Prepared by R.R. Donnelley Financial -- Form 10-Q

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

	March 31, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	1,472		$	2,137
Note receivable		—			250
Accounts receivable, net		2,448			2,409
Prepaid operating lease obligation		581			641
Other current assets		569			267

Total current assets		5,070			5,704
Property and equipment, net		1,492			1,593
Other assets		194			231

Total assets	$	6,756		$	7,528

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	826		$	1,303
Accrued compensation		529			385
Other accrued liabilities		1,103			1,359
Current portion of capital lease obligation		142			115
Deferred revenues		857			110

Total current liabilities		3,457			3,272
Long term liabilities—
Capital lease obligation—less current portion		78			67
Stockholders’ equity:
Preferred stock; $0.001 par value; 2,000,000 shares authorized; 3,500 shares issued in 2001; 3,000 shares outstanding in 2002 and 2001, respectively; (aggregate liquidation preference of $3,027,273 as of March 31, 2002)		1			1
Common stock; $0.001 par value; 60,000,000 shares authorized; 13,022,528 and 12,923,603 shares issued and outstanding, respectively		13			13
Additional paid-in capital		32,512			32,449
Accumulated deficit		(29,305	)		(28,274	)

Total stockholders’ equity		3,221			4,189

Total liabilities and stockholders’ equity	$	6,756		$	7,528

	Three Months Ended March 31,
	2002			2001
Revenues	$	2,185		$	5,314
Cost of revenues		129			237

Gross profit		2,056			5,077

Operating expenses:
Product development		1,246			1,775
Sales and marketing		915			2,516
General and administrative		674			1,164
Settlement of claims		240			—

Total operating expenses		3,075			5,455

Operating loss		(1,019	)		(378	)
Interest income (expense), net		(1	)		28

Loss from continuing operations before income tax expense		(1,020	)		(350	)
Income tax expense		11			—

Loss from continuing operations		(1,031	)		(350	)
Loss from discontinued operations		—			(2,201	)

Net loss	$	(1,031	)	$	(2,551	)

Basic and diluted net loss per share:
Loss from continuing operations	$	(0.08	)	$	(0.03	)
Loss from discontinued operations		—			(0.17	)

Net loss	$	(0.08	)	$	(0.20	)

Weighted average shares of common stock outstanding:
Basic and diluted		13,028			12,664

	Three Months Ended March 31,
	2002			2001
Cash flows from operating activities:
Net loss	$	(1,031	)	$	(2,551	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		297			546
Amortization of stock-based compensation		2			13
Settlement of claims with issuance of common stock		240
Provision for (recovery of) doubtful accounts and sales returns		22			(11	)
Changes in operating assets and liabilities:
Accounts receivable		(61	)		(2,425	)
Inventories		—			(194	)
Prepaid operating lease obligations		60			—
Other current assets		(302	)		(81	)
Accounts payable		(656	)		(2,041	)
Accrued compensation		144			574
Other accrued liabilities		(256	)		922
Deferred revenues		747			(175	)

Net cash used for operating activities		(794	)		(5,423	)

Cash flows from investing activities:
Additions to property and equipment		(60	)		(323	)
Software production costs and other assets		—			(1,341	)
Proceeds from note receivable		250			—

Net cash provided by (used for) investing activities		190			(1,664	)

Cash flows from financing activities:
Proceeds from exercise of common stock options		—			154
Proceeds from issuance of preferred stock		—			3,265
Repayment of capital lease obligations		(61	)		—

Net cash provided by (used for) financing activities		(61	)		3,419

Net decrease in cash and cash equivalents		(665	)		(3,668	)
Cash and cash equivalents at beginning of period		2,137			8,343

Cash and cash equivalents at end of period	$	1,472		$	4,675

In the opinion of management, the accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows of ClickAction Inc. include all material adjustments (consisting of normal recurring adjustments and adjustments relating to the sale of Elibrium) which are, in the opinion of management, necessary for their fair presentation. The interim results presented are not necessarily indicative of results for a full year. Certain reclassifications have been made for consistent presentation. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001.

We provide email usage services under two plans: subscription plans and project plans. Under a subscription plan, email services are provided over a designated period, typically with a monthly maximum of emails. Subscription plan revenues are recognized ratably over the contract period. Email services are also provided on a project basis and revenues for these services are recognized once the project has been completed. We provide data and list management services and recognize data and list management fees based on the number of email lists downloaded and delivered. We provide consulting services and we recognize consulting services fees as services are rendered.

We allocate revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements as required by Statement of Position (SOP) 97-2, Software Revenue Recognition. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We have analyzed elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenue to maintenance and basic support services and consultative services components of our perpetual license products. For arrangements where VSOE has been established for all undelivered elements, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance and support services is recognized ratably over its respective term. For arrangements where VSOE has not been established for all undelivered elements, revenue is recognized from the date of delivery ratably over the remaining term of the agreement.

We recognize revenue for name acquisition services on a per name basis when the names are delivered to the client. We have sold name acquisition services on a stand-alone basis and thus have established evidence of fair value. The client may also have rights to receive credit for names acquired which become invalid over a specified period of time. In these circumstances, we record a reserve based on historical evidence.

We recognize revenue on all products and services when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable and (4) collection is reasonably assured or, for software licenses, collection is probable. We define each of the four criteria as follows:

Delivery has occurred or services have been rendered. Delivery of email under the subscription plan is deemed to have occurred ratably over the term of the contract. Delivery of email on a project basis is deemed to have occurred when the project is completed. Delivery of setup services is deemed to have occurred ratably over the term of the contract. Delivery of data and list management services is deemed to have occurred when email lists are downloaded and delivered. Delivery of consulting services is deemed to have occurred when services are rendered and accepted by our clients. Delivery of licenses is deemed to have occurred when the license is delivered and accepted by our client. If undelivered products and services exist in an arrangement that are essential to the functionality of the delivered software, delivery is not considered to have occurred until these products or services are delivered. Delivery of acquired names is deemed to have occurred when they are delivered to and accepted by our clients.

Collection is reasonably assured or, for software licenses, collection is probable. Collectibility is assessed on a client-by-client basis at the time the arrangement is entered into. We typically sell to clients for which there is a history of successful collection. New clients are subject to a credit review process, through which we evaluate the clients’ financial condition and their ability to pay. If we determine that collectibility is not reasonably assured or, for software licenses, collectibility is not probable based upon the credit review, revenue will be recognized on a cash-collected basis. Our initial judgment that collectibility is probable for any given client may change subsequent to the date the transaction is entered into due to deterioration in the client’s ability to pay. In such situation, we would recognize additional bad debt expense to the extent all or a portion of the outstanding fees yet to be collected.

On June 15, 2001, we completed the sale of substantially all of the assets and liabilities of our Elibrium division to a corporation owned and controlled by certain former members of our management team. The Elibrium division developed, marketed and manufactured a line of desktop application products consisting of small business productivity software and services. The original sales price for the Elibrium division was $3.0 million, of which $500,000 was paid on June 15, 2001, $274,000 on June 30, 2001 and $726,000 on September 15, 2001. On December 17, 2001, we agreed to set off $750,000 from the remaining $1.5

million of scheduled payments of the purchase price from Elibrium. The setoffs were due to a dispute over certain accounts payable and accounts receivable items. Under the definitive settlement agreement, Elibrium agreed to pay $750,000 as the remaining balance of the purchase price, of which $500,000 was paid on December 20, 2001 and $250,000 was paid on March 1, 2002. Further, Elibrium agreed to end all disputes, to pay all of certain disputed liabilities and to release us of all known and unknown claims arising from the purchase of our Elibrium division.

We entered into a Release Agreement, effective as of March 29, 2002, with The Tail Wind Fund Ltd., the holder of all of our issued and outstanding Series A Preferred Stock, related to certain disputes that have arisen between us and Tail Wind. Under this agreement, each party released all claims against the other party. In consideration of this release, we issued Tail Wind 250,000 shares of our common stock and agreed to use our commercially reasonable best efforts to register these shares within 90 days after the date of the execution of the release agreement. The fair value of these shares was $310,000, of which $240,000 was charged to the statement of operations for the three months ended March 31, 2002 and $70,000 was charged to the statement of operations for the three months ended September 30, 2001.

Basic net loss per share is computed using the weighted average shares of common stock outstanding during each period presented. Diluted net loss per share is computed using the weighted average shares of common stock and potential shares of common stock from options and warrants using the treasury stock method, when dilutive. A total of 2,895,047 and 1,381,762 outstanding stock warrants and stock options with a weighted average exercise price of $0.96 and $5.93 for the three months ended March 31, 2002 and 2001, respectively, were not included in the computation of diluted net loss per share because their effect would have been antidilutive.

SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized in earnings when incurred. We adopted SFAS No. 141 as of July 1, 2001 and will apply its provisions to future acquisitions, if any. We do not believe SFAS No. 141 and SFAS No. 142 will have a material effect on our consolidated financial position or results of operations, unless the Company records material amounts of intangible assets, including goodwill, resulting from future acquisitions, if any.

SFAS No. 143, Accounting for Asset Retirement Obligations requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over the useful life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not believe the adoption of SFAS No. 143 will have a material effect on the results of our operations.

In October 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including the disposal of a segment of business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We do not believe the adoption of SFAS No. 144 will significantly change our method of assessing asset impairment.

On March 30, 2001, we issued 3,500 shares of its Series A 4% Cumulative Convertible Preferred Stock for an aggregate purchase price of $3.5 million. The net proceeds from this private placement were $3.3 million. The Series A Preferred Stock accrues cumulative dividends at the rate of 4% per annum, payable semi-annually, in shares of its common stock or cash at its option or the holder’s option if certain conditions are not satisfied. Prior to January 2, 2003, the Series A Preferred Stock is convertible into shares of our common stock at a conversion price of $4.09.

In the event of any liquidation or dissolution of the Company, the holders of the Series A Preferred Stock will be entitled to receive, out of the assets of our company available for distribution to stockholders, prior and in preference to the holders of our common stock, a liquidation preference equal to $1,000 per share plus all accrued and unpaid dividends. As of March 31, 2002, the liquidation preference was $3,027,273.

You should read the following discussion of our consolidated financial condition and results of operations along with our condensed consolidated financial statements and the related notes. In addition to historical information contained herein, the following discussion contains words such as “intends,” “believes,” “anticipates,” “plans,” “expects” and similar expressions which are intended to identify forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in these forward-looking statements. Factors that could cause or contribute to these differences include the factors discussed below under “Factors Which May Impact Future Operating Results.” You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by federal securities laws, we do not intend to update any of the forward-looking statements after the date of this Form 10-Q to conform them to actual results or to reflect new information or changed circumstances.

We are a leading provider of email marketing automation products and services. ClickAction Email Marketing Automation, or EMA, solution helps marketers design, deploy and manage personalized email campaigns. ClickAction EMA saves time, generates revenues and reduces costs by providing highly scalable outbound and inbound messaging, one-to-one publication, powerful rule-based segmentation, real-time tracking and detailed reporting, all integrated in a Web-based solution. Our email marketing products are permission-based, which means that our clients send emails to customers and potential customers who have provided their email addresses, have a business relationship or explicitly asked to receive information on specific subjects, brands, services or products. Our clients typically use our EMA solution to send content rich emails that inform these customers about new products, sales and promotions, specified items of interest and corporate events.

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. You should read the following discussion along with our condensed consolidated financial statements and the related notes included in this Form 10-Q. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the relevant reporting period. We base our estimates and judgments, in part, on historical experience and on various other factors that we believe to be reasonable under the circumstances at the time we prepare our financial statements, 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. Factors that could cause or contribute to these differences include the factors discussed below under “Factors Which May Impact Future Operating Results.”

We recognize revenue for name acquisition services on a per name basis when the names are delivered to the client. We have sold name acquisition services on a stand alone basis and thus have established evidence of fair value. The client may also have the rights to receive credit for names acquired which become invalid over a specified period of time. In these circumstances, we accrue a reserve based on historical evidence of credits issued.

Collection is reasonably assured or, for software licenses, collection is probable. Collectibility is assessed on a client-by-client basis at the time the arrangement is entered into. We typically sell to clients for which there is a history of successful collection. New clients are subject to a credit review process, through which we evaluate the clients’ financial condition and their ability to pay. If we determine that collectibility is not reasonably assured or, for software licenses, collectibility is not probable based upon the credit review, revenue will be recognized on a cash-collected basis. Our initial judgement that collectibility is probable for any given client may change subsequent to the date the transaction is entered into due to deterioration in the client’s ability to pay. In such situation, we would recognize additional bad debt expense to the extent all or a portion of the outstanding fees yet to be collected.

These percentages are based upon our historical experience. In addition, an allowance is made on a specific account basis if we determine that there is doubt regarding a specific client’s ability to pay. If our clients encounter difficulties in meeting their payment obligations to us that differs from our historical loss experience, additional bad debt expense will need to be recognized above our estimates. Additionally, if the financial condition of specific clients deteriorates resulting in an impairment of their ability to make payments, we may make additional allowances thus increasing the expense for bad debt.

Restructuring reserve. We established a reserve for the restructuring costs in the quarter ended September 30, 2001. The reserve was established for severance costs in connection with the reduction in staffing levels and the closure of our offices in San Francisco, CA., Los Angeles, CA. and New York, NY. The reserve was made under the assumption that we would not be able to sublease the office space in San Francisco and New York and that we would be able to terminate the office lease in Los Angeles for an expected amount. The severance was paid out in 2001 and the office lease in Los Angeles was terminated February 8, 2002 for the expected amount. The following shows the changes in the reserve account:

Accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. To date, we have established a 100% valuation allowance against our deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize any deferred tax assets in the future, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Total revenues for the three months ended March 31, 2002 decreased $3.1 million, or 58%, to $2.2 million, compared to total revenues of $5.3 million for the corresponding period in 2001. This decrease was due primarily to decreased sales of our EMA products and services as a result of increased pricing pressures in the email marketing industry and reductions in email marketing expenditures by our existing and prospective clients caused primarily by an overall weak economy and intense competition for new business opportunities. Until the economy improves and companies begin to increase their marketing budgets, we expect these trends to continue and also expect that our competitors in the email marketing industry will continue to use lower prices as a means to generate revenue and improve their market share, which could adversely effect our financial results and may require us to revise our financial projections.

Gross profit for the three months ended March 31, 2002 decreased 59% to $2.1 million from $5.1 million in the corresponding period in 2001. This decrease in our gross profit was primarily due to the decrease in revenue of our EMA products and services. Gross profit as a percentage of revenue for the three months ended March 31, 2002 was 94%, compared to 96% for the corresponding period in 2001. Our gross profit varies from period to period due primarily to the direct costs associated with our EMA set-up activities and costs paid to third parties in association with our name acquisition activities.

Product development expenses decreased 33% to $1.2 million for the three months ended March 31, 2002 from $1.8 million in the corresponding period in 2001. The decrease in product development expenses was due primarily to increased efficiency and a smaller staff as a result of our strategy to focus our resources on developing and maintaining our EMA products. As a percentage of total revenues, product development expenses were 57% for the three months ended March 31, 2002 compared to 33% for the corresponding period in 2001. The increase in product development expenses as a percentage of total revenues was primarily due to the capitalization of a portion of product development expenses related to the development of enterprise software which had reduced product development expenses in the three months ended March 31, 2001. We discontinued the enterprise software development in the three months ended September 30, 2001. We expect our product development expenses to be slightly lower as a percentage of total revenues in the future quarters as we continue to streamline and look for ways to increase productivity and efficiency.

Sales and marketing expenses decreased 64% to $915,000 in the three months ended March 31, 2002 from $2.5 million for the corresponding period in 2001. As a percentage of total net revenues, sales and marketing expenses were 42% for the three months ended March 31, 2002, compared to 47% for the corresponding period in 2001. The decrease in sales and marketing expenses was primarily due to a more focused marketing program which reduced the need for certain promotions that occurred in the quarter ended March 31, 2001. In addition, the headcount in sales and marketing was smaller in the quarter ended March 31, 2002 compared to the corresponding quarter in 2001. We expect our sales and marketing expenses to remain flat or slightly lower as a percentage of total revenues during the remainder of 2002 as we continue to find ways to more effectively gain exposure and recognition among current and potential

General and administrative expenses decreased 42% to $674,000 for the three months ended March 31, 2002 from $1.2 million in the corresponding period in 2001. This decrease was primarily a result of a lower headcount and lower other general and administrative expenses related to rent, professional services and bad debt expense in the quarter ended March 31, 2002. As a percentage of total revenues, general and administrative expenses were 31% for the three months ended March 31, 2002 compared to 22% for the corresponding period in 2001. The increase in general and administrative expenses as a percentage of total revenues was a result of relatively fixed costs in the areas of insurance, rent and outside services in light of lower total revenues for the quarter ended March 31, 2002. We expect our general and administrative expenses to decrease slightly as a percentage of total revenues for the remainder of 2002 as we continue to improve cost efficiencies in general and administrative areas.

Settlement of claims expenses were $240,000 for the three months ended March 31, 2002. We entered into a Release Agreement, effective as of March 29, 2002, with The Tail Wind Fund Ltd., the holder of all of our issued and outstanding Series A Preferred Stock, related to certain disputes that have arisen between us and Tail Wind. Under this agreement, each party released all claims against the other party. In consideration of this release, we issued Tail Wind 250,000 shares of our common stock with a total value of $310,000. Because one of the claims released was the liquidated damages previously recognized in the quarter ended September 30, 2001 in the amount of $70,000, the settlement of claims expense was $240,000 for the quarter ended March 31, 2002.

Net interest expense was $1,000 for the three months ended March 31, 2002, compared to a net interest income of $28,000 for the corresponding period in 2001. The increase in net interest expense was due primarily to lower average cash balances in the three months ended March 31, 2002 compared to the corresponding period in 2001 and the recognition of interest expense related to our capital lease financing transactions in the three months ended March 31, 2002.

Since inception, we have financed our activities primarily from cash generated from operations and equity financings. On March 30, 2001, we completed a private placement of convertible preferred stock and received net proceeds of approximately $3.3 million. On June 15, 2001, we completed the sale of substantially all of the assets and liabilities of our Elibrium division for $3.0 million. In December 2001, we agreed to set off $750,000 from the purchase price to settle a dispute over certain accounts payable and accounts receivable included in the Elibrium sale. After setoffs, the purchase price was reduced to $2.25 million, of which $2.0 million was paid during the period ended December 2001 and $250,000 was paid in March 2002. In connection with the sale of our Elibrium division, we also entered into a licensing agreement with the acquiring company for which we received a fee of $1.5 million. On June 29, 2001, we entered into a sale and leaseback agreement with Sun Microsystems Finance and received net proceeds of $1.6 million. We have no interest-bearing debt.

Our operating activities used $794,000 of cash for the three months ended March 31, 2002 which were primarily attributable to payments made to the landlord of our Los Angeles, CA office for lease termination and payments related to the restructuring activities that took place in the three months ended September 30, 2001. Our operating activities used $5.4 million of cash for the three months ended March 31, 2001 which were primarily attributable to operating activities for the Elibrium division prior to its sale on June 15,

Our investing activities provided $190,000 of cash for the three months ended March 31, 2002 which consisted of a payment from Elibrium related to the purchase of the Elibrium division offset by equipment purchases. Our investing activities used $1.7 million for the three months ended March 31, 2001 which primarily consisted of capitalized software production costs related to the enterprise software which was discontinued and equipment purchases.

Our financing activities used $61,000 in cash for the three months ended March 31, 2002 which primarily consisted of repayment of capital lease obligations. Our financing activities provided $3.4 million in cash for the three months ended March 31, 2001 which consisted of net proceeds of $3.3 million from sale of 3,500 shares of preferred stock and proceeds from exercise of stock options.

As of March 31, 2002, we had $1.5 million in cash and cash equivalents, of which $678,000 is restricted in a money market account used as a collateral to a standby letter of credit issued in connection with a sale and leaseback transaction with Sun Microsystems Finance in June 2001. The letter of credit will expire on December 31, 2002.

We are continuously monitoring our operations and the use of our cash. We have compiled cash projections for the year ending December 31, 2002 which indicate that sufficient financial resources will be available to enable us to fulfill our current operating plan. We developed these forecasts using various estimates of revenue, operating expenses and other non-operating cash expenditures. Assuming minimum estimates of revenue, the forecasts indicate sufficient cash resources will be available to enable us to continue to operate for the year ending December 31, 2002. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash, cash equivalents and cash that may be generated from operations are insufficient to satisfy our liquidity requirements, we will likely seek to sell additional equity or debt instruments. The sale of additional equity or equity related securities could result in additional dilution to our stockholders. See “Factors Which May Impact Future Operating Results” in the following section.

If all or substantially all of our outstanding accounts receivable as of March 31, 2002 are not paid, we believe that our existing cash and cash equivalents and cash that may be generated from operations may not be sufficient to fund our operations at currently anticipated levels beyond the third quarter of 2002. In such event, additional capital from equity or credit financings may be necessary in order to fund our operations at currently anticipated levels beyond the third quarter of 2002. While we may attempt to finance our future capital needs through some combination of commercial bank borrowings, leasing, vendor financing and the sale of additional equity or debt securities, there can be no assurance that we will be able to raise additional capital, on terms acceptable to us, or at all.

On March 30, 2001, we issued 3,500 shares of our Series A 4% Cumulative Convertible Preferred Stock for an aggregate purchase price of $3.5 million. The net proceeds from this private placement were $3.3 million. The Series A Preferred Stock accrues cumulative dividends at the rate of 4% per annum, payable semi-annually, in shares of our common stock or cash at our option or the holder’s option if certain conditions are not satisfied. The Series A Preferred Stock is convertible into shares of our common stock at a conversion price of $4.09. Subject to certain conditions, any outstanding shares of Series A Preferred Stock will automatically convert into shares of our common stock on January 2, 2003 at a conversion price equal to the lesser of $4.09 or the reset price, which is the average closing bid prices of our common stock during the fourth quarter of 2002. In the event that the number of shares of common stock issuable upon conversion of the Series A Preferred Stock exceeds certain limits, we would be obligated to make substantial cash payments to the holders of such stock. For more information, see the discussion under the caption “We would be required to issue a substantial number of additional shares upon conversion of our Series A Preferred Stock, and, under certain circumstances, make substantial cash payments to holders of our Series A Preferred Stock if the average closing bid price of our common stock during the fourth quarter of 2002 does not exceed $4.09 per share” under “Factors Which May Impact Future Operating Results,” below.

If certain specified events occur, we may be required to repurchase the outstanding shares of our Series A Preferred Stock at a premium price per share. In accordance with the terms of the documents relating to the issuance of our Series A Preferred Stock, we are required to repurchase the outstanding shares of Series A Preferred Stock under specified circumstances which include if our common stock is no longer listed or included for quotation on the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange or the American Stock Exchange or the trading of our common stock is suspended or halted for more than one trading day.

The following risk factors should be considered very carefully in addition to the other information contained in this Form 10-Q. The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are not material may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition, or results of operations could be materially adversely affected.

As of March 31, 2002, our net accounts receivable totaled $2.4 million. If we do not receive payment for all or substantially all of our outstanding accounts receivables, we believe that our existing cash and cash equivalents and cash that may be generated from operations may not be sufficient to fund our operations at currently anticipated levels beyond the third quarter of 2002. In such event, additional capital from equity or credit financings may be necessary in order to fund our operations at currently anticipated levels beyond the third quarter of 2002. There can be no assurance that we will be able to raise additional capital on terms acceptable to us, or at all. In particular, unless the market price of our common stock increases dramatically, it is unlikely that we will be able to raise funds through a public offering of our common stock. If adequate funds are not available or are not available on acceptable terms, we would have to scale back our operations, which could significantly impair our ability to develop or enhance products or services and respond to competitive pressures, or we may be forced to cease our operations entirely. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage of ownership of our stockholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders.

We derive, and expect to continue to derive for the foreseeable future, a large portion of our revenues from the email marketing automation products and services we provide to our customers for their marketing and advertising campaigns. Marketing and advertising expenditures by our customers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including email marketing products and services, has been characterized in recent quarters by increasing softness of demand, lower prices, the reduction or cancellation of contracts, an increased risk of uncollectible receivables from advertisers and the reduction of marketing and advertising budgets. As a result of these reductions, email marketing spending as well as advertising spending across traditional media has decreased. We cannot assure you that further reductions will not occur. We also cannot assure you that if economic conditions improve, marketing budgets and advertising spending will increase from current levels. As a result, our revenues from email marketing automation products and services may decline significantly in any given period.

If our common stock trades below $1.00 per share for more than 30 consecutive trading days or we fail to satisfy any other Nasdaq listing requirement, we will face potential delisting from The Nasdaq National Market. If delisting occurs, the market liquidity of our common stock would be adversely affected and the market price of our common stock could significantly decrease.

Our common stock is traded on the Nasdaq National Market. Nasdaq has requirements that a company must meet in order to remain listed on the Nasdaq National Market. These requirements include maintaining a minimum bid price of $1.00. Since April 11, 2002, our common stock has traded below $1.00. On May 8, 2002, the most recent practicable date prior to the filing of this report, the last sale price of our common stock on Nasdaq was $0.75. If our common stock continues to trade below $1.00 for 30 consecutive trading days or we fail to satisfy any of the other Nasdaq listing requirements, our common stock could be delisted from the Nasdaq National Market. If we fail to maintain the standards necessary to be quoted on the Nasdaq National Market or alternatively, the Nasdaq Small Cap Market, and our common stock is delisted, trading in our common stock would be conducted on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the “pink sheets.” Such alternatives are generally considered to be less efficient markets, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to, the market price of our common stock. If such were to occur, our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.

As of March 31, 2002, we had an accumulated deficit of $29.3 million. We recorded a net loss of $1.0 million from continuing operations for the quarter ended March 31, 2002. There can be no assurance that we can achieve profitability in the near future. We have historically relied to a significant extent on the revenues and cash flow generated from the sale of desktop software products by our Elibrium division to fund the development and expansion of our email marketing strategy. As a result of the sale of our Elibrium division on June 15, 2001, our ability to achieve profitability in the future will depend primarily upon our ability to continue development of new email marketing products and services, enhance our infrastructure and expand our customer base and brand awareness. To achieve these goals, we may need to increase spending on product development, sales and marketing and technology. To the extent that our email marketing revenues do not significantly increase as a result of this increased spending, we may not achieve profitability. Even if we do achieve profitability, there is no guarantee that we will be able to sustain or increase our profitability on a quarterly or annual basis in the future.

We would be required to issue a substantial number of additional shares upon conversion of our Series A Preferred Stock and, under certain circumstances, make substantial cash payments to holders of our Series A Preferred Stock if the average closing bid price of our common stock during the fourth quarter of 2002 does not exceed $4.09 per share.

conversion price equal to the lesser of $4.09 or the reset price, which is the average closing bid price of our common stock during the fourth quarter of 2002. The closing bid price of our common stock on May 1, 2002 was $0.69. If the average closing bid price of our common stock during the fourth quarter of 2002 does not exceed $4.09 per share, we would be required to issue a substantial number of additional shares of our common stock upon the automatic conversion of any outstanding shares of Series A Preferred Stock. We will not receive any consideration for the issuance of these additional shares of our common stock. In addition, the issuance of these additional shares of our common stock would result in substantial dilution to our common stockholders.

The number of shares of our common stock issuable in connection with an automatic conversion of the Series A Preferred Stock is subject to two limitations related to the holder’s percentage ownership of our outstanding shares of common stock after such automatic conversion. The first limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock beneficially owned by such holder prior to such conversion, exceed 9.99% of the total number of outstanding shares of our common stock immediately after such automatic conversion. Our obligation to issue any shares of common stock in excess of this 9.99% cap is suspended until such time as the issuance of such shares would not exceed the 9.99% cap. The second limitation is that the number of shares of our common stock issuable to a holder of Series A Preferred Stock in connection with an automatic conversion cannot, together with any other shares of our common stock beneficially owned by such holder prior to such conversion, exceed 19.9% of the total number of outstanding shares of our common stock as of March 30, 2001. In lieu of issuing any shares in excess of this 19.9% cap, we are required to pay on conversion to such holder an amount equal to the number of shares in excess of the 19.9% cap multiplied by 107.5% of the closing bid price per share of our common stock on the day before the automatic conversion of the Series A Preferred Stock. This payment is due in twelve equal monthly installments.

The following table illustrates the number of shares of our common stock immediately issuable upon an automatic conversion of the Series A Preferred Stock assuming that the average closing bid price of our common stock during the fourth quarter of 2002 has remained at $0.74 per share, the closing bid price on May 8, 2002, or if it has decreased by 25%, 50% or 75% from $0.80 per share. This table also illustrates the number of shares of our common stock that cannot be issued in connection with an automatic conversion of the Series A Preferred Stock until such time as the issuance of such shares would not cause the holder of such shares to be in violation of the 9.99% ownership cap described above. Finally, this table illustrates the aggregate cash payment we would be required to pay in connection with an automatic conversion of the Series A Preferred Stock for shares of common stock in excess of the 19.9% ownership cap described above. The calculations in the following table assume that:

Assumed Average Closing Bid Price during the 4th Quarter of 2002	Number of Shares of Common Stock Immediately Issuable Upon Conversion	Number of Shares of Common Stock in Excess of 9.99% Cap	Cash Payment Required in Lieu of Issuance of Shares in Excess of 19.9% Cap
$0.80	1,022,930	1,081,380	$1,415,293
0.60	1,022,930	1,081,380	1,867,720
0.40	1,022,930	1,081,380	2,320,147
0.20	1,022,930	1,081,380	2,772,573

In the event that any of such circumstances occur, each holder of shares of our Series A Preferred Stock has the option to compel us to repurchase any or all of such holder’s then outstanding shares of Series A Preferred Stock at a premium. The price per share payable by us for any repurchased shares of Series A Preferred Stock is generally equal to the greater of 120% of the original purchase price per share plus any accrued but unpaid dividends or the market price for our common stock on such date. If we are required to repurchase a significant number of shares of our Series A Preferred Stock under such circumstances, our liquidity and capital could be materially and adversely affected and we may not be able to implement our growth strategy.

Due to these factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of our future performance. In addition, a significant portion of our operating expenses, particularly labor costs and rent, are relatively fixed, and planned expenditures are based, in part, on expectations with regard to future sales. As a result, we will likely be unable, or may elect not to, reduce spending quickly enough to offset any unexpected revenue shortfall. In the event of a revenue shortfall or unanticipated expenses in any given quarter, our operating results may be below the expectations of securities analysts or investors. If this occurs, the market price of our common stock may decline significantly.

The market for email marketing automation products and services is new and rapidly evolving. If email marketing automation does not gain widespread acceptance as a means of marketing to, and communicating with, consumers, our business will suffer. Businesses that have relied upon traditional means of attracting new customers and maintaining customer relationships may not accept, or may be slow in accepting, our EMA products and services because:

Our success also depends on the growth and acceptance of the Internet as a medium for executing transactions. If consumers do not continue to purchase products online, then the market for our email marketing solution may disappear. If that happens, or if the number of business-to-consumer electronic commerce transactions grows more slowly than we anticipate, our business would suffer.

The success of our EMA business depends to a significant extent on our ability to provide satisfactory services to our clients, meet their demands and maintain an infrastructure capable of handling, without interruption, the volume of emails or marketing campaigns resulting from our clients’ email marketing campaigns. Failure to meet our clients’ demands for email marketing services would have a material adverse effect on our business and reputation. The success of our email marketing businesses also depends on our ability to successfully deliver emails or marketing campaigns over the Internet. Software programs exist that limit or prevent advertising from being delivered to a user’s computer. Widespread adoption of this software by Web users would significantly undermine the commercial viability of email advertising and marketing. The failure to deliver email messages or marketing campaigns for our clients in an effective and consistent manner may cause our clients to discontinue their use of our email campaign services. In

addition, because we provide our clients with a 100% service guarantee, if our clients are not completely satisfied with our service we may be required to refund the delivery fees paid by dissatisfied clients or resend an email marketing campaign at our own expense. If these refunds are large in amount, our business and financial results could be adversely affected.

The trading price of our common stock has been volatile and we have experienced significant declines in the market price of our common stock. In the past, many companies have been subject to securities class action litigation following significant declines in the market price of their securities. If we were sued in a securities class action, it could result in substantial costs and a diversion of management’s attention and resources and could cause the market price of our common to decline further.

We believe that our future success depends in large part upon our ability to keep pace with competitive offerings, to adapt to new operating systems, hardware platforms, media, and industry standards, and to provide additional functionality by enhancing our existing products and services and introducing new products and services on a timely basis. If we are unable to develop such products or services in a timely manner due to resource constraints or technological or other reasons, this inability could have a material adverse effect on our business.

The market for email marketing products and services is intensely competitive and rapidly evolving. Our competitors are continuing to engage in significant price competition for email marketing services. We expect competition to increase significantly in the future because of the attention the Internet has received as a means of advertising and direct marketing and because there are relatively low barriers to entry in our market. We compete directly with publicly traded email service providers as well as numerous private companies. We compete with the information technology departments of current and prospective clients who use in-house email systems to manage and deliver email marketing campaigns. We also compete with companies providing software and services for outsourced solutions such as email distribution, list management, reporting and bounce processing, email consulting and campaign analysis.

We depend on the continued services of our key technical, sales and senior management personnel, particularly our President and Chief Executive Officer George Grant, and our Senior Vice President of Technology, Kentyn Reynolds. Any officer or employee can terminate his or her relationship with us at any time, and we do not maintain key man insurance policies for either Mr. Grant or Mr. Reynolds. The future growth of our business will depend on our ability to attract, retain and motivate qualified, highly-skilled employees, particularly persons with marketing, Internet and information technology experience. There is competition for these employees with technical, management, marketing, sales, product development and other specialized skills in our industry. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have from time to time in the past experienced, and expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

Our industry is characterized by rapid changes in technology and customer demands. As a result, our current products and services may quickly become obsolete and unmarketable. We believe that our future success depends in large part upon our ability to keep pace with competitive offerings and customer requirements, to adapt to new operating systems, hardware platforms, media and industry standards, and to provide additional functionality by enhancing our existing products and services and introducing new products and services on a timely and cost-effective basis. We may be unable to do this due to resource constraints or technological or other reasons. Any failure or delay in adapting to technological advances or emerging industry standards or developing, introducing or marketing new products and services could cause us to lose clients or fail to gain new clients. If this happens, our business could suffer and our stock price could decline.

We must offer clients reliable, secure and continuous service to attract and retain clients and persuade them to increase their reliance on our email marketing products and services. As the volume of emails generated by our clients increases, we must continuously upgrade and enhance our technical infrastructure to accommodate the increased demands placed on our systems. Our operations also depend in part on our ability to protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, unauthorized user access or hacker attacks, physical break-ins and similar events. Any interruption or decrease in response time of our email marketing services could damage our reputation, reduce customer satisfaction and decrease usage of our services.

A fundamental requirement for online communications and transactions is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. Any breach in our online security could result in liability to our customers, damage to our reputation and harm to our business. Our servers are vulnerable to computer viruses or software programs that disable or impair computers, physical or electronic break-ins and similar disruptions, which could lead to loss of data. We may need to spend significant resources to license technologies to protect against security breaches or to address problems caused by a security breach.

We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to privacy and electronic commerce. Although there are currently few of these laws and regulations, state, federal and foreign governments may adopt more of these laws and regulations. The adoption of new laws or the adaptation of existing laws to the Internet may decrease the growth in the use of the Internet, which could in turn decrease the demand for our services, increase our cost of doing business or otherwise harm our business. Federal, state, local and foreign governments are considering a number of legislative and regulatory proposals relating to Internet commerce. As a result, a number of laws or regulations may be adopted regarding:

It is also uncertain as to how existing laws may be applied to the Internet in areas such as property ownership, copyright, trademark and trade secrets. The recent growth of Internet commerce has been attributed by some to the lack of sales and value-added taxes on interstate sales of goods and services over the Internet. Numerous state and local authorities have expressed a desire to impose such taxes on sales to consumers and businesses in their jurisdictions. Recently, Congress extended until November 1, 2003, the Internet Tax Freedom Act of 1998 which had prevented the imposition of such taxes through October 2001. If this extension of the federal moratorium on state and local taxes on Internet sales is not renewed when it expires on November 1, 2003, sales of goods and services over the Internet could be subject to multiple overlapping tax schemes, which could substantially hinder the growth of Internet commerce, including the use of our email marketing solution.

We gather and maintain data related to consumers’ buying behavior. Recently, lawsuits have been brought alleging, among other things, that at least one company, which combines information from online and other sources regarding users, has improperly collected and used information concerning Internet users in violation of federal electronics privacy statutes and other privacy laws. The United States Federal Trade Commission has launched an informal inquiry to determine whether that company has engaged in unfair or deceptive practices in collecting and maintaining information concerning Internet users. While we believe the “opt-in” nature of the user profiles that we create do not raise these issues, we may be sued or investigated regarding our practices. Any similar legal actions, whether against us or others, could limit our ability to sell our email marketing services or otherwise seriously harm our business.

Privacy concerns may cause consumers who use the Internet to decide not to opt in to receive emails and even the perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our email marketing services. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify users that the data captured after visiting Web sites may be used to direct product promotions and advertising to that user. For example, the European Union recently enacted its own privacy regulations that may result in limits on the collection and use of some user information. The United States and other countries may adopt similar legislation or regulatory requirements. If privacy legislation is enacted or consumer privacy concerns are not adequately addressed, our business could be harmed.

Because our email marketing services often require us to provide a connection to the Web sites of our customers and their marketing partners, we may be perceived as being associated with the content of these Web sites. We do not and cannot screen all of the content generated by our customers and their marketing partners. As a result, we may face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the materials displayed on our customers’ sites and on their marketing partners’ sites and email messages. For example, if one of our customers is sued for posting information on its Web site that is alleged to be defamatory, we may also be named as a defendant in that legal action based solely on our limited association with that customer’s Web site. As a result, we could be involved in legal proceedings and disputes that are costly to resolve. We may also suffer a loss of customers or damage to our reputation harm based on this information or resulting from our involvement in these legal proceedings. Furthermore, some foreign governments have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States.

We rely primarily on a combination of trademarks, copyright and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect our proprietary rights. We do not have any patents or any patent applications to protect our proprietary rights. The measures we have taken to protect our proprietary rights may not be adequate to prevent unauthorized use of our proprietary technology and other intellectual property rights.

We are highly dependent on technologies we license from third parties to enable us to send email through the Internet and to offer a variety of database management and targeted marketing capabilities. The email marketing industry is rapidly evolving, and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms, or at all. The failure to license these technologies could adversely affect our ability to offer competitive email marketing products and services.

As part of our growth strategy, we may pursue the acquisition of businesses, technologies or products that are complementary to our business. Acquisitions involve a number of special risks that could harm our business, including the diversion of management’s attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees. In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during expansion could harm our business.

Our board of directors has the authority to issue up to an additional 1,996,500 shares of preferred stock and to determine the price, rights, preferences, and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of

shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, we are subject to anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of ClickAction. Certain other provisions of our certificate of incorporation may have the effect of delaying or preventing changes in control or management, which could adversely affect the market price of our common stock. In addition, in June 1998 our board of directors adopted a share purchase rights plan, or poison pill. This poison pill could have the effect of discouraging, delaying or preventing an acquisition of us.

We currently provide our services to clients primarily in the United States. As a result, it is unlikely that our financial results would be directly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All of our sales are currently denominated in United States dollars.

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Given the short-term nature of these investments, we believe we are not subject to significant interest rate risk with respect to these investments. We currently have no interest bearing debt outstanding and we do not plan to use derivative financial instruments in our investment portfolio.

The primary objective of our investment activities is to preserve principal and meet liquidity needs while at the same time maximizing the income we receive from our investments without significantly increasing risk. Most of the securities that we have invested in are not subject to significant market risk due to their short-term maturity. We maintain our portfolio of cash equivalents and short-term investments in a variety of investments, including U.S. Treasuries, U.S. Government Agencies and money market funds.

We entered into a Release Agreement, effective as of March 29, 2002, with The Tail Wind Fund Ltd., the holder of all of our issued and outstanding Series A Preferred Stock, related to certain disputes that have arisen between Tail Wind and us. Under this agreement, each party released all claims against the other party. In consideration of this release, we issued Tail Wind 250,000 shares of our common stock with a total value of $310,000 and agreed to use our commercially reasonable best efforts to register these shares within 90 days after the date of the execution of the release agreement. A registration statement on Form S-3 for the resale of these shares was filed with the SEC on April 16, 2002. The issuance of the shares of common stock and the warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

Delaware		77-0195362
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

	2197 E. BAYSHORE ROAD
	PALO ALTO, CA	94303
	(Address of principal executive offices)	(Zip code)

		Page
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

a) Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001		3

b) Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001		4

c) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001		5

d) Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27


PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds		28

Item 6. Exhibits and Reports on Form 8-K		28

SIGNATURES		29

	0–30 Days	31–60 Days	61–90 Days	91 and Above
Allowance for doubtful accounts percentage	0%	2%	20%	50%

		Balance as of December 31, 2001		Payments		Balance as of March 31, 2002
Closure of offices		$619,339		$(438,416)		$180,923

CLICKACTION INC.

By:		/s/ ALBERT P. LIONG
		Albert P. Liong Senior Vice President, Finance

Non-cash investing and financing activities:

Equipment acquired under capital lease

Dividend paid with issuance of common stock

Cash paid during the period for interest

	Three Months Ended
	March 31, 2002		March 31, 2001
Desktop applications revenues	$	—	$	2,914
Cost of revenues		—		2,162

Gross profit		—		752
Operating expenses		—		2,953

Loss from discontinued operations	$	—	$	(2,201	)