potentially dilutive shares outstanding during the period. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transition guidance and disclosure provisions of SFAS 148
are effective for the Companys financials statements issued for 2003. The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for its employee
stock options. Accordingly, no compensation expense is recognized in the
Companys financial statements in connection with employee stock awards where
the exercise price of the award is equal to the fair market value of the stock
on the date of grant. When stock options are granted with an exercise price
that is lower than the fair market value of the stock on the date of grant, the
difference is recorded as deferred compensation and amortized to expense on a
straight-line basis over the vesting term of the stock options. Pro forma information regarding net loss and net loss per share is
required by FAS 123. This information is required to be determined as if the
Company had accounted for its employee stock options (including shares issued
under the Employee Stock Purchase Plan, collectively called stock-based
awards), under the fair value method of FAS 123. Stock-based awards have been
valued using the Black-Scholes option-pricing model. Among other things, the
Black-Scholes model considers the expected volatility of the Companys stock
price, determined in accordance with FAS 123, in arriving at an option
valuation. The fair value of the stock-based compensation was estimated at the date
of grant using the Black-Scholes option-pricing model using the assumptions
below. Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Valuation assumptionsExpected option life in years
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Expected volatility
    
    
    1.19
    %
    
    
    0.75
    %
    
    
    1.97
    %
    
    
    0.75
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.32
    %
    
    
    1.92
    %
    
    
    1.95
    %
    
    
    1.92
    %
 The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Companys stock-based awards have characteristics
significantly 7




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different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock-based awards. For purposes of pro forma disclosures, the estimated fair value of the
stock-based awards is amortized to expense over the awards vesting periods.
The pro forma stock-based employee compensation expense has no impact on the
Companys cash flow. In the future, the Company may elect, or be required, to
use a different valuation model, which could result in a significantly
different impact on pro forma net income (loss). For purposes of this
reconciliation, the Company adds back to previously reported net income all
stock-based employee compensation expense that relates to acquisitions, then
deducts the pro forma stock-based employee compensation expense determined
under the fair value method for all awards. The Companys pro forma information
is as follows (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    
    ($1,398
    )
    
    
    ($1,568
    )
    
    
    ($2,992
    )
    
    
    ($4,235
    )Add: intrinsic value compensation expense
    
    
    50
    
    
    
    85
    
    
    
    100
    
    
    
    169Less: total stock based employee
compensation expense determined under
fair value based method for all awards,
net of tax
    
    
    (881
    )
    
    
    (1,992
    )
    
    
    (1,816
    )
    
    
    (4,049
    )Pro-forma net loss
    
    $
    (2,229
    )
    
    $
    (3,475
    )
    
    $
    (4,708
    )
    
    $
    (8,115
    )Weighted-average shares used in computing
basic and diluted net loss per common
share
    
    
    3,237
    
    
    
    3,226
    
    
    
    3,237
    
    
    
    3,226Basic and diluted loss per share:As reported
    
    $
    (0.43
    )
    
    $
    (0.49
    )
    
    $
    (0.92
    )
    
    $
    (1.31
    )Pro forma
    
    $
    (0.69
    )
    
    $
    (1.08
    )
    
    $
    (1.45
    )
    
    $
    (2.52
    )
 On February 17, 2004, the Compensation Committee approved an increase of
500,000 shares under the 1998 Stock Plan and 8,825 shares under the 1999
Directors Stock Plan. Concentration of Credit Risk and Significant Customers The Companys customer base consists of businesses located primarily in
North America. The Company maintains allowances for potential credit losses and
historically, such losses have been within managements expectations. Revenue
and accounts receivable by customers comprising more than 10% of total amounts
are as follows: % of Total revenues
    
    
    
    
    
    % of Net accountsThree Months Ended
    
    Six Months Ended
    
    receivable as ofJune 30
    
    June 30
    
    June 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Customer A
    
    
    15
    %
    
    
    25
    %
    
    
    15
    %
    
    
    20
    %
    
    
    11
    %Customer B
    
    
    14
    %
    
    
    12
    %
    
    
    13
    %
    
    
    12
    %
    
    
    12
    %
    
    
    10
    %Customer C
    
    
    8
    %
    
    
    20
    %
    
    
    
    
    
    
    16
    %
    
    
    
    
    
    
    23
    %Customer D
    
    
    12
    %
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    35
    %Customer E
    
    
    13
    %
    
    
    12
    %
    
    
    14
    %
    
    
    11
    %Customer F
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    %Customer G
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    %
 Long Lived Assets The Company reviews property, plant and equipment, goodwill and purchased
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Our asset
impairment review assesses the 8




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fair value of the assets based on the future cash flows the assets are
expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset,
plus net proceeds expected from disposition of the asset (if any) are less than
the carrying value of the asset. This approach uses our estimates of future
market growth, forecasted revenue and costs, expected periods the assets will
be utilized and appropriate discount rates. When an impairment is identified,
the carrying amount of the asset is reduced to its estimated fair value. This
impairment analysis is required to be performed at least annually for goodwill
and purchased intangibles with indefinite useful lives. Also, potential
impairment of long-lived assets other than goodwill and purchased intangible
assets with indefinite useful lives is evaluated using the guidance provided by
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Note 3. Comprehensive Loss SFAS No. 130, Reporting Comprehensive Income, establishes standards of
reporting and display of comprehensive income and its components of net loss
and Other Comprehensive Income. Other Comprehensive Income refers to
revenues, expenses, gains and losses that are not included in net income (loss)
but rather are recorded directly in stockholders deficit. For all periods
presented there are no reconciling items for comprehensive loss. Net loss as
presented on the Consolidated Statements of Operations is the same as total
comprehensive loss. Note 4. Goodwill and Purchased Intangibles SFAS 142, Goodwill and Other Intangible Assets, requires that we evaluate
on an annual basis (or whenever events occur which may indicate possible
impairment) whether any portion of our recorded intangible assets is impaired.
This analysis requires management to make a series of critical assumptions to
(1) evaluate whether any impairment exists, and (2) measure the amount of
impairment. In accordance with our policy for assessing the carrying value of our long
lived assets, in each quarter of 2003 we compared the carrying value of the
intangible assets with the undiscounted cash flows expected to be generated by
those assets over their remaining estimated useful lives. No indicators of
impairment were found in the first, second or third quarters of 2003. In the
fourth quarter of 2003 a reduction in our revenue forecast and a reduction in
the estimated useful lives of the intangible assets due to our fourth quarter
decision to adopt a plan to transition toward an indirect channel solution led
us to conclude there were indicators the intangible assets were impaired. The
resulting analysis of discounted cash flows led to an impairment charge of
approximately $6.4 million, leaving approximately $139,000 of intangible assets
to be amortized evenly over 2004. Of that value, approximately $137,000 is
purchased technology related to the acquisitions of NexPrise and InfoPrise and
approximately $2,000 is for a non-compete agreement signed at the time of the
NexPrise acquisition. During 2004, we will continue to evaluate these
intangible assets for impairment as events and circumstances warrant. If an
impairment is determined, further write-offs may be required. Subsequent to the adoption of SFAS 142, identifiable intangible assets
with definite lives will continue to be amortized over their useful lives and
will be reviewed for impairment in accordance with SFAS 144 when impairment
indicators exist. These assets are shown as intangible assets on the face of
the balance sheet and are as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Gross Carrying Amount
    
    $
    14,733
    
    
    $
    14,733Write-down
    
    
    (6,385
    )
    
    
    (6,385
    )Accumulated Amortization
    
    
    (8,279
    )
    
    
    (8,209
    )Net Balance
    
    $
    69
    
    
    $
    139
 Prior to the writedown in the fourth quarter of 2003, NexPrise purchased
technology was being amortized based on forecast revenue over 5 years.
InfoPrise purchased technology was being amortized based on forecast revenue
over 3 years. The NexPrise trade name and non-compete intangible assets were
being amortized using a straight line method over 2 and 3 year periods,
respectively. All remaining NexPrise and InfoPrise intangible assets will be
fully amortized using a straight line method over their remaining useful lives,
which extend through the end of 2004. 9




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Note 5. Balance Sheet Details Other Current Assets Other current assets of $240,000 and $362,000 as of June 30, 2004 and
December 31, 2003, respectively, are comprised primarily of prepaid royalties,
current deposits and other receivables. Other Long-term Assets Other long-term assets are comprised of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Deposits and other
    
    $
    151
    
    
    $
    128Deferred debt offering costs, net of
accumulated amortization of $532 and
$508 in 2004 and 2003 respectively
    
    
    84
    
    
    
    107Employee notes receivable
    
    
    35
    
    
    
    82Total intangible and other assets
    
    $
    270
    
    
    $
    317
 Note 6. Convertible Notes In February 2002 NexPrise issued unsecured, convertible promissory notes
due in 2007 with a face value of $3,040,000, a common stock conversion price of
$18.75 and interest rate of 6% in connection with the acquisition of InfoPrise.
As of June 30, 2004, no amount of the notes had been converted into NexPrise
common stock. With respect to the InfoPrise convertible promissory note,
approximately $73,000, which represents 40% of annual interest, is payable
annually on each anniversary date of the issuance of the promissory note, with
the balance of interest owed due at maturity. The interest balance accrued in
accrued expenses at June 30, 2004 is approximately $292,000. In April 2000,
NexPrise issued $250 million of convertible subordinated notes due in 2007,
bearing annual interest at 6% and convertible at the option of the holder into
the Companys common stock at a price of $1,361.70 per share. The Company
subsequently repurchased $241.2 million of these notes during 2001.
Approximately $8.8 million of the convertible subordinated notes remained
outstanding as of June 30, 2004 and December 31, 2003. Note 7. Contingencies Starting in March 2001, several lawsuits were filed in United States
District Court for the Northern District of California against the Company and
certain of its officers and directors on behalf of putative classes of persons
who purchased the Companys securities during time periods from December 1999
through December 6, 2000. One of the lawsuits also names as a defendant the
underwriters for the Companys offering of convertible notes. The lawsuits
generally allege that the Company and certain individuals violated the federal
securities laws by making false and misleading statements during 2000,
including in the Companys registration statement for its convertible notes
offering. These lawsuits were consolidated as In re Ventro Corp. Sec. Litig.,
Master File No. Civ. 01-1287 SBA, and a consolidated complaint was filed.
Following several motions to dismiss and the filing of amended complaints, the
Court set a trial date for January 20, 2005 with respect to the issues
remaining in the case, and discovery commenced. The parties have tentatively
reached an agreement in principle to settle the securities action together with
the settlement of the related derivative action described below. The Companys
portion of the settlement would be funded by insurance. There can be no
assurance that the settlement will be finalized, and if the settlement is not
finalized, the Company intends to defend the case vigorously. In August 2001, Chadwell v. Byers, Case No. CV800814, a putative
stockholder derivative suit, was filed in California Superior Court, Santa
Clara County against certain of the Companys present and former officers and
directors, alleging breaches of fiduciary duty and insider trading. The Company
is named solely as a nominal defendant against which no recovery is sought.
After a demurrer was sustained with leave to amend, the parties stipulated to a
stay of proceedings pending resolution of the In re Ventro Corp. Sec. Litig.
action. As described above, the parties have reached an agreement in principle
to settle this litigation together with the settlement of the federal
securities action. In March 2001, Kassin v. Ventro Corp. et al., Index No. 01-CV-3450 (SAS), a
stockholder class action complaint, was filed in the United States District
Court for the Southern District of New York against the Company, several of its
officers and directors, and the 10




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underwriters of its initial public offering. The class action has been
consolidated for pre-trial purposes with more than one thousand other actions,
filed against more than 300 other issuers of securities, affiliated individuals
and dozens of underwriters of the securities offerings in In Re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS) (IPO Allocation Litigation).
The plaintiffs allege that the prospectus for the initial public offering of
the Companys common stock, incorporated in the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission, was materially false and
misleading because it failed to disclose, among other things, that the
underwriters had made secret arrangements for aftermarket purchases of the
securities and made arrangements for excessive and improper underwriters
compensation in the form of increased brokerage commissions. Plaintiffs are
claiming damages of an unspecified amount based on the subsequent decline in
the market price of the Companys shares below their original offering price.
In recent months in the IPO Allocation Litigation, counsel for the plaintiffs,
liaison counsel for the issuer defendants and counsel for insurers of the
issuer defendants have taken part in continuing discussions mediated by a
former federal district court judge to explore a possible settlement of the
claims against all of the issuer defendants, including the Company. In June
2003, a memorandum of understanding was entered into by and among the
plaintiffs, liaison counsel for the issuer defendants and counsel for the
insurers which would result in dismissal of the action against the issuers,
including the Company, on terms that would not require any current payment by
the Company and are believed by the Companys board of directors to carry only
a remote risk that any future payment by the Company would be required. In
addition, the plaintiffs would release the Company and its officers and
directors from the claims that have been asserted against them in the IPO
Allocation Litigation as a part of the proposed settlement. On June 30, 2003,
the Companys board of directors approved the memorandum of understanding and
authorized the Company to enter into the proposed settlement. On June 14, 2004,
the proposed settlement was submitted to the Court for its required approval,
and the Court has taken the motion for preliminary approval of the proposed
settlement under submission. The IPO Allocation Litigation in general, and the
litigation against the Company in particular, are in an early phase, and no
date has yet been set by the court for completion of pre-trial discovery or
trial. Although we believe that we have meritorious defenses to the actions and
intend to defend the suits vigorously, we cannot predict with certainty the
outcome of these lawsuits. Our defense against such lawsuits could be costly
and will require a significant commitment of time and resources by our senior
management. Although the Company has insurance to cover these claims, the
recovery of all future costs is not assured. The Company is a party to various claims in the ordinary course of
business. Although the results of litigation and claims cannot be predicted
with certainty, the Company believes the final outcome of such matters will not
have a material adverse effect on the Companys financial position, results of
operations or cash flows. Indemnification The Company sells software licenses and services to its customers under
contracts which the Company refers to as Software License and Service
Agreements (each an SLSA). Each SLSA contains the relevant terms of the
contractual arrangement with the customer, and generally includes certain
provisions for indemnifying the customer against losses, expenses, and
liabilities from damages that may be incurred by or awarded against the
customer in the event the Companys software or services are found to infringe
upon a patent, copyright, trade secret, trademark, or other proprietary right
of a third party. The SLSA generally limits the scope of remedies for such
indemnification obligations in a variety of industry-standard respects,
including but not limited to certain product usage limitations and
geography-based scope limitations and a right to replace an infringing product
or modify it to make it non-infringing. If the Company cannot address the
infringement by replacing the product or services, or modifying the product or
services, the Company is allowed to cancel the license or services and return
the fees paid by the customer. The Company requires its employees to sign a
proprietary information and inventions assignment agreement, which assigns the
rights in its employees development work to the Company. To date, the Company has not had to reimburse any of its customers for any
losses related to these indemnification provisions and no material claims are
outstanding as of June 30, 2004. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the SLSA, the Company cannot determine the
maximum amount of potential future payments, if any, related to such
indemnification provisions. There can be no assurance that potential future
payments will not have a material adverse effect on the Companys business,
results of operations or financial condition. Government Regulations In addition to regulations applicable to businesses generally, the Company
is or may be subject to direct regulation by governmental agencies which
includes numerous laws and regulations generally applicable to the chemical,
pharmaceutical, controlled substances, human and biological reagents, medical
and in vitro devices, nuclear chemical businesses and environmental spills, as
well as U.S. import and export controls and import controls of other countries.
While the shutdown of Chemdex, Promedix and 11




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SpecialtyMD may limit future regulatory and product liability risks, until
all statutes of limitation have expired, certain legal risks will remain. The Company relied on its suppliers to comply with applicable local, state
and federal laws regarding the labeling and the dissemination of information on
any products sold that may be hazardous or present a health threat to the user.
If these suppliers have failed, or we have failed, to maintain the requisite
records irrespective of the actions of the suppliers, or if either of us had
failed to adequately comply with labeling and information dispensing
requirements of local, state or federal laws, then the Company may be held
legally responsible, since Company held title to these products, and could be
subject to governmental penalties or fines, as well as private lawsuits to
enforce these laws. Finally, the Company has relied upon its suppliers to obtain appropriate
approvals for products regulated by the FDA and to comply with the requirements
relating to those approvals and products. The failure of suppliers to obtain or
comply with those approvals, or the failure of the product advertising or
labeling to be consistent with the FDA approval for the products, or other
failures by the products themselves, or our failure to keep regulatory records
required by the FDA, such as complaint files, could result in costly product
recalls, significant fines and judgments, civil and criminal liabilities and
negative publicity. In February 2001, the Company received a subpoena from the U.S. Department
of Justice, Drug Enforcement Administration, for certain billing, invoice, and
shipping records concerning sales to an unaffiliated purchaser. Other than the
foregoing, the Company is unaware of any current investigations, inquiries,
citations, fines or allegations of violations or non-compliance relating to
regulatory requirements pending by government agencies or by third parties
against us. It is possible, however, that there may be such investigations or
allegations that the Company is not aware of or future investigations or
allegations. The risk that any noncompliance may be discovered in the future is
currently unknown. Although any potential impact on the Company for
noncompliance cannot currently be established, it could result in significant
civil or criminal penalties, including monetary fines and injunctions, for
noncompliance and negative publicity, and seriously harm our business,
revenues, results of operations and financial condition. Note 8. Accrued Expenses Accrued expenses were comprised of the following as of June 30, 2004 and
December 31, 2003 (in thousands): 2004
    
    2003Accrued marketing expenses
    
    $
    21
    
    
    $
    7Accrued consulting expenses
    
    
    71
    
    
    
    71Accrued interest payable
    
    
    424
    
    
    
    406Accrued professional fees
    
    
    351
    
    
    
    385Other accrued liabilities
    
    
    186
    
    
    
    289$
    1,053
    
    
    $
    1,158
 Note 9. Deferred Stock-Based Compensation In connection with the acquisition of InfoPrise completed in February
2002, the Company assumed the outstanding options granted under the InfoPrise
stock option plans. The Company recorded deferred compensation of $132,293 for
the difference between the exercise price of the unvested options assumed and
the fair value of the common stock underlying those options as of the date the
acquisition was consummated. That charge is being amortized over the remaining
vesting period of the options. Additionally, the Company recorded deferred
compensation of $184,178 with respect to the issuance of restricted common
stock. That charge is being amortized over the remaining vesting period of the
stock. The Company recognized $100,000 and $169,000 in stock compensation expense
for the six months ended June 30, 2004 and 2003, respectively. Note 10. Settlement, Restructuring and Discontinued Operations During the year ended December 31, 2002, the Company took actions to
improve efficiencies and reduce operating costs, including employee and
contractor terminations, consolidation of facilities, and settlements of
various disputes and termination of leases. The net of these charges was
reported as a component of loss from continuing operations. 12




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The Company paid approximately $12,000 in severance payments during the
quarter ended March 31, 2003. In the quarter ending June 30, 2003, the Company
reversed an accrual related to the Companys cancellation of a contract as part
of a restructuring in 2001. The reversal was made in accordance with Company
policy, as two years had passed since the related activity ceased and no actual
charges had been, were then expected to be, or have been paid. At June 30,
2004, and 2003, the Company had no remaining restructuring accruals and
reserves. 
 Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations The following Managements Discussion and Analysis of Results of
Operations and Financial Condition contains forward-looking statements. In some
cases, readers can identify forward-looking statements by terminology such as
may, will, should, could, expects, plans, anticipates,
believes, estimates, predicts, potential, or continue. These
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from those stated herein. Although management of NexPrise believes
that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, performance, or
achievements. For further information, refer to Managements Discussion and
Analysis and the Risk Factors section of NexPrises Annual Report on Form 10-K
and the section entitled Risk Factors in thisForm 10-Q. Overview We are a seller of business process applications and collaborative
solutions for program management and quote management. Our revenue primarily
consists of subscriptions of bundled licenses, post contract support and, in
most cases, hosting services and also includes perpetual licenses. On February 4, 2002, we acquired privately-held InfoPrise, a provider of
data management solutions located in Carlsbad, California. As consideration
for the acquisition, we issued to InfoPrises stockholders an aggregate of
139,790 shares of NexPrise common stock together with unsecured 6% promissory
notes convertible into the Companys common stock, due in 2007, with a face
value of $3,040,000 and a common stock conversion price of $18.75 per share.
We also assumed InfoPrises outstanding stock options, which may result in the
issuance of up to approximately 64,000 shares of common stock if all of the
assumed options are exercised. As of June 30, 2004, 2,096 of these options had
been exercised. All operating results presented for periods following the above
date are derived from the combined operations of NexPrise and InfoPrise. We
expect to incur operating losses on a quarterly basis for at least the next 12
months as we continue to develop and enhance our technology and service
offerings and build our customer base. Critical Accounting Policies Use of Estimates.Managements discussion and analysis of its financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the following critical accounting policies concerning
revenue recognition, long lived assets and legal issues, affect its more
significant estimates and assumptions used in the preparation of its
consolidated financial statements Revenue Recognition.For all arrangements, we determine whether evidence
of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection is probable. If any of these criteria are not met,
revenue recognition is deferred until such time as all of the criteria are met.
Our revenue recognition policy is in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, as amended, Staff Accounting
Bulletin 104 and EITF 00-21, Revenue Arrangements with Multiple Deliverables. Term license revenue includes bundled term licenses, post contract support
and, in most cases, hosting services. The Company recognizes such revenue
using the subscription method, whereby the initial and renewal amounts are
recognized ratably over the 13




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period of the license during which the services are expected to be
provided. In instances where maintenance is bundled with licenses of software
products, such maintenance terms are typically one year. Perpetual license revenue is recognized using the residual method
described in SOP No. 98-9 for arrangements in which licenses are sold with
multiple elements. We allocate revenues on these licenses based upon the fair
value of each undelivered element (for example, undelivered maintenance and
support, training and consulting). The determination of fair value is based
upon vendor specific objective evidence (VSOE). VSOE of the fair value of
maintenance for license agreements with and without stated renewal rates is
based on the Companys price list. VSOE of the fair value of maintenance for
license agreements that do not include stated renewal rates is determined by
reference to the price paid by the Companys customers when maintenance is sold
separately. Past history has shown that the rate the Company charges for
maintenance on license agreements with a stated renewal rate is similar to the
rate the Company charges for maintenance on license agreements without a stated
renewal rate. Revenue for training or consulting is based upon separate sales
of these services. When software services are considered essential or the
arrangement involves significant customization or modification of the software,
both the net license and service revenues under the arrangement are recognized
under the percentage of completion method of contract accounting, based on
input measures of hours, or completed contract method. Assuming all other
revenue recognition criteria are met, the difference between the total
arrangement fee and the amount deferred for each undelivered element is
recognized as license revenue. NexPrise did not establish VSOE for maintenance prior to March 31, 2003,
and therefore recognized the revenue from license agreements entered into prior
to March 31, 2003 ratably over the maintenance period. NexPrise established
VSOE in the three months ended June 30, 2003. The Company must maintain VSOE
on maintenance for perpetual licenses or risks an end to recognition of
perpetual license revenue using the residual method and potentially revision to
previously recognized perpetual licenses. Revenue for training or consulting services is recognized based upon
contract completion or on a time and materials basis. Long Lived Assets. The Company reviews the carrying value of property,
plant and equipment and purchased intangible assets for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Our asset impairment review assesses the fair value of the
assets based on the future cash flows the assets are expected to generate. An
impairment loss is recognized when estimated undiscounted future cash flows
expected to result from the use of the asset, plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the
asset. This approach uses our estimates of future market growth, forecasted
revenue and costs, expected periods the assets will be utilized and appropriate
discount rates. When an impairment is identified, the carrying amount of the
asset is reduced to its estimated fair value. No indicators of impairment were found in the first, second or third
quarters of 2003. In the fourth quarter of 2003 a reduction in our revenue
forecast and a reduction in the estimated useful lives of the intangible assets
due to our fourth quarter decision to adopt a plan to transition toward an
indirect channel solution led us to conclude there were indicators the
intangible assets were impaired. The resulting analysis of discounted cash
flows led to an impairment charge of approximately $6.4 million, leaving
approximately $139,000 of intangible assets to be amortized evenly over their
revised remaining estimated useful lives, which is through the end of 2004. During 2004 we will continue to evaluate our intangible assets for
impairment as events and circumstances warrant. Among other circumstances, a
material deterioration in the future cash flows expected from these assets due
to lower than planned revenue or a decline in the Companys market
capitalization could be indicators of impairment and lead to write-offs. Legal.The Company is involved in certain claims and litigation related
to its operations, including ordinary, routine litigation incidental to its
business. Management reviews and determines which liabilities, if any, arising
from these claims and litigation could have a material adverse effect on the
Companys consolidated financial position, liquidity or results of operations.
In reviewing these claims and litigation, management assesses the likelihood of
any adverse judgments or outcomes to these matters as well as potential ranges
of probable losses. A determination of the amount of accruals required, if
any, for these contingencies is made after analysis of each matter, which
includes discussion with counsel retained in such matter. The required
accruals may change in the future due to new developments in a matter or
changes in strategies to resolve that matter, including changes in litigation
defense and settlement strategies. The Company had no accruals for legal
contingencies at June 30, 2004. Results of Operations Net Revenues.NexPrises revenues were approximately $672,000 and $1.3
million for the three and six months ended June 30, 2004, a decrease of 33%
from the three months ended June 30, 2003 and 23% from the six months ended
June 30, 2003. The revenue is primarily made up of revenue being recognized
ratably over the contract term that consists of bundled subscriptions, with
maintenance, perpetual licenses, with maintenance, sold prior to the
establishment of VSOE for maintenance and maintenance on 14




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perpetual licenses sold after the establishment of VSOE on maintenance.
Other components of revenue include license revenue recognized upon delivery
and consulting and training. The table below shows the relative percentages of
each type of revenue for the three and six months ended June 30, 2004 and 2004. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Ratable revenue
    
    
    87
    %
    
    
    79
    %
    
    
    88
    %
    
    
    85
    %Non-ratable perpetual
licenses
    
    
    9
    %
    
    
    13
    %
    
    
    6
    %
    
    
    8
    %Consulting and training
    
    
    4
    %
    
    
    8
    %
    
    
    6
    %
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Cost of Product Licenses and Services.The cost of product licenses and
services was $242,000 and $554,000 for the three and six months ended June 30,
2004, a decrease of 21% and 5% from the three and six months ended June 30,
2003. These costs consist primarily of outsourced hosting and co-location
services for our customers, personnel and other expenses associated with
providing maintenance and technical support services and royalties payable to
third parties whose software is incorporated in the NexPrise solution. The
decrease in 2004 was primarily due to lower managed hosting expenses achieved
as a result of migrating part of the hosting infrastructure to a collocation
facility. Cost of Amortization of Purchased Technology.Amortization of the
developed technology intangible assets acquired in the purchases of NexPrise in
August 2001 and InfoPrise in February 2002 was $34,000 and $68,000 for the
three and six months ended June 30, 2004, a 93% decrease from the three and six
months ended June 30, 2003. This decrease is a result of the write-down in the
fourth quarter of 2003. These assets will be fully amortized in 2004. Research and Development.Research and development (R&D) expenses
consist primarily of personnel and other expenses associated with developing,
updating, and enhancing software. R&D expenses were approximately $571,000 and
$1.2 million for the three and six months ended June 30, 2004, an increase of
3% from the three months ended June 30, 2003 and a decrease of 12% from the six
months ended June 30, 2003. The increase for the three months ended June 30,
2004 is due to a $191,000 reversal of an estimated liability originally accrued
in 2001 that decreased R&D expenses for the three months ended June 30, 2003.
The reversal was made on the basis that two years had passed since the
estimated liability had been accrued and no actual charges related to that
liability had been, were then expected to be, or have since been paid. The
decrease for the six months ended June 30, 2004 reflects reduced depreciation
and payroll expenses. To date, all software development costs have been
expensed in the period incurred. We believe that continued investments in
research and development are required to remain competitive. Sales and Marketing.Sales and marketing expenses consist primarily of
payroll and related expenses for personnel engaged in enterprise sales
activities and enterprise account management, as well as travel and promotional
expenses. Sales and marketing expenses were approximately $407,000 and $1.0
million for the three and six months ended June 30, 2004, a decrease of 57% and
48% from the three and six months ended June 30, 2003. The decreases were
driven by reductions in workforce performed throughout 2003 and in the first
quarter of 2004, reduced spending on marketing programs and lower amortization
of intangible assets. General and Administrative.General and administrative expenses consist
primarily of salaries, fees for professional services and facilities expenses.
General and administrative expenses were approximately $636,000 and $1.2
million for the three and six months ended June 30, 2004, a decrease of 31% and
27% from the three and six months ended June 30, 2003. The decreases were
driven by reductions in infrastructure costs, including depreciation and
insurance expenses. Restructuring & Settlement.In the three months ended June 30, 2003, the
Company reversed a restructuring and settlement accrual related to the
Companys cancellation of a contract as part of a restructuring in 2001. The
reversal was made in accordance with Company policy, as two years had passed
since the related activity ceased and no actual charges had been, were then
expected to be, or have since been paid. The reversal resulted in a credit of
$493,000 being reported on the restructuring line of the statement of
operations. Interest Expense.Interest expense was $189,000 in both the three and six
months ended June 30, 2004, and in the comparable periods in 2003. Interest
expense consists primarily of interest related to convertible subordinated
notes issued in April 2000, the convertible promissory note issued in
association with the purchase of InfoPrise in February 2002 and, to a lesser
extent, financed equipment and other financing arrangements. With respect to
the subordinated notes, approximately $264,000 is payable semi-annually in
arrears on April 1 and October 1 of each year for interest on the notes that
remain outstanding at June 30, 2004. In addition, the remaining deferred
offering costs of approximately $128,000 related to the subordinated notes are
being amortized as interest expense ratably over the term of the subordinated
notes. With respect to the InfoPrise convertible promissory note, 15




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approximately $73,000, which represents 40% of the annual interest, is
payable annually on each anniversary of the issuance of the promissory note,
with the balance of interest owed due at maturity. Interest Income and Other, Net.Interest income and other, net, was $9,000
and $49,000 for the three and six months ended June 30, 2004, a decrease of
$119,000 for the three months ended June 30, 2003 and of $112,000 from the six
months ended June 30, 2003. Interest income and other, net, has been derived
primarily from earnings on investments in cash equivalents and short-term
investments. Also included in the six months ended June 30, 2004 are fees of
approximately $28,000 charged for late rental payments on subleased office
space. Included in the six months ended June 30, 2003 is a gain from reversal
of estimated taxes associated with the gain from retirement of bonds recognized
in 2001. All tax returns have been filed and no liability was incurred. Investment Losses.Investment losses for the three and six months ended
June 30, 2003 were $113,000. The loss is a write-down for impairment deemed to
be other than temporary of an investment accounted for using the cost method.
The book value of the investment was approximately $500,000 as of June 30,
2003. The investment was sold in the third quarter of 2003. Gain from discontinued operations.In the quarter ended June 30, 2003,
the Company reversed an accrual of $334,000 related to an estimated liability
accrued upon the Companys cancellation of a contract that had been part of
operations discontinued in 2000 and which ceased functioning in 2001. The
reversal was made in accordance with Company policy, as two years had passed
since the related activities ceased and no actual charges had been, were then
expected to be or have since been paid. Net Loss.As a result of the changes described above, the net loss was
approximately $1.4 million and $3.0 million for the three and six months ended
June 30, 2004, a decrease of 11% and 29% from the net losses reported for the
three and six months ended June 30, 2003. Liquidity and Capital Resources As of June 30, 2004 NexPrise had approximately $3.6 million of cash, cash
equivalents and short-term investments and working capital was approximately
$1.2 million. Net cash used in operating activities was approximately $2.3 million for
the six months ended June 30, 2004 compared to $1.9 million of net cash used in
operating activities for the six months ended June 30, 2003. Net cash used in
operating activities for the six months ended June 30, 2004 consists primarily
of the net loss for the period less non-cash items. Net cash provided by investing activities totaled $3.5 million for the six
months ended June 30, 2004, compared to net cash used in investing activities
of $31,000 for the six months ended June 30, 2003. Net cash provided during
the six months ended June 30, 2004, related primarily to net sales and
maturities of approximately $3.5 million of short-term investments, partially
offset by purchases of approximately $50,000 in property and equipment. Such
purchases accounted for all of the net cash used in investing activities during
the six months ended June 30, 2003. Management believes the Company has adequate cash to sustain operations at
least through 2004 and is managing its business to achieve positive cash flow
utilizing existing assets. During 2003 the Company continued to reduce ongoing
operating expenses by reducing purchases of other services and making workforce
reductions. In January 2004, the Company eliminated several positions,
primarily in the sales and marketing functions, to reduce operating expenses.
At the same time, our product development team is focusing on enhancing our
solutions so they can be more easily configured by customers and indirect
channel partners, will require less involvement by our technical personnel and
can be delivered efficiently via the Internet. It will take several quarters
before the business flowing through this indirect channel has a significant
impact on operating results, but the reduced variable cost per incremental
revenue dollar is expected to significantly improve our operating margin and
allow our business to scale more readily. We are hopeful that we can achieve
cash flow break-even in 2005 using this indirect channel, our continuing direct
sales efforts and the aforementioned reduction in expenses. Management believes that the Companys restructuring activities have
reduced ongoing operating expenses such that the quarterly use of cash in 2004
will be between $500,000 and $1.2 million and the Company will have sufficient
working capital to support planned activities at least through 2004. Management
is committed to the successful execution of our operating plan and will take
further action as necessary to align our operations and reduce expenses. Although we expect our existing cash, cash equivalent and investment
balances together with our anticipated cash flows from operations to be
sufficient to meet our working capital and operating resource expenditure
requirements for at least through 2004 and beyond, higher than anticipated
expenses or lower than anticipated receipts may result in lower cash, cash
equivalents and investments balances than presently anticipated and we may find
it necessary to obtain additional equity or debt financing. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all. 16




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Risk Factors This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following cautionary statements and elsewhere
in this Quarterly Report on Form 10-Q. If any of the following risks were to
occur, our business, financial condition or results or operations would likely
suffer. In addition to other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating NexPrise and its business
because such factors currently may have significant impact on NexPrises
business, operating results and financial condition. An investment in our securities involves significant risks, including
those described below. These risks relate to our ability to generate revenues
and gain operating efficiencies, our history of losses, significant changes,
our ability to hire and retain key personnel, our reliance on the hosted
environment and technology provided by others, the possible delisting of our
common stock, the need to respond to rapid technological change and legal
claims against us. Our actual results may differ materially from those expressed in any
forward-looking statement as a result of certain factors, including but not
limited to those set forth below and included in other portions of this
document. The Company Has a History of Losses and Expects to Continue to Incur
Significant Operating Losses and Negative Cash Flow; We May Never Achieve or
Maintain Profitability We have incurred substantial net losses in the past and we expect to incur
net losses in future periods. We incurred a net loss of approximately $1.4
million during the three months ended June 30, 2004. As of June 30, 2004 we had
an accumulated deficit of approximately $642 million. We will need to generate
significant increases in revenues to achieve and maintain profitability, and we
may not be able to do so. If our revenues grow more slowly than we anticipate
or if our operating expenses cannot be reduced in the event of lower than
expected revenues, we may find it necessary to obtain additional equity or debt
financing or, in the alternative, significantly curtail our operations. Such
financing may not be available on acceptable terms or at all. Even if we
achieve profitability in the future on a quarterly or annual basis, we may not
be able to sustain or increase profitability. Failure to achieve profitability
or achieve and sustain the level of profitability expected by investors and
securities analysts may adversely affect the market price of our common stock. Our Common Stock is not Listed on an Exchange or the Nasdaq System, and
Trading is Restricted by the Additional Regulations on the Sale of Penny Stocks Our common stock is neither listed on any exchange nor quoted on Nasdaq
but is reported on the OTC Bulletin Board. Accordingly, our shares are subject
to the regulations regarding trading in penny stocks, which are those
securities trading for less than $5.00 per share. The following is a list of
the primary restrictions on the sale of penny stocks:  
    
    Prior to the sale of penny stock by a broker-dealer to a new
purchaser, the broker-dealer must determine whether the purchaser is
suitable to invest in penny stocks. To make that determination, a
broker-dealer must obtain, from a prospective investor, information
regarding the purchasers financial condition and investment experience
and objectives. Subsequently, the broker-dealer must deliver to the
purchaser a written statement setting forth the basis of the suitability
finding.
    
    A broker-dealer must obtain from the purchaser a written agreement to
purchase the securities. This agreement must be obtained for every
purchase until the purchaser becomes an established customer.
    
    The Securities Exchange Act of 1934 requires that prior to effecting
any transaction in any penny stock, a broker-dealer must provide the
purchaser with a risk disclosure document that contains, among other
things, a description of the penny stock market and how it functions and
the risks associated with such investment. These disclosure rules are
applicable to both purchases and sales by investors.
    
    A dealer that sells penny stock must send to the purchaser, within
ten days after the end of each calendar month, a written account
statement including prescribed information relating to the security. 17




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As a result of the foregoing, an investors ability to convert shares of
our common stock into cash or to sell to a third party may be very limited. We
can provide no assurance that our current market-makers will continue to make a
market in our securities, or that any market for our securities will continue. We Have a Limited Operating History and an Evolving Technology and Service
Offering, Which Makes it Difficult to Evaluate Our Future Prospects Our success is based on integrating and developing a viable technology and
services offering and securing new customers. Our business model is not fully
developed, not proven and depends upon our ability, among other things, to:  
    
    develop and market technology and services solutions that achieve broad market acceptance by our customers;
    
    acquire and deploy a sufficient number of customers to achieve profitability;
    
    extend our technology to support a large range of customers with a variety of needs;
    
    acquire or license third party technologies that we require to deliver our technology and services;
    
    overcome publicity related to our public announcements of
restructurings, litigation and the shutdown of our former marketplaces;
    
    overcome customer bias toward choosing larger, well capitalized
vendors to provide their enterprises software solutions; and
    
    acquire customers operating in industries where we have limited
experience and provide them quality technology and services. We may not successfully address these risks. If we do successfully address
these risks, additional risks related to factors that are outside our control
may prevent us from realizing sufficient revenues or profit margins to reach or
sustain profitability. For example, collaborative business process solutions
may experience problems with users as a result of security and privacy concerns
or general reticence about technology. We Are Dependent on a Small Number of Customers in a Limited Number of
Industries To date, we have derived a significant portion of our revenues from a
small number of customers in two industries. Many of our customers do not have
contracts that extend beyond one year. Critical to the success of the Companys
business plan will be the acquisition of new customers in other industries,
increasing the number of users in our current customers and renewing current
contracts. There can be no assurance that we will be successful in developing
profitable relationships with new customers in new industries or that we will
retain existing customers. Our Business Involves a Lengthy and Unpredictable Sales Cycle The sales cycle for the target customers for the software and services we
offer tends to be lengthy and may be somewhat longer than those of our more
established competitors. The unpredictability of the length of our sales cycle
could make it difficult to forecast revenue and plan expenditures.
Additionally, any delays in deployment of our software related to our
inexperience with a type of business or the size or complexity of the account
would delay our ability to recognize revenue from that account. Such delays
could adversely affect our financial results. Legislative Actions, Higher Insurance Costs and Potential New Accounting
Pronouncements May Cause our General and Administrative Expenses to Increase
and Impact our Future Financial Position and Results of Operations In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and
proposed accounting changes and to implement other corporate governance
practices that are now expected of publicly-traded companies, we may be
required to hire additional personnel and will utilize additional outside
legal, accounting and advisory services, all of which would cause our general
and administrative costs to increase beyond what we currently have planned.
Insurers may also increase premiums for liability coverage as a result of the
high claims rates incurred in past years, and so our premiums for our various
insurance policies, including our directors and officers insurance policies,
may increase. Proposed changes to accounting rules, including proposals to
account for employee stock options as a compensation expense, could, if
mandated, materially increase the expenses we report under generally accepted
accounting principles and adversely affect our operating results. 18




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Security Risks and Concerns May Decrease the Demand for Our Services, and
Security Breaches May Disrupt Our Services or Make Them Inaccessible to Our
Customers Our services include the storage and transmission of business-critical,
proprietary information. If the security measures we or our third party data
centers have implemented are breached, our customers could lose this
information, or a party who circumvents these security measures could
misappropriate business-critical proprietary information or cause interruptions
in our services or operations. As a result, we could be exposed to litigation
and possible liability to our customers. In addition, computer hackers could
introduce computer viruses into our systems or those of our customers, which
could disrupt our services or make them inaccessible to customers. We may be
required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by breaches.
Our security measures and those that our third-party data centers provide may
be inadequate to prevent security breaches, and our business and reputation
will suffer if these breaches occur. We May Not Be Able to Sustain VSOE and May Not be Able to Use the Residual
Method We established VSOE for maintenance in the second quarter of 2003 and
began recognizing perpetual license revenue upon delivery of the license. If we
are unable to continuously meet the criteria required to maintain VSOE on
maintenance, we may not be able to continue to recognize perpetual license
revenue using the residual method. Our Products May Contain Defects That Could Harm Our Reputation, Be Costly
to Correct, Delay Revenue and Expose Us to Litigation Despite testing by us, our partners and our customers, errors may be found
in our products after commencement of commercial delivery. Errors have arisen
in our software products from time to time, and they could arise again in the
future. If errors are discovered, we may not be able to successfully correct
them in a timely manner or at all. Errors and failures in our products could
result in loss of or delay in market acceptance of our products and damage to
our reputation and our ability to convince commercial users of the benefits of
our products. In addition, we may need to make significant expenditures of
capital resources in order to eliminate errors and failures. Since our products
are used by customers for mission-critical applications, errors, defects or
other performance problems could also result in financial or other damages to
our customers, which could assert warranty and other claims for substantial
damages against us. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential
product liability claims, it is possible that such provisions may not be
effective or enforceable under the laws of certain jurisdictions. In addition,
our insurance policies may not adequately limit our exposure with respect to
such claims. A product liability claim, even if unsuccessful, would be costly
and time-consuming to defend and could harm our business. Our Operating Results Fluctuate Significantly from Quarter-to-Quarter Important factors that could cause our quarterly results to fluctuate
materially include:  
    
    our lengthy sales cycle and the resulting unpredictability of the timing of obtaining new customers;
    
    the timing of deploying services for new customers;
    
    whether our customers purchase perpetual licenses or subscriptions;
    
    the timing and magnitude of operating expenses and capital expenditures;
    
    costs associated with the various third-party technologies we incorporate into our products;
    
    utilization of third party data center services and technology infrastructure;
    
    changes in our pricing policies or those of our competitors; and
    
    the amount of credits that we may be required to issue to our current
customers if we fail to deliver our services pursuant to contractual
arrangements. Due to these and other factors, quarter-to-quarter comparisons of our
operating results may not be meaningful. You should not rely on our results for
any one quarter as an indication of our future performance. In future quarters,
our operating results may fall below the expectations of public market analysts
or investors. If this occurs, the market price of our common stock would likely
decline. 19




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Our current and future levels of operating expenses and capital
expenditures are based largely on our operating plans and estimates of future
billings and revenues. These expenditure levels are, to a large extent, fixed
in the short term. We may not be able to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue relative to planned expenditures could negatively impact our
business and results of operations. Our Operating Results Are Highly Dependent on License and Service Revenues
from Our Software Suite, and Our Business Could Be Materially Harmed by Factors
That Adversely Affect the Pricing and Demand for This Software Suite Substantially all of our revenues to date have been derived from the sale
of licenses and services associated with the ipTeam and nProcesssolutions.
Our future operating results will depend on continued demand for ipTeam and the
nProcessPlatform. ipTeam was commercially launched in 1998 and nProcesswas
launched in June 2002. If our competitors release new products that are
superior to ipTeam or nProcessPlatform in performance or price, or if we fail
to enhance ipTeam and nProcessPlatform in a timely manner, demand for our
products may decline, and we may have to reduce the pricing of our products. A
decline in demand or pricing as a result of these or other factors would
significantly reduce the revenues we can expect in the future. In the past, many software companies have experienced delays in the
commencement of commercial release of their products. To date, such delays have
not had a material impact on NexPrises revenues. In the future, we may fail to
introduce or deliver new products on a timely basis. If new releases or
products are delayed or do not achieve market acceptance, we could experience
customer dissatisfaction or a delay or loss of revenues. In addition, customers
may delay purchases of our products in anticipation of future releases. If
customers defer material orders in anticipation of new releases or new product
introductions, our revenues may decline. Moreover, as we release enhanced versions of our products, we may not be
successful in upgrading our customers who purchased previous versions of the
product to the current version. We also may not be successful in selling add-on
modules for our products to existing customers. Any failure to continue to
upgrade existing customers products or sell new modules, if and when they are
introduced, could negatively impact customer satisfaction and our revenues. As with most software companies, developing and selling a product that
does not require significant customization in product features or sales process
for any particular customer or set of customers is critical to our success. If
we are unable to resist customer requests to individualize our product or
unable to develop a repeatable sales process our revenues will suffer and our
costs will increase. We Operate in a Highly Competitive Market and Our Inability to Compete
Successfully Against New Entrants and Established Companies Could Adversely
Affect Our Market Share Our target market is rapidly evolving and is highly competitive. It may be
characterized by an increasing number of market entrants, as many companies may
find a technological path around existing barriers to entry. We already have competition from a diverse group of companies, including
companies such as MatrixOne and PTC. In addition, providers of various software
products such as Oracle, IBM, PeopleSoft and SAP may expand their product
offerings to be competitive with us in the future. Our current and potential competitors may develop superior platforms that
achieve greater market acceptance than our solution. Many of our existing and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. Such competitors can undertake
more extensive marketing campaigns for their brands, products and services,
adopt more aggressive pricing policies and make more attractive offers to
customers, potential employees, distribution partners, commerce companies and
third-party suppliers. In addition, substantially all of our prospective customers have
established and long-standing relationships with some of our current or
potential competitors. Accordingly, we cannot be certain that we will be able
to expand NexPrises customer and user base, or retain its current customers.
We may not be able to compete successfully against our current or future
competitors, which could have a material adverse effect on our business,
results of operations and financial condition. We Are Dependent Upon Outsourcing Providers for Provision of the Hosted
Environment for our Customers; Connection and Performance Issues Have Occurred
and May Recur We rely on third-party providers for our data center services, principal
Internet connections and data hosting. This hosted environment is critical to
the provision of our software to many of our customers and if the environment
does not work well, is cut-off or fails, our customers would be unable to use
our solution. We have experienced and may continue to experience interruptions
and 20




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delays in service and availability for such services. We have signed an
agreement with a new vendor to provide the hosted environment, but there can be
no assurance that the new provider will provide service to the full
satisfaction of our customers. Furthermore, we rely on these third party
providers to respond promptly to requests we make for changes to our hardware,
networking and telecommunications configuration in order to deliver our
products and services to our customers. Any failures, security breaches,
interruptions, or delays experienced or caused by these third party providers
could negatively impact our relationship with users and adversely affect our
brand and our business and could expose us to liabilities to third parties. Our operations could be significantly hindered by the occurrence of a
natural disaster or other catastrophic event at our company or any third party
provider. Our operations and theirs are susceptible to outages due to fire,
floods, power loss, telecommunications failures, break-ins and similar events.
In addition, the majority of our network infrastructure is located in
California, an area susceptible to earthquakes. In the recent past, the western
United States (and California, in particular) has experienced repeated episodes
of diminished electrical power supply. As a result of these episodes, certain
of our and their operations or facilities may be subject to rolling blackouts
or other unscheduled interruptions of electrical power. The prospect of such
unscheduled interruptions may continue for the foreseeable future, and we are
unable to predict their occurrence, duration or cessation. We do not have, and
our third party providers may not have, multiple site capacity for all of our
services in the event of any such occurrence. Despite implementation of network
security measures, the servers are vulnerable to computer viruses, physical and
electronic break-ins, and similar disruptions from unauthorized tampering with
our computer systems. In addition, systems are vulnerable to coordinated
attempts to overload them with data, which could result in denial or reduction
of service to some or all of our users for a period of time. Furthermore, the
failure by the third party providers to provide our required data
communications capacity could result in interruptions in our service.
Interruptions in our service will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable or insecure. We have experienced system failures from time to
time. If we experience frequent or persistent system failures, our reputation
and brand could be permanently harmed. We do not carry sufficient business
interruption insurance to compensate us for losses that may occur as a result
of any of these events. Any such event could have a material adverse effect on
our business, operating results, and financial condition. Our Financial Performance and Workforce Reductions May Adversely Affect
the Morale and Performance of Our Personnel and Our Ability to Hire New
Personnel In connection with the evolution of our business model and in order to
reduce our cash expenses, we have adopted a number of changes in personnel,
including significant workforce reductions and transfers of several employees.
The changes in personnel may adversely affect morale and the Companys ability
to attract and retain key personnel. In addition, recent trading levels of our
common stock have decreased the value of the stock options granted to employees
pursuant to our stock option plan. As a result of these factors, our remaining
personnel may seek employment with larger, more established companies or
companies they perceive to have better prospects. Our Business Will Suffer If We Do Not Enhance Our Product or Introduce New
Features to Meet Changing Customer Requirements The market for software and services is characterized by rapid
technological change, frequent new hardware, software and networking product
introductions and Internet-related technology enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. If we
do not develop technology that can respond to these changes we will find it
very difficult to attract new customers. In particular, we are designing our
technology to support a variety of hardware, software and networking products
that we believe to be proven and among the most widely used. We can make no
assurances, however, that future customers will continue to use these products.
Even if they do, as new versions of these products are released, we will need
to adapt our technology to keep pace with changes made to hardware and software
configurations and network infrastructures. If we do not develop, license or acquire new technology, or deliver
enhancements to existing products on a timely and cost-effective basis, we may
be unable to meet the growing demands of potential customers. In addition, as
we introduce new services or technologies into existing customer architectures,
we may experience performance problems associated with incompatibility among
different versions of hardware, software and networking products. To the extent
that such problems occur, we may face adverse publicity, delay in market
acceptance of our services or customer claims against us, any of which could
harm our business. We Are Dependent on Intellectual Property and on Products Licensed or
Purchased from Third Parties and are Exposed to Legal Liability for
Infringement Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology. We rely on a combination of
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect the proprietary aspects of our technology. We seek to
protect the source code for our software, documentation and other written
materials under trade 21




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secret copyright laws. Finally, we seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, and to determine the validity and scope of the proprietary rights of
others. Any resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business
operating results. Our business has involved the licensing of our technology to our
customers. Pursuant to our existing licenses, we have made certain
representations and warranties and agreed to indemnify our licensees against
claims of infringement by third parties. Thus, we may be exposed to a
significant risk of liability for intellectual property infringement claims by
others. Our success and ability to compete also depend on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability
to license the infringed technology, our business and operating results would
be significantly harmed. As part of our normal operations, we purchase or license software products
from third party commercial vendors. These products may not continue to be
available on commercially reasonable terms, or at all. The loss of these
products could result in delays in the sale of our services until equivalent
technology, if available, is identified, procured and integrated, and these
delays could result in lost revenues. Some of the key components of our
services are available only from sole or limited sources. Further, to the
extent that the vendors from whom we purchase these products increase their
prices, our gross margins could be negatively affected. Non-Compliance with Government Regulations May Subject Us to Liability In addition to regulations applicable to businesses generally, in
connection with our former business of servicing business-to-business
marketplaces, we were subject to direct regulation by governmental agencies
which includes numerous laws and regulations generally applicable to the
chemical, pharmaceutical, controlled substances, human and biological reagents,
medical and invitro devices, nuclear chemical businesses and environmental
spills, as well as U.S. import and export controls and import controls of other
countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit
future regulatory and product liability risks, until all statutes of limitation
have expired, certain legal risks will remain. We relied on our suppliers to comply with applicable local, state and
federal laws regarding the labeling and the dissemination of information on any
products sold that may be hazardous or present a health threat to the user. If
these suppliers have failed, or we have failed to maintain the requisite
records irrespective of the actions of the suppliers, or if either of us have
failed to adequately comply with labeling and information dispensing
requirements of local, state or federal laws, then we may be held legally
responsible, since we held title to these products, and could be subject to
governmental penalties or fines, as well as private lawsuits to enforce these
laws. We have also relied upon our suppliers to obtain appropriate approvals
for products regulated by the Food and Drug Administration (FDA) and to
comply with the requirements relating to those approvals and products. The
failure of suppliers to obtain or comply with those approvals, or the failure
of the product advertising or labeling to be consistent with the FDA approval
for the products, or other failures by the products themselves, or our failure
to keep regulatory records required by the FDA, such as complaint files, could
result in costly product recalls, significant fines and judgments, civil and
criminal liabilities and negative publicity. In addition, we may discover that
we inadvertently sold other regulated products without a requisite license or
permit or failed to fully comply with other local, state or federal laws
governing these sales. We are unaware of any current investigations, inquiries, citations, fines
or allegations of violations or noncompliance relating to regulatory
requirements pending by government agencies or by third parties against us,
other than a subpoena we received in February, 2001 from the U.S. Department of
Justice, Drug Enforcement Administration, for certain billing, invoice, and
shipping records concerning sales to an unaffiliated purchaser, which we
complied with. It is also possible that there may be investigations or
allegations that we are not aware of or future investigations or allegations.
The risk that any noncompliance may be discovered in the future is currently
unknown. Although any potential impact on us for noncompliance cannot currently
be established, it could result in significant civil or criminal penalties,
including monetary fines and injunctions, for noncompliance and negative
publicity, and seriously harm our business, revenues, results of operations and
financial condition. Government Contracts and Compliance With Government Regulations May
Subject Us to Increased Administrative Burdens and Risks That May Increase the
Cost of Doing Business As a result of increased contracting with Federal, state and local
agencies and their primary contractors, we may become subject to additional
laws and regulations not currently applicable to us thereby increasing our
administrative burdens. Furthermore, we must comply with any new regulations in
both Europe and the United States, as well as any other regulations adopted by
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where we may do business. Compliance with any newly adopted laws may prove
difficult and may harm our business, operating results and financial condition. Government entities may also terminate their contracts with us earlier
than we expect which could result in revenue shortfalls. Government entities
may also investigate and audit our contracts and, if any improprieties are
found, we may be required to refund revenues we have received and forego
anticipated revenues and may be subject to penalties. In addition, if we fail
to establish and maintain important relationships with government entities and
agencies, our ability to successfully bid for future contracts may be adversely
affected. We Face Risks Associated With Stockholder and Bondholder Litigation Several class action lawsuits have been filed and served upon us alleging
that we and certain individuals made false and misleading statements concerning
our business model and earnings for fiscal 2000 and concerning our initial
public offering. Although we believe that we have meritorious defenses to the
actions, intend to defend the suits vigorously and tentative settlements have
been reached, we cannot predict with certainty the outcome of these lawsuits.
Our defense against such lawsuits has been costly, may require additional
expenditures and will require a significant commitment of time and resources by
our senior management. General Economic and Political Conditions May Impact Our Results Our revenue growth and future profitability depend on the overall demand
for software and related services. This demand can be adversely affected by
unfavorable economic conditions, as customers reduce or defer spending on
information technology improvements. We may be especially prone to this as a
result of the relatively small installed base and operating history of our
products. A softening demand for software caused by a prolonged slowdown of the
economy would result in decreased revenue or lower revenue growth rates and
would adversely affect our operating results. Recent political events, including the U.S. military action in the Middle
East, have put further pressure on economic conditions. The potential turmoil
that may result from such events contribute to the uncertainty of the economic
climate, further reducing predictability and our ability to develop and
implement long-term strategic plans. The impact of these or future similar
events may have a material adverse impact on our operating results and
financial position. Our Common Stock Price is Especially Volatile, Which Could Result in
Substantial Losses to Investors The stock market and specifically the stock prices of technology related
companies have been very volatile. This broad market volatility and industry
volatility may reduce the price of our common stock, because our business is
Internet-based without regard to our operating performance. On a post reverse
split basis, our stock reached a high of $7.25 and a low of $1.34 during fiscal
2002. Our stock reached a high of $4.20 and a low of $1.15 during fiscal 2003.
On June 30, 2004 the last quoted price on the OTC Bulletin Board was $1.21. 
 Item 3.Qualitative and Quantitative Disclosure about Market Risk The following discussion about the Companys market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. We are exposed to
market risk related primarily to changes in interest rates. However, we do not
hold derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity We are also exposed to interest rate risk related to our investment
portfolios. We have performed a sensitivity analysis as of June 30, 2004, using
a modeling technique that measures the change in the fair values arising from a
hypothetical 10% adverse movement in the levels of interest rates across the
entire yield curve with all other variables constant. The discount rates used
were based on the market interest rates in effect at June 30, 2004. The
sensitivity analysis at June 30, 2004 indicated that a potential loss in the
fair values of our interest rate sensitive investment instruments was not
material. Our convertible and promissory notes are not exposed to interest rate risk
as our interest rate is fixed at 6%. Foreign Currency Risk 23




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Our sales to-date have primarily been made to U.S. customers and, as a
result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. If our
sales outside of the U.S. increase and are made in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets. 
 Item 4.Controls and Procedures (a) Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this quarterly report on
Form 10-Q. (b) There has been no change in our internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings Starting in March 2001, several lawsuits were filed in United States
District Court for the Northern District of California against the Company and
certain of its officers and directors on behalf of putative classes of persons
who purchased the Companys securities during time periods from December 1999
through December 6, 2000. One of the lawsuits also names as a defendant the
underwriters for the Companys offering of convertible notes. The lawsuits
generally allege that the Company and certain individuals violated the federal
securities laws by making false and misleading statements during 2000,
including in the Companys registration statement for its convertible notes
offering. These lawsuits were consolidated as In re Ventro Corp. Sec. Litig.,
Master File No. Civ. 01-1287 SBA, and a consolidated complaint was filed.
Following several motions to dismiss and the filing of amended complaints, the
Court set a trial date for January 20, 2005 with respect to the issues
remaining in the case, and discovery commenced. The parties have tentatively
reached an agreement in principle to settle the securities action together with
the settlement of the related derivative action described below. The Companys
portion of the settlement would be funded by insurance. There can be no
assurance that the settlement will be finalized, and if the settlement is not
finalized, the Company intends to defend the case vigorously. In August 2001, Chadwell v. Byers, Case No. CV800814, a putative
stockholder derivative suit, was filed in California Superior Court, Santa
Clara County against certain of the Companys present and former officers and
directors, alleging breaches of fiduciary duty and insider trading. The Company
is named solely as a nominal defendant against which no recovery is sought.
After a demurrer was sustained with leave to amend, the parties stipulated to a
stay of proceedings pending resolution of the In re Ventro Corp. Sec. Litig.
action. As described above, the parties have reached an agreement in principle
to settle this litigation together with the settlement of the federal
securities action. In March 2001, Kassin v. Ventro Corp. et al., Index No. 01-CV-3450 (SAS),
a stockholder class action complaint, was filed in the United States District
Court for the Southern District of New York against the Company, several of its
officers and directors, and the underwriters of its initial public offering.
The class action has been consolidated for pre-trial purposes with more than
one thousand other actions, filed against more than 300 other issuers of
securities, affiliated individuals and dozens of underwriters of the securities
offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92
(SAS) (IPO Allocation Litigation). The plaintiffs allege that the prospectus
for the initial public offering of the Companys common stock, incorporated in
the Registration Statement on Form S-1 filed with the Securities and Exchange
Commission, was materially false and misleading because it failed to disclose,
among other things, that the underwriters had made secret arrangements for
aftermarket purchases of the securities and made arrangements for excessive and
improper underwriters compensation in the form of increased brokerage
commissions. Plaintiffs are claiming damages of an unspecified amount based on
the subsequent decline in the market price of the Companys shares below their
original offering price. In recent months in the IPO Allocation Litigation,
counsel for the plaintiffs, liaison counsel for the issuer defendants and
counsel for insurers of the issuer defendants have taken part in continuing
discussions mediated by a former federal district court judge to explore a
possible settlement of the claims against all of the issuer defendants,
including the Company. In June 2003, a memorandum of understanding was entered
into by and among the plaintiffs, liaison counsel for the issuer defendants and
counsel for the insurers which would result in dismissal of the action against
the issuers, including the Company, on terms that would not require any current
payment by the Company and are believed by the Companys board of directors to
carry only a remote risk that any future payment by the Company would be
required. In addition, the plaintiffs would release the Company and its
officers and directors from the claims that have been asserted against them in
the IPO Allocation Litigation as a part of the proposed settlement. On June 30,
2003, the Companys board of directors approved the memorandum of understanding
and authorized the Company to enter into the 24




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proposed settlement. On June 14, 2004, the proposed settlement was
submitted to the Court for its required approval, and the Court has taken the
motion for preliminary approval of the proposed settlement under submission.
The IPO Allocation Litigation in general, and the litigation against the
Company in particular, are in an early phase, and no date has yet been set by
the court for completion of pre-trial discovery or trial. The Company is a party to various claims in the ordinary course of
business. Although the results of litigation and claims cannot be predicted
with certainty, the Company believes the final outcome of such matters will not
have a material adverse effect on the Companys financial position, results of
operations or cash flows. 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities None 
 Item 3.Defaults upon Senior Securities None 
 Item 4.Submission of Matters to a Vote of Securities Holders The Company held its annual meeting of stockholders in Palo Alto, California on
April 22, 2004. Of the 3,238,443 shares outstanding as of March 10, 2004, the
record date, 2,180,307 shares were present or represented by proxy at the
meeting. At the meeting the following actions were voted upon: 1) To elect the following five (5) directors to serve until the next
Annual Meeting of Shareholders and until their successors are duly elected and
qualified: For
    
    Authority WithheldTed Drysdale
    
    
    2,176,043
    
    
    
    4,264David P. Perry
    
    
    2,175,512
    
    
    
    4,795Thomas Insley
    
    
    2,065,074
    
    
    
    115,233Donald Westerheide
    
    
    2,065,068
    
    
    
    115,239Daniel Jess
    
    
    2,065,060
    
    
    
    115,247
 2) To approve the appointment of Ernst & Young LLP as the independent
auditors of NexPrise for fiscal year 2004: For
    
    Against
    
    Abstain2,177,261
    
    
    2,047
    
    
    
    999
 3) To approve the amendment to the certificate of incorporation effecting
a reduction of authorized common shares: For
    
    Against
    
    Abstain2,176,577
    
    
    3,423
    
    
    
    307
 
 Item 5.Other Information None 25




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Item 6.Exhibits and Reports on Form 8-K (a) Exhibits. The following is a list of exhibits filed as part of this
Report on Form 10-Q. Where indicated by footnote, exhibits that were previously
filed are incorporated by reference. ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K: A Report on Form 8-K was furnished on April 23, 2004 (Item 12). The
report contained information announcing NexPrise, Inc. earnings release
issued on April 21, 2004. 26




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on July 30, 2004. NEXPRISE, INC.By:
    
    /s/ Jerome E. NatoliJerome E. NatoliChief Financial Officer
 27




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EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002