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 March 31, 2006

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 0-30881

CLICK COMMERCE, INC.

(Exact name of registrant as specified in its charter)

Delaware		36-4088644
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

233 North Michigan Avenue, 22nd Floor
Chicago, Illinois 60601

(Address of principal executive offices)

(312) 482-9006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 8, 2006, there were 12,618,659 shares of the registrant’s common shares outstanding.

CLICK COMMERCE, INC.

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005		3
	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2006 and 2005 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
Item 4.	Controls and Procedures		24
PART II.	OTHER INFORMATION
Item 6.	Exhibits		25
SIGNATURES			26

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

CLICK COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)

	March 31, 2006				December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	22,327			$	17,498
Trade accounts receivable, less allowance for doubtful accounts of $1,014 and $935 respectively		22,043				25,336
Revenue earned on contracts in progress in excess of billings		746				481
Prepaids and other current assets		3,222				1,879
Total current assets		48,338				45,194
Property and equipment, net		2,922				2,765
Intangible assets, net		24,574				22,129
Goodwill		60,565				48,782
Deferred tax assets		4,194				7,116
Other assets		1,653				1,673
Total assets		$	142,246			$	127,659
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,443			$	1,454
Billings in excess of revenues earned on contracts in progress		15				177
Deferred revenue		15,623				16,421
Accrued compensation		3,087				3,190
Accrued rent		1,986				2,610
Accrued expenses and other current liabilities		4,991				4,552
Short-term notes payable		307				829
Total current liabilities		27,452				29,233
Long-term debt		6,456				6,464
Other liabilities		1,185				846
Total liabilities		35,093				36,543
Shareholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding		—				—
Common stock, $0.001 par value, 75,000,000 shares authorized; 12,828,747 and 12,217,857 shares issued as of March 31, 2006 and December 31, 2005, respectively; 12,618,659 and 12,007,769 shares outstanding as of March 31, 2006 and December 31, 2005, respectively		13				12
Additional paid-in capital		133,769				120,589
Accumulated other comprehensive income		133				194
Treasury stock, at cost—210,088 shares		(2,923		)		(2,923		)
Accumulated deficit		(23,839		)		(26,756		)
Total shareholders’ equity		107,153				91,116
Total liabilities and shareholders’ equity		$	142,246			$	127,659

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

CLICK COMMERCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME

(Dollars in thousands, except share and per share data)
(Unaudited)

	Three months ended March 31,
	2006			2005
Revenues:
Product license and hardware
Product license	$	2,676		$	1,963
Hardware	376			—
Total product license and hardware	3,052			1,963
Service
Maintenance and hosting	9,007			3,814
Consulting and implementation service	5,643			3,497
Subscription	1,986			1,651
Total service	16,636			8,962
Total revenues	19,688			10,925
Cost of revenues:
Product license and hardware	818			198
Service	6,083			3,989
Total cost of revenues	6,901			4,187
Gross profit	12,787			6,738
Operating expenses:
Sales and marketing	2,091			1,146
Research and development	2,439			1,209
General and administrative	2,364			1,006
Amortization of intangibles	986			720
Stock-based compensation	81			—
Total operating expenses	7,961			4,081
Operating income	4,826			2,657
Other income (expense), net	131			(27		)
Income before income taxes	4,957			2,630
Income tax expense	2,040			—
Net Income	$	2,917		$	2,630
Basic income per common share	$	0.25		$	0.25
Diluted income per common share	$	0.22		$	0.23
Weighted average common shares outstanding—basic	11,896,592			10,423,675
Weighted average common shares outstanding—diluted	13,082,101			11,412,852
Comprehensive income:
Net income	$	2,917		$	2,630
Foreign currency translation adjustment	(61		)	—
Comprehensive income	$	2,856		$	2,630

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

CLICK COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

	Three months ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	2,917		$	2,630
Adjustments to reconcile net income to net cash provided by operating activities:
Income tax expense	2,040			—
Depreciation	353			204
Amortization of intangibles	1,417			917
Provision for doubtful accounts	79			—
Gain on disposal of assets	(13		)	—
Stock-based compensation	81			—
Changes in operating assets and liabilities, net of effect of acquisitions:
Trade accounts receivable	4,001			603
Prepaids and other current assets	(1,381		)	130
Accounts payable	(18		)	(1,303		)
Billings in excess of revenues earned on contracts in progress	(162		)	2
Deferred revenue	(2,076		)	(880		)
Accrued compensation	(145		)	(2,668		)
Accrued rent, accrued expenses and other current liabilities	1,090			415
Other, net	—			243
Net cash provided by operating activities	8,183			293
Cash flows from investing activities:
Purchases of property and equipment	(301		)	(156		)
Payments for acquisitions, net of transaction costs and cash required (see supplemental schedule on the following page)	(3,894		)	(1,986		)
Other investing activities	22			—
Net cash used in investing activities	(4,173		)	(2,142		)
Cash flows from financing activities:
Proceeds from exercise of stock options	1,349			114
Proceeds from long-term debt	—			4,500
Payments on capital lease obligations	—			(3		)
Payments of short-term debt obligations	(522		)	(1,761		)
Payments of long-term debt obligations	(8		)	(2,524		)
Net cash provided by financing activities	819			326
Net increase (decrease) in cash and cash equivalents	4,829			(1,523		)
Cash and cash equivalents at beginning of period	17,498			13,382
Cash and cash equivalents at end of period	$	22,327		$	11,859
Supplemental disclosures:
Cash paid in the period for:
Interest	$	114		$	35
Income taxes	$	891		$	—
Noncash investing activities:
Common stock issued for acquisition activities	$	11,751		$	30,404

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

CLICK COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Information
(Dollars in thousands)
(Unaudited)

	Quarter Ended March 31, 2005
	ChannelWave, Inc.			Optum, Inc.		Total
Intangible assets acquired		$	3,272	$	13,726	$	16,998
Goodwill		2,896		24,151		26,922
Other assets acquired, not including cash		471		6,815		7,286
Total assets acquired		6,639		44,692		51,206
Less: Liabilities acquired		1,381		19,042		20,298
Net assets acquired, not including cash		5,258		25,650		30,908
Less: Value of shares issued for acquisition		4,280		26,124		30,404
Plus: Acquisition costs paid		75		50		125
Plus: Cash paid for escrow settlements — year ended December 31, 2005		—		745		745
Payments for acquisitions, net of transaction costs and cash acquired		$	1,053	$	321	$	1,374

	Quarter Ended March 31, 2006
	Elance		Requisite, Inc.			Total
Intangible assets acquired	$	3,500		$	—	$	3,500
Goodwill	11,614			—		11,614
Other assets acquired, not including cash	1,575			—		1,575
Total assets acquired	16,689			—		16,689
Less: Liabilities acquired	1,469			—		1,469
Net assets acquired, not including cash	15,220			—		15,220
Less: Value of shares issued for acquisition	11,751			—		11,751
Plus: Acquisition costs paid	100			—		100
Plus: Cash paid for escrow settlements	—			325		325
Payments for acquisitions, net of transaction costs and cash acquired	$	3,569		$	325	$	3,894

The difference between the March 31, 2005 Supplemental Information and the Condensed Consolidated Statements of Cash Flows is due to a valuation change in both the ChannelWave, Inc. and Optum Inc. opening balance sheet subsequent to March 31, 2005.

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

CLICK COMMERCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the “Company”) and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the three months ended March 31, 2006, include the results of operations of Elance, Inc. (see note 4) from February 8, 2006 through the end of the period. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K and other documents that have been filed with the Securities and Exchange Commission.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Substantially all of the Company’s revenues are derived from four primary sources: (i) licensing software, (ii) providing technical support and product updates, otherwise known as maintenance, (iii) application hosting, and (iv) providing professional services, including implementation and training services. The Company’s software is generally sold through a perpetual license or a limited term license (a subscription). The Company licenses its software in multiple-element arrangements in which the customer typically purchases a combination of: (i) software products, (ii) a maintenance arrangement, which is generally priced as a percentage of the software license fees and provides for technical support and updates over a period of generally one year, (iii) hosting services, and/or (iv) a professional services arrangement.

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

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

Revenue from contracts in which the Company’s services are essential to the functionality of the other elements of the contract is recognized using the percentage-of-completion method under contract accounting as services are performed as the Company delivers, customizes and installs the software. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total labor hours required to fulfill the contract. In contracts with revenue recognized under the percentage-of-completion method based on labor hour inputs, revenues are presented as product license revenue to the extent that the underlying contracts are for software licenses based on equal application of discounts across all elements of the larger arrangement. For arrangements in which percentage-of-completion accounting is used, the Company records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of cash receipts from customers can vary significantly depending on specific contract terms and can, therefore, have a significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.

The Company provides hosting services to customers that have licensed the Company’s software under a limited-term software license (a subscription). Software subscriptions are accounted for under revenue recognition principles in accordance with the guidance provided by Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” The fees related to multiple-element arrangements are allocated to the individual elements in accordance with Emerging Issues Task Force (“EITF”) 00-21 “Revenue Arrangements with Multiple Deliverables,” based upon verifiable, objective evidence of the fair values of each element. The Company’s subscription arrangements with customers generally include several elements, including (1) a limited-term software license (a subscription), (2) strategic consulting services, (3) set-up and software subscription services, and (4) hosting services. The Company requires customers in these limited term arrangements to use its hosting services, which in accordance with EITF 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” results in all such revenue being deferred and recognized ratably over the term of the agreement analogous to a service arrangement. If the arrangement includes consulting services, these services are presented as consulting and implementation service revenues and are deferred and recognized ratably over the term of the arrangement, which is normally 12-24 months. Under SAB No. 104 “Revenue Recognition,” costs associated with set-up and implementation of the subscriptions may be expensed as incurred or deferred and recognized over the term of the related arrangement. The Company has elected to defer such costs. The software subscription service typically begins upon customer acceptance.

The Company also provides hosting services to customers that have licensed the Company’s software on a perpetual basis. In such cases and in accordance with EITF 00-3, the hosting revenue is considered a separate contractual element of the arrangement and is recognized according to SOP 97-2. Fair value of the hosting services is typically based on the stated renewal rate of the hosting services, which is deemed substantive by management.

The Company determines the fair value of the maintenance portion of an arrangement based on the stated renewal rate for additional maintenance terms based on renewal rates charged separately to other companies. The Company’s customers typically prepay maintenance for the first year in connection with new software licenses and the related revenue is deferred and recognized ratably over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a

specified percentage of net license fees as set forth in the arrangement and is deemed to be substantive by management.

Professional service revenue primarily consists of implementation services related to the installation of the Company’s software products and training revenues. The fair value of the professional services portion of the arrangement is based on the daily rates the Company charges for these services when sold independently from a software license.

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

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair market value.

Long-term Investments

The Company has invested in a long-term investment fund. Under terms of the investment, the Company has a total commitment of $2.0 million of which $1.4 million has been contributed to date for an ownership interest of less than 2%. This investment is stated at book value and is recorded in other assets in the Consolidated Balance Sheet.

Income Taxes

SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, our results of operations, or our cash flows.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share—Based Payments (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their consolidated financial statements. The standard is effective for fiscal years beginning after December 15, 2005.

Effective January 1, 2006, the Company has adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, the Company is required to recognize compensation expense for all share-based payments granted after the effective date, and also for all awards granted prior to the effective date of SFAS NO. 123(R) that remain unvested. For the quarter ended March 31, 2006, the Company incurred approximately $0.1 million in non-cash stock-based compensation charges in connection with its adoption of SFAS No. 123(R). The Company determined the fair value for this charge using the Black-Scholes option-pricing model.

The Company previously accounted for its stock options in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allowed entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to

Employees” (“APB 25”) and related interpretations. The Company applied the provisions of APB 25 and provided the pro forma disclosures required by SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123.” As such, compensation expense would be recorded only if the fair value of the underlying stock exceeded the exercise price of the option on the grant date.

The Company has applied APB 25 and related interpretations in accounting for its stock options issued under the Amended and Restated Click Commerce Stock Option and Stock Award Plan and the Amended and Restated Directors’ Stock Option and Stock Award Plan. Accordingly, no compensation cost was recognized in the quarter ended March 31, 2005 for stock options for which the exercise price equaled the fair value at the date of grant. Had the Company determined compensation expense based on the method required by SFAS No. 123, the Company’s net income and net income per common share for the three months ended March 31, 2005 would approximate the pro forma amounts below:

	Three months ended March 31, 2005
	(in thousands, except per share data)
Net income, as reported		$	2,630
Total fair value method employee stock-based compensation expense, net of related tax effects		(199		)
Pro forma net income		$	2,431
Basic income per share:
As reported		$	0.25
Pro forma		$	0.23
Diluted income per share:
As reported		$	0.23
Pro forma		$	0.21

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for the three months ended March 31, 2005; an expected life of 4.25 years, an expected volatility of 147%, a risk-free interest rate of 2.7% and a 0% dividend yield. There were no stock options granted in 2006.

3. NET INCOME PER SHARE

Net income per share was computed as follows:

	Three months ended March 31,
	2006		2005
	(in thousands, except per share data)
Basic income per share:
Net income	$	2,917	$	2,630
Weighted average common shares outstanding	11,897		10,424
Per share amount	$	0.25	$	0.25
Diluted income per share:
Net income	$	2,917	$	2,630
Weighted average common shares outstanding	11,897		10,424
Add: Effect of dilutive securities—stock options	774		714
Common stock held in escrow	411		275
Diluted weighted average and equivalent shares outstanding	13,082		11,413
Per share amount	$	0.22	$	0.23

Common stock held in escrow is not included in the basic weighted average common shares outstanding calculation until the shares are released from escrow.

For the three months ended March 31, 2006 and 2005, 58,810 and 67,210 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

4. BUSINESS COMBINATIONS

Effective February 2, 2005, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc. (“ChannelWave”). Pursuant to the Purchase Agreement, the Company acquired certain assets from ChannelWave, including substantially all assets relating to ChannelWave’s Partner Relationship Management System and Service Information System businesses, for consideration comprised of $1.0 million of cash and 225,807 shares valued at $18.954 per share of the Company’s common stock (of which 29,033 shares were being held by the Company in escrow but were released on the anniversary date of the acquisition pursuant to the Purchase Agreement). The Company incurred $0.1 million of transaction costs. ChannelWave offers demand chain solutions. On October 19, 2005, the Company completed a repurchase of 181,024 shares pursuant to Share Repurchase Agreements (the “Share Repurchase Agreements”) with Commerce 5, Inc. (formerly known as ChannelWave, Inc.) and a former executive officer of Commerce 5, Inc., respectively. Pursuant to the terms of the Share Repurchase Agreements, the Company repurchased shares of its common stock for a purchase price of $15.50 per share, or $2,805,872 in the aggregate.

Effective February 7, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”), and its stockholders, pursuant to which the Company acquired Optum. In consideration for the merger, the Company paid $325,467 in cash, issued 1,405,780 shares valued at $18.583 per share of the Company’s common stock to the stockholders of Optum (of which $65,093 in cash and 281,156 shares of the Company’s common stock are being held by an escrow agent for certain potential additional liabilities of Optum pursuant to the Merger Agreement for a period of fifteen months from the date of acquisition), and assumed approximately $4.3 million of Optum indebtedness. The Company incurred $0.1 million of transaction costs.

Effective May 27, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc. (“Xelus”), and its stockholders, pursuant to which the Company acquired Xelus. In consideration for the merger, the Company paid $1 in cash, assumed approximately $2.2 million of Xelus indebtedness, settled a long-term lease liability for $543,000 and incurred transaction-related expenses in the amount of $0.1 million. No shares of Company stock were issued in connection with the Xelus acquisition.

Effective November 22, 2005, the Company acquired all of the assets and liabilities of Requisite Technology, Inc. (“Requisite”), pursuant to an Agreement and Plan of Merger (the “Agreement”). In consideration for the merger, the Company paid $1,526,416 in cash and issued 777,903 shares of the Company’s common stock valued at $26.42 per share to stockholders of Requisite (of which $93,800 in cash and 80,337 shares of the Company’s common stock are being held by an escrow agent to satisfy certain potential obligations of Requisite and its former stockholders for a period of twelve months from the date of acquisition). The shares of the Company’s common stock are expected to be registered for resale on a Registration Statement on Form S-1. The Company incurred $0.2 million of transaction costs.

On February 8, 2006, the Company and its wholly-owned subsidiary, Click Procure, Inc. (the “Subsidiary”) entered into an Asset Purchase Agreement (the “Purchase Agreement”), with Elance, Inc., (“Elance”) pursuant to which the Subsidiary purchased the assets of the Seller’s on-demand e-commerce solutions for services business (the “enterprise software business”). The assets acquired by the Subsidiary in the transaction include software, trademarks, customer contracts and lists, product processes, other intangible assets, cash, receivables and other operating assets, as well as its obligations under certain contracts related to the enterprise software business. The Subsidiary also acquired all of the stock of Elance’s subsidiaries in the United Kingdom and India engaged in such business. The total consideration paid for the acquisition was approximately $15,250,000, comprised of $3,500,000 in cash and 420,123 shares of the Company’s common stock valued at $27.97 per share to Elance (of which 75,622 shares of the Company’s common stock are being held by an escrow agent to satisfy the indemnification obligations of Elance under the agreement for a period of twelve months from the date of acquisition). The shares of the Company’s common stock are expected to be registered for resale on a Registration Statement on Form S-1. The Company incurred $0.1 million of transaction costs

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed on the effective dates of the ChannelWave, Optum, Xelus and Requisite acquisitions. The Company incurred approximately $0.1 million, $0.1 million, $0.1 million and $0.2 million of direct expenses related to the closing of the ChannelWave, Optum, Xelus and Requisite acquisitions, respectively. The final allocations of the purchase price for Requisite are subject to change as the Company completes the valuation of the acquired assets and assumed liabilities.

	ChannelWave			Optum			Xelus			Requisite
	February 2, 2005			February 7, 2005			May 27, 2005			November 22, 2005
	(in thousands)
Assets:
Cash and cash equivalents		$	—		$	817		$	844		$	9,473
Trade accounts receivable, net		421			4,235			1,742			1,370
Other current assets		—			516			378			416
Total current assets		421			5,568			2,964			$	11,259
Property and equipment		50			1,644			807			39
Intangible assets		3,272			13,726			3,036			3,372
Goodwill		2,896			24,151			3,608			11,672
Other assets		—			420			—			299
Total assets		$	6,639		$	45,509		$	10,415		$	26,641
Liabilities:
Accounts payable		$	—		$	1,703		$	1,141		26
Accrued liabilities		52			6,215			648			2,595
Accrued compensation		—			3,073			1,023			500
Deferred revenue		1,329			3,587			4,803			1,391
Short-term lease obligation		—			165			—			—
Short-term debt obligation		—			1,762			2,204			—
Long-term debt obligation		—			2,537			69			—
Total liabilities		1,381			19,042			9,888			4,512
Net assets acquired		$	5,258		$	26,467		$	527		$	22,129

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed on the effective date of the Elance acquisition. The Company incurred approximately $0.1 million of direct expenses related to the closing of the transaction. The final allocations of the purchase price are subject to change as the Company completes the valuation of the acquired assets and assumed liabilities.

	Elance February 8, 2006
Assets:
Cash and cash equivalents		$	31
Trade accounts receivable, net		1,324
Other current assets		33
Total current assets		1,388
Property and equipment		218
Intangible assets		3,500
Goodwill		11,614
Other assets
Total assets		16,720
Liabilities:
Accounts payable		7
Accrued liabilities		142
Accrued compensation		42
Deferred revenue		1,278
Total liabilities		1,469
Net assets acquired		$	15,251

The following table sets forth the allocation, to date, of intangible assets to customer relationships, developed technology, trade names and order backlog, as well as the in-process R&D charge recorded from the acquisition of bTrade. These intangible assets, as well as the goodwill recorded by the Company, will be evaluated, as required, to compare the fair values of such assets to their recorded values. If impairment exists, the carrying values of such assets will be reduced to their fair value.

	Customer Relationships(1)				Developed Technology(2)				Trade Names(3)				Order Backlog(4)				In process R&D(5)				Total
Elance(6)		$	3,500			$				$	—			$	—			$	—		$	3,500
Requisite		748				2,288				—				336				—			3,372
Xelus		2,684				283				—				69				—			3,036
Optum		9,850				3,573				—				303				—			13,726
ChannelWave		2,758				514				—				—				—			3,272
bTrade		1,195				274				—				143				6			1,618
Webridge		560				910				150				—				—			1,620
Allegis		466				—				—				—				—			466
Gross intangible assets and in-process R&D		21,761				7,842				150				851				6			30,610
Accumulated amortization to date		(3,620		)		(1,693		)		(98		)		(619		)		(6		)	(6,036		)
Balance at March 31, 2006		$	18,141			$	6,149			$	52			$	232			$	—		$	24,574
Amortization expense
Three months ended March 31, 2006		808				433				13				163				—			1,417
Three months ended March 31, 2005		401				168				57				291				—			917
Estimated amortization expense for the 12 months ended:
December 31, 2006		3,285				1,615				50				395				—			5,345
December 31, 2007		3,279				1,575				15				—				—			4,869
December 31, 2008		3,279				1,362				—				—				—			4,641
December 31, 2009		3,082				1,226				—				—				—			4,308
December 31, 2010		2,928				463				—				—				—			3,391
Thereafter		3,096				341				—				—				—			3,437

(1) Customer relationships are amortized over seven years for Requisite, Xelus, Optum and ChannelWave, five and one-half years for Elance, five years for bTrade and Webridge, and three years for Allegis.

(2) Developed technology is amortized over six years for Requisite, five years for Optum, ChannelWave and bTrade, four years for Webridge and three years for Xelus and is reflected in the cost of product license revenue on the consolidated statement of income and comprehensive income.

(3) Trade names are amortized over three years.

(4) Order backlogs are amortized over one year.

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

(6) Pending final valuation by an independent firm.

The following unaudited pro forma financial information for the three months ended March 31, 2006 and 2005 presents the consolidated operations of the Company as if all of the acquisitions had been made on January 1, 2005, after giving effect to certain adjustments for the pro forma acquisition as of the assumed January 1, 2005 acquisition date. The unaudited pro forma financial information is provided for informational purposes only. It should not be construed to be indicative of the Company’s consolidated results of operations had the acquisitions been consummated on the earlier date and do not project the Company’s results of operations for any future period:

	Three months ended March 31,
	2006			2005
	(in thousands except share amount)
Revenues		$	20,428		$	21,609
Net income (loss)		2,940			2,774
Basic net income per share		$	0.25		$	0.27
Diluted net income per share		$	0.22		$	0.24

5. RESTRUCTURING

As of March 31, 2005, the Company had a restructuring accrual in the amount of $61,000 covering the remaining lease commitments on excess office space. The final payment against the restructuring accrual was made in the quarter ending December 31, 2005. The cash paid in the quarter ended March 31, 2005 was $18,000.

6. CREDIT FACILITY

On March 31, 2005, the Company entered into a $10.0 million revolving line of credit maturing on April 1, 2008. The borrowing under the line of credit carries an interest rate based on the LIBOR average rate with a weighted average interest rate of 6.02% in the quarter ended March 31, 2006. There is a fee of 0.3% on the unused portion of this line of credit. On March 31, 2006, Company borrowings under this revolving line of credit were $6.5 million. The proceeds were used to pay off debt and certain liabilities assumed in the Optum and Xelus acquisitions. Of the remaining $3.5 million, up to $2.0 million may be used for the Company’s letters of credit. As of March 31, 2006, the Company has $0.6 outstanding under various letters of credit. The line of credit contains terms that, among other provisions, require the Company to maintain certain minimum net worth and other financial ratios and specific limits or restrictions on additional indebtedness, liens and continuity of business. Provisions under this line of credit are not considered restrictive to normal operations. The Company is not obligated to make any principal payments on the loan until April 1, 2008 unless it violates any loan covenants. The Company was not in violation of any loan covenants at March 31, 2006.

7. COMMITMENTS AND CONTINGENCIES

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of others.” Under the Company’s standard software license agreements, the Company agrees to indemnify, defend and hold harmless its licensees’ use of Company software from and against certain losses, damages and costs arising from claims alleging the licensees’ use of Company software infringes on the intellectual property rights of a third party. The indemnification is contingent upon (a) the customer providing the Company with prompt written notice of such claims; (b) the customer providing reasonable cooperation to the Company in the defense and settlement of such claim, at the Company’s expense; and (c) the Company having sole authority to defend or settle the claim. Historically, the Company has not been required to pay material amounts in connection with claims asserted under these provisions, and accordingly, the Company has not recorded a liability relating to such provisions.

In 2004, the Company was notified by the tax authorities in the Netherlands that the Company had a potential tax liability. In the fourth quarter of 2005, the Company received a determination letter from the tax authorities in the Netherlands that asserted tax deficiencies, penalties and interest in the amount of EURO 2.3 million, or approximately $2.8 million. The asserted tax deficiencies relate to certain wage tax amounts, including amounts related to vested employee stock options that the tax inspector believes should have been withheld by the Company on behalf of several employees. The Company believes that it has meritorious legal defenses to a significant portion of these alleged deficiencies. The Company recorded an accrual of $650,000 in the year ended December 31, 2004 for its assessment of the most probable outcome of this matter. This reserve is recorded in accrued expenses and other current liabilities on the March 31, 2006 and December 31, 2005 consolidated balance sheets.

In addition to it’s revolving credit facility, the Company also assumed three short-term notes in connection with its acquisition of Xelus. The table below outlines the payment time frames for these notes. The table also outlines the Company’s lease commitments over the next five years. The Company is obligated as lessee under certain noncancelable operating leases for equipment, cars and office space, and is also obligated to pay insurance, maintenance and other executory costs associated with the leases.

	Operating Leases(1)			Short-term Notes payable			Long-term Debt
2006		$	3,172		$	307		$	—
2007		1,308			—			—
2008		1,079			—			6,456
2009		802			—			—
2010		486			—			—

(1) The Company has sub-lease commitments of $1.0 million pertaining to lease obligations.

8. Income Taxes

Our effective tax rates for the first quarter of calendar year 2006 and the first quarter of calendar year 2005 were 41% and 0%, respectively. The increase in the tax rate resulted primarily from the reversal of a valuation allowance on our net deferred tax assets (not related to our acquisitions) in the fourth quarter of 2005. The effective tax rate for 2006 is more than the statutory U.S. federal income tax rate principally due to the effect of the amortization arising from certain acquisitions which is not deductible for tax purposes.

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

The following discussion should be read in conjunction with the Company’s consolidated condensed financial statements and notes elsewhere in this quarterly report.

Overview

Click Commerce, Inc. (the “Company”) provides software designed to help companies streamline their trading partner interactions and automate compliance-related activities. We believe that companies using our software, can optimize business processes, improve financial performance, lower costs for partners and customers, increase brand loyalty, improve customer service and reduce risk. The Company’s collaborative commerce and supply chain solutions are designed to enable companies to streamline their trading partner interactions to drive business value and competitive advantage. The Company’s compliance automation solutions are designed to enable institutions to automate their regulatory compliance processes and manage research project approvals. Each of the Company’s product lines applies similar underlying technology to effect secure Internet communications as a replacement for handwritten forms, telephone and fax communications and other electronic data systems. The Company commenced operations on August 20, 1996.

Effective February 2, 2005, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc. (“ChannelWave”), pursuant to which the Company acquired certain assets from ChannelWave, including substantially all assets relating to ChannelWave’s Partner Relationship Management System and Service Information System businesses, for consideration comprising $1.0 million of cash and 225,807 shares valued at $18.954 per share of the Company’s common stock (of which 29,033 shares were being held by the Company in escrow but were released on the anniversary date of the acquisition pursuant to the Purchase Agreement). The Company incurred $0.1 million of transaction costs. On October 19, 2005, the Company completed a repurchase of 181,024 shares pursuant to Share Repurchase Agreements (the “Share Repurchase Agreements”) with Commerce 5, Inc. (formerly known as ChannelWave, Inc.) and a former executive officer of Commerce 5, Inc., respectively. Pursuant to the terms of the Share Repurchase Agreements, the Company repurchased shares of its common stock for a purchase price of $15.50 per share, or $2,805,872 in the aggregate.

On February 7, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”), and its stockholders, pursuant to which the Company acquired Optum. In consideration for the merger, the Company paid $325,467 in cash, issued 1,405,780 shares valued at $18.583 per share of the Company’s common stock to the stockholders of Optum (of which $65,093 in cash and 281,156 shares of the Company’s common stock are being held by an escrow agent for certain potential additional liabilities of Optum pursuant to the Merger Agreement for a period of fifteen months from the date of acquisition), and assumed approximately $4.3 million of Optum indebtedness. The Company incurred $0.1 million of transaction costs.

On May 27, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc. (“Xelus”), and its stockholders, pursuant to which the Company acquired Xelus. In consideration for the merger, the Company paid $1 in cash, assumed approximately $2.2 million of Xelus indebtedness, settled a long-term lease liability for $543,000 and incurred transaction costs in the amount of $0.1 million. No shares of Company stock were issued in connection with the Xelus acquisition.

On November 22, 2005, the Company acquired all of the assets and liabilities of Requisite Technology, Inc. (“Requisite”), pursuant to an Agreement and Plan of Merger (the “Agreement”). In consideration for the merger, the Company paid $1,526,416 in cash and issued 777,903 shares of the Company’s common stock valued at $26.42 per share to stockholders of Requisite (of which $93,800 in cash and 80,337 shares of the Company’s common stock are being held by an escrow agent to satisfy certain potential obligations of Requisite and its former stockholders for a period of twelve months from

the date of acquisition). The shares of the Company’s common stock are expected to be registered for resale on a Registration Statement on Form S-1. The Company incurred $0.2 million of transaction costs.

On February 8, 2006, the Company and its wholly-owned subsidiary, Click Procure, Inc. (the “Subsidiary”) entered into an Asset Purchase Agreement (the “Purchase Agreement”), with Elance, Inc. (“Elance”) pursuant to which the Subsidiary purchased the assets of the Seller’s on-demand e-commerce solutions for services business (the “enterprise software business”). The assets acquired by the Subsidiary in the transaction include software, trademarks, customer contracts and lists, product processes, other intangible assets, cash, receivables and other operating assets, as well as its obligations under certain contracts related to the enterprise software business. The Subsidiary also acquired all of the stock of Elance’s subsidiaries in the United Kingdom and India engaged in such business. The total consideration paid for the acquisition was approximately $15,250,000, comprised of $3,500,000 in cash and 420,123 shares of the Company’s common stock valued at $27.97 per share to Elance (of which 75,980 shares of the Company’s common stock are being held by an escrow agent to satisfy the indemnification obligations of Elance under the agreement for a period of twelve months from the date of acquisition). The shares of the Company’s common stock are expected to be registered for resale on a Registration Statement on Form S-1. The Company incurred $0.1 million of transaction costs.

The Company focused its efforts in 2005 and the first quarter of 2006 on maintaining and improving profitability as well as broadening its product offerings through acquisitions. In 2005 and through the first quarter of 2006, the Company reported increasing operating profits. Management plans to continue investing in new and improved product offerings and in increasing the exposure of the Company’s products and services through its targeted marketing programs. Management further believes that each investment must be prudently made and justified by the expected return on such investment.

The Company offers several licensing and service options for its software products. Customers can either purchase a perpetual software license or enter into a limited-term software license, also called a subscription contract. Customers may also choose to use the Company’s hosting services for their perpetual software license or install the software on servers within their own internal environment. Subscription licenses are only available to customers who also use our hosting services.

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

The Company depends on several factors to increase revenue and maintain profitability: adding new customers, maintaining its current base of subscriptions, increasing hosting and maintenance revenues, and improving the gross margin on professional services. Adding new customers is the primary responsibility of the sales department. Maintaining the other revenue streams is the responsibility of the Company’s professional services department. The Company has developed compensation structures for these departments that it believes provide appropriate incentives for achievement of their respective goals.

The Company’s revenue is principally derived from sales of perpetual licenses or subscriptions to its software, and the related services surrounding those products. The Click Commerce software suite consists of the Partner Portal platform; various applications that provide the basis for controlling workflow, reporting, opportunity management, product information management, sales order management, after sales service management, supply chain management and warehouse management; network logistics management, parts optimization and master data management. The Company also recognizes revenue from services, including business consulting, implementation, maintenance, training and managed hosting services.

Cost of product license revenues includes production and shipping expenses, which are expensed as incurred, amortization of developed technology (acquired in the Company’s acquisitions), the costs of licensing third party software incorporated into or required by the Company’s products and the costs of hardware purchased for resale to customers. The third party license costs are expensed as the products are delivered under perpetual licenses and subscriptions or over the maintenance period to the extent that the third party license costs relate to those product offerings.

Cost of service revenues include salaries and related expenses for professional services and technical support personnel who provide consulting and implementation services, maintenance and hosting services, as well as an allocation of data processing and direct overhead costs which are expensed as incurred.

Operating expenses are classified into five general categories: sales and marketing, research and development, general and administrative, amortization of intangible assets and stock-based compensation. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive management, finance and administrative employees, legal and accounting services, and corporate liability insurance. Amortization of intangible assets represents amortization expense for certain intangible assets with finite useful lives, which were recorded in connection with the Company’s acquisitions. The intangible assets are identified, valued and classified into separate categories. The categories are customer relationships, developed technologies, order backlog, trade names and in-process research and development. The amortization of developed technologies is recorded in the cost of product license line item on the consolidated statement of income and comprehensive income. Stock-based compensation represents the charge in connection with the adoption, as of January 1, 2006, of the provisions of SFAS 123(R) for the fair value of share-based payments granted to employees after the adoption of SFAS 123(R) and the fair value for all awards granted to employees prior to the effective date that are unvested.

The Company believes that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. The Company’s prospects must be considered in light of the risks, expenses and difficulties encountered by similarly sized software and technology companies, particularly companies in new, rapidly evolving markets. The Company may not be successful in addressing such risks and difficulties.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, the Company makes certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company’s critical accounting policies include revenue recognition and any resulting deferral of revenues and related costs, the estimation of credit losses on accounts receivable, the application of purchase accounting and the valuation of deferred tax assets. There has been no change to these policies. For a discussion of these critical accounting policies, see “Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission.

Results of Operations

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

	Three months ended March 31,
	2006					2005
			% of					% of
	(in 000’s)		Revenue			(in 000’s)		Revenue
Revenues
Product license	$	2,676		13.6	%	$	1,963		18.0	%
Hardware	376			1.9	%	—			0.0	%
Total product license and hardware	3,052			15.5	%	1,963			18.0	%
Service
Maintenance and hosting	9,007			45.7	%	3,814			34.9	%
Consulting and implementation service	5,643			28.7	%	3,497			32.0	%
Subscription	1,986			10.1	%	1,651			15.1	%
Total Service	16,636			84.5	%	8,962			82.0	%
Total Revenues	19,688			100.0	%	10,925			100.0	%
Cost of Revenues
Product license and hardware	818			4.2	%	198			1.8	%
Service	6,083			30.9	%	3,989			36.5	%
Total cost of revenues	6,901			35.1	%	4,187			38.3	%
Gross profit	12,787			64.9	%	6,738			61.7	%
Operating Expenses:
Sales and marketing	2,091			10.6	%	1,146			10.5	%
Research and development	2,439			12.4	%	1,209			11.1	%
General and administrative	2,364			12.0	%	1,006			9.2	%
Amortization of intangibles assets	986			5.0	%	720			6.6	%
Stock-based compensation	81			0.4	%	—			0.0	%
Total operating expenses	7,961			40.4	%	4,081			37.4	%
Operating income	4,826			24.5	%	2,657			24.3	%

Comparison of the three months ended March 31, 2006 to the three months ended March 31, 2005

Revenue

Total revenue increased $8.8 million, or 80.2%, to $19.7 million for the three months ended March 31, 2006 from $10.9 million for the three months ended March 31, 2005. Product license revenue consists of revenue from separate product-only agreements and from multiple element agreements accounted for under the percentage-of-completion method using hours of input in relation to the estimate of total hours to complete the engagements. Product license and hardware revenue increased by $1.1 million, or 55.5%, to $3.1million including $0.4 million from the sale of hardware. The remaining increase of $0.7 million was attributable to $1.0 million in license sales by Xelus, Inc. (acquired on May 27, 2005). This increase was partially offset by a $0.3 million decrease in the Company’s legacy license sales. Maintenance and hosting revenues increased by $5.2 million or 136.2% to $9.0 million for the three months ended March 31, 2006. The increase was primarily attributable to the acquisitions of Xelus, Inc. and a full quarter of maintenance and hosting by Optum, Inc., which was acquired on February 7, 2005. These acquisitions accounted for $3.1 million of the increase in maintenance and hosting revenue. Of the remaining $2.1 million increase, $1.7 million resulted from the acquisitions of Requisite Inc and Elance, Inc. Internal growth accounted for $0.4 million of the 2006 increase. Consulting and implementation service revenues are largely comprised of fees

related to time and materials projects, other service agreements, maintenance, hosting, training and needs analyses, as well as multiple element agreements accounted for under the percentage-of-completion method using hours of input in relation to the estimate of total hours to complete the engagements. Consulting and implementation service revenues increased by $2.1 million, or 61.4%, to $5.6 million, over the prior year quarter. Acquisitions increased consulting and implementation services by $2.7 million. Xelus accounted for 60.0% of this $2.7 million increase. Elance accounted for 18.8% or $0.5 million of the $2.7 million increase. The remaining increase resulted from having a full quarter of revenue from Optum and the acquisition of Requisite. These acquisitions contributed $0.3 million each to the increase in revenue. The increase in consulting and implementation service of $2.7 million emanated from acquisitions and was partially offset by a decrease of $0.6 million in consulting and implementation service from to the Company’s legacy operations. This decrease was due to a reduction in revenues in the Company’s retail product line. Subscription revenue increased by $0.3 million, to $2.0 million for the quarter ended March 31, 2006. The increase is a direct result of the acquisition of Requisite.

Cost of Revenue

Total cost of revenue increased by $2.7 million, or 64.8% to $6.9 million for the three months ended March 31, 2006. The increase relates to the increased volume of business generated by the Company, largely through the acquisitions made in 2005 and 2006. The costs consist of compensation expenses, amortization of developed technology, hardware and third party contracted labor. The increase in employee compensation results from the acquisitions of Xelus, Requisite and Elance. These acquisitions added approximately 69 full time equivalents to the service and support departments. The additional head count resulted in an increase in compensation expense of $1.5 million. Contracted labor increased by $0.7. Amortization of developed technology has increased by $0.3 million. The amortization of developed technology resulted from the allocation of purchase price to developed technologies in the Company’s acquisitions. Outside of the increases related to acquisitions, the Company also incurred an increase in cost of revenue of $0.2 million pertaining to the sale of hardware. Gross profit margins increased to 64.9% for the three months ended March 31, 2006, compared to 61.7% for the three months ended March 31, 2005. The gross margin percentage increase is due to an improvement in the utilization rate of professional service staff and the increase in higher margin subscription and license revenue.

Operating Expenses

Sales and Marketing Sales and marketing expenses increased by approximately $1.0 million, or 82.5%, to $2.1 million for the three months ended March 31, 2006 from $1.1million for the three months ended March 31, 2005. The increase in sales and marketing expense was related to an increase in head count due to the Xelus, Requisite and Elance acquisitions. These acquisitions added 10 full time equivalents and an additional $0.6 million in compensation expense. The legacy companies added 3 full time sales people in the first quarter of 2006, adding $0.2 million in compensation and related expenses. The remaining increase of $0.2 million in the quarter ended March 31, 2006 pertains to corporate marketing expenditures.

Research and Development Research and development expenses increased by approximately $1.2 million, or 101.7%, to $2.4 million for the three months ended March 31, 2006, from $1.2 million for the comparable prior year three-month period. This increase was almost entirely attributable to an increase in employee compensation and related costs. The Xelus, Requisite and Elance acquisitions resulted in an increase in the Company’s employee compensation expense by $1.2 million. The Company added 33 full time equivalents with these acquisitions. To date, all software development costs have been expensed as incurred.

General and Administrative General and administrative expenses increased by approximately $1.4 million, or 135.0%, to $2.4 million for the three months ended March 31, 2006 from $1.0 million for the three months ended March 31, 2005. The increase related to an increase in compensation expense in the finance department of $0.2 million (resulting from the addition of four full time equivalents), an increase in contracted labor (Sarbanes Oxley compliance work) of $0.2 million, an increase in legal fees relating to general matters of $0.3 million, an increase in executive compensation of $0.2 relating to adding two full time equivalents in the third quarter of 2005, an increase in accounting fees related to Sarbanes Oxley of $0.2 million and an increase in use taxes of $0.2 million.

Amortization of Intangible Assets The increase in amortization of intangibles relates to the intangible assets acquired in the Company’s acquisitions. These intangible assets have useful lives that range from one to seven years and accounted for the $0.3 million increase in amortization expense for the quarter ended March 31, 2006.

Stock-based Compensation Stock-based compensation represents the charge of $0.1 million in connection with the adoption, as of January 1, 2006, of the provisions of SFAS 123(R) for the fair value of share-based payments granted to employees after the adoption of SFAS 123(R) and the fair value of all awards granted to employees prior to the effective date that are unvested.

Liquidity and Capital Resources

At March 31, 2006, the Company had $22.3 million of cash and cash equivalents.

Net cash provided by operating activities was $8.2 million for the three months ended March 31, 2006. The cash provided by operating activities was the product of net income plus depreciation, amortization, provision for doubtful accounts, stock-based compensation and a noncash charge for income taxes. Sources of cash from operations include $2.9 million in net income, $4.0 million in depreciation, amortization, provisions for doubtful accounts and income taxes, stock-based compensation, and a source of cash from the decrease in receivables (net of $1.1 million of receivables acquired) of $4.0 million, and an increase in accrued rent, accrued expenses and other liabilities of $1.1 million (net of $0.2 million of accrued expenses assumed). The reduction of receivables resulted from the receipt of payments from existing customers invoiced in the fourth quarter of 2005. Cash sources were partially offset by uses of cash of $3.8 million involving decreases in deferred revenue, and prepaids and other expenses and a use of cash from the other working capital accounts in the amount of $0.3 million. The decrease in deferred revenue resulting from the recognition of revenue from previously billed transactions amounted to $2.1 million (net of $1.3 million of deferred revenue acquired) and the $1.4 million increase in prepaids and other current assets resulted from tax payments.

The Company used $4.2 million in cash for investing activities in the first quarter ended March 31, 2006. Of the $4.2 million, $3.6 million arose from the acquisition of Elance and $0.3 involved a payment relating to the acquisition of Requisite. The remaining $0.3 million was used to purchase fixed assets.

Net cash provided by financing activities was $0.8 million. The Company generated $1.3 million from the exercise of stock options. This was partially offset by the repayment of short and long-term debt in the amount of $0.5 million.

Company had $0.6 million of letters of credit outstanding. The line of credit contains terms that, among other provisions, require the Company to maintain certain minimum net worth and other financial ratios and specific limits or restrictions on additional indebtedness, liens and continuity of business. Provisions under this line of credit are not considered restrictive to normal operations. The Company has no obligation to make principal payments on this loan until April 1, 2008, unless it violates any loan covenants. As of March 31, 2006, the Company was not in violation of any of the covenants.

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

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

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

Statements in this Form 10-Q that are not historical facts and refer to the Company’s future prospects are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate” and other similar words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including but not limited to the extent of customer acceptance and utilization of the Company’s channel management solutions, the impact of competitive products and services, the Company’s ability to develop new and enhanced versions of its products and services, the effect of economic and business conditions, the volume and timing of customer contracts and related approval processes, capital and intellectual property spending of the Company’s target customers, changes in technology, deployment delays or errors associated with the Company’s products, the ability of the Company to integrate acquired businesses or products and the Company’s ability to protect its intellectual property rights. For a discussion of these and other risk factors that could affect the Company’s business, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which is on file with the Securities and Exchange Commission.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

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

Foreign Currency Exchange Rate Risk

To date, substantially all of the Company’s recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the exposure to foreign currency exchange rate changes has been immaterial. The Company expects, however, that future product license and professional service revenues may also be derived from international markets and may be denominated in the currency of the applicable market. As a result, operating results may become subject to

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

Interest Rate Risk

As of March 31, 2006, the Company had cash and cash equivalents of $22.3 million and short-term and long-debt of $0.3 million and $6.4 million, respectively. Rising interest rates will increase interest income from short-term investments and interest expense on the Company’s debt. A change in interest rates of 0.5% would cause a corresponding change in annual interest income of approximately $0.1 million and an increase in interest expense of less than $0.1 million.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in Internal Controls

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

PART II. OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5 are inapplicable and have been omitted from this report.

Item 6. Exhibits and Reports on Form 8-K

Exhibits:

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

Exhibit Number		Description
2.3*		Elance Asset Purchase Agreement
31.1		Certification of Michael W. Ferro, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Michael W. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Michael W. Ferro, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Michael W. Nelson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Incorporated by reference to the Company’s Current Report on Form 8-K, dated February 10, 2006

SIGNATURES

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

	Click Commerce, Inc.
	By:	/s/ MICHAEL W. NELSON
		Michael W. Nelson
		Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
Date: May 8, 2006