CLAR

Clarus Corp 10-Q Summary: Period Ended June 30, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1999, for Clarus Corporation, a Delaware corporation based in Suwanee, Georgia. The company develops and markets Internet-based business-to-business e-commerce solutions and financial/human resources software. As of July 31, 1999, there were 11,072,151 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 7.8% for the quarter and 21.0% for the six months compared to the prior year periods. This growth was driven by a 18.6% quarterly increase in services fees and a 38.3% quarterly increase in maintenance fees.
• License Fee Decline: License fees decreased 12.3% for the quarter and 6.7% for the six months, attributed to a decline in traditional ERP product sales, partially offset by new Web-based commerce products.
• Profitability Deterioration: The company reported a net loss of $1.669 million for the quarter, compared to a net income of $263,000 in the same period in 1998. Operating expenses increased significantly, with R&D up 70.1% and Sales & Marketing up 18.6% year-over-year.
• Cash Flow: Net cash used in operating activities increased substantially to $4.493 million for the six months ended June 30, 1999, compared to $507,000 in the prior year period, primarily due to increased accounts receivable and decreased deferred revenue.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes current cash balances and available credit facilities (approximately $8.7 million available under a line of credit with Silicon Valley Bank) are adequate for foreseeable capital and working capital requirements.
• Acquisition Impact: The November 1998 acquisition of ELEKOM Corporation contributed to increased depreciation and amortization expenses ($963,000 for the quarter) and goodwill amortization.
• Year 2000 Compliance: The company estimates $300,000 in costs for internal Year 2000 compliance. While products are designed to be compliant, there is a risk of litigation regarding undetected errors or third-party non-compliance.
• Tax Position: The company has established a full valuation allowance against its $29.3 million in NOL carryforwards due to uncertainty regarding future realization, particularly under Section 382 limitations following ownership changes.
• Unusual Items: Non-cash compensation expense dropped significantly to $42,000 for the quarter from $749,000 in the prior year, largely due to a one-time charge in 1998 related to accelerated stock option vesting.

Investor Verification Checklist

• Verify the collectibility of the $1.169 million equity/cash consideration from the recent license agreement with a customer, noting the cash fallback clause if the customer's equity offering is not complete by September 30, 1999.
• Monitor the trend in accounts receivable, which increased by $2.25 million in the first six months of 1999, contributing to negative operating cash flow.
• Assess the sustainability of the shift in revenue mix from high-margin license fees to lower-margin services fees, which now comprise 44.4% of total revenue.
• Review the status of Year 2000 remediation for internal systems and third-party dependencies to evaluate potential litigation or disruption risks.
• Confirm the utilization of the $8.7 million available credit line given the current cash burn rate of approximately $4.5 million per six months from operations.