As filed with the Securities and Exchange
Commission on August 5, 2010
Registration
No. 333-165720
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 4
to
Form S-1
REGISTRATION
STATEMENT
UNDER THE SECURITIES ACT OF
1933
SCIQUEST, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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7372
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56-2127592
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(State or other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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6501 Weston Parkway, Suite 200
Cary, North Carolina 27513
(919) 659-2100
(Address, including zip
code, and telephone number,
including area code, of registrants principal executive
offices)
Stephen J. Wiehe
President and Chief Executive Officer
SciQuest, Inc.
6501 Weston Parkway, Suite 200
Cary, North Carolina 27513
(919) 659-2100
(919) 659-2199
(Facsimile)
(Name, address, including
zip code, and telephone number,
including area code, of agent
for service)
Copies to:
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Grant W. Collingsworth, Esq.
Seth K. Weiner, Esq.
Morris, Manning & Martin, LLP
3343 Peachtree Road, N.E.
Atlanta, GA 30326
Phone:
(404) 233-7000
Facsimile:
(404) 365-9532
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William B. Asher, Jr., Esq.
Lee S. Feldman, Esq.
Choate, Hall & Stewart LLP
Two International Place
Boston, MA 02110
Phone: (617) 248-5000
Facsimile: (617) 248-4000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effectiveness of this
registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Securities
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Aggregate
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Registration
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to be Registered
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Offering Price(1)
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Fee
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Shares of Common Stock, $0.001 par value per share
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$75,000,000
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$5,348(2)
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(1)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933, as amended.
Includes shares of common stock that the underwriters have the
option to purchase solely to cover overallotments, if any.
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(2)
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Previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant files a further amendment which
specifically states that this Registration Statement will
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement becomes effective on such dates as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is declared effective. This prospectus is not an
offer to sell these securities and we are not soliciting offers
to buy these securities in any state where the offer or sale is
not permitted.
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SUBJECT
TO COMPLETION, DATED AUGUST 5, 2010
PRELIMINARY
PROSPECTUS
Shares
Common
Stock
$
per share
SciQuest, Inc. is
selling shares
of our common stock, and the selling stockholders identified in
this prospectus are selling an
additional shares.
We will not receive any of the proceeds from the sale of the
shares of the selling stockholders. We have granted the
underwriters a
30-day
option to purchase up to an
additional shares
of common stock from us, and the selling stockholders have
granted the underwriters a 30-day option to purchase up to an
additional shares
of common stock, to cover over-allotments, if any.
This is an initial
public offering of our common stock. We currently expect the
initial public offering price to be between
$ and
$ per share. We have applied for
approval for quotation of our common stock on the NASDAQ Global
Market under the symbol SQI.
INVESTING
IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS
BEGINNING ON PAGE 11.
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Per
Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
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Page
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1
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11
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27
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28
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29
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30
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31
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33
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38
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62
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77
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83
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98
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100
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102
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106
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108
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112
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115
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115
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115
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115
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F-1
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EX-1.1 |
EX-3.2 |
EX-23.1 |
You should rely only on the information contained in this
prospectus, any free writing prospectus prepared by us or
information to which we have referred you. We have not, and the
underwriters have not, authorized anyone to provide you with
additional information or information different from that
contained in this prospectus. This prospectus is not an offer to
sell, nor is it seeking offers to buy, shares of our common
stock in jurisdictions where offers and sales are not permitted.
The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of shares of our
common stock. Our business, prospects, financial condition and
results of operations may have changed since that date.
Through and
including ,
2010 (the 25th day after the date of this prospectus), all
dealers that effect transactions in shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
This prospectus contains registered and unregistered
trademarks, service marks, trade names and references to
intellectual property owned by other companies. All trademarks,
service marks and trade names appearing herein are the property
of their respective holders. We obtained industry and market
data used throughout this prospectus through our research,
surveys and studies conducted by third parties and industry and
general publications. We have not independently verified market
and industry data from third-party sources.
PROSPECTUS
SUMMARY
The following summary highlights information contained
elsewhere in this prospectus. This summary is not complete and
does not contain all of the information that you should consider
before investing in our common stock. You should read the entire
prospectus, including the section entitled Risk
Factors, before making a decision to invest in shares of
our common stock. In this prospectus, references to our
company, we, us, and
our mean SciQuest, Inc., a Delaware corporation.
Unless otherwise indicated, the information contained in this
prospectus assumes (1) the shares of common stock to be
sold in this offering are sold at
$ per share and (2) no
exercise by the underwriters of their overallotment option to
purchase up to an
additional shares
of common stock from us and the selling stockholders.
Our
Business
Overview
SciQuest provides a leading on-demand strategic procurement and
supplier enablement solution that integrates customers with
their suppliers to improve procurement of indirect goods and
services. Our on-demand software enables organizations to
realize the benefits of strategic procurement by identifying and
establishing contracts with preferred suppliers, driving spend
to those contracts and promoting process efficiencies through
electronic transactions. Using our managed SciQuest Supplier
Network, our customers do business with more than 30,000 unique
suppliers and spend billions of dollars annually.
Our current target markets are higher education, life sciences,
healthcare and state and local governments. We tailor our
solution for each of the vertical markets we serve by offering
industry-specific functionality, content and supplier
connections. We serve more than 160 customers operating in 16
countries and offer our solution in five languages and 22
currencies. Our value proposition has led to an average annual
customer renewal rate of over 94% over the last three fiscal
years. On a dollar basis, our annual renewal rate has been 106%
over this same time period solely as a result of pricing
increases at the time of renewal. We believe our renewal rates
are among the highest for on-demand model companies.
Customers pay us subscription fees and implementation service
fees for the use of our solution under multi-year contracts that
are generally three to five years in length. We typically
receive subscription payments annually in advance and
implementation service fees as the services are performed,
typically within the first three to eight months of contract
execution. Our revenues have grown to $36.2 million in 2009
from $20.1 million in 2007, and our Adjusted Free Cash Flow
increased to $6.8 million from $3.6 million during
this period. Adjusted Free Cash Flow is not determined in
accordance with U.S. generally accepted accounting
principles, or GAAP, and is not a substitute for or superior to
financial measures determined in accordance with GAAP. For
further discussion regarding Adjusted Free Cash Flow and a
reconciliation of Adjusted Free Cash Flow to cash flows from
operations, see footnote 4 to the table in Summary
Financial Data included elsewhere in this prospectus
summary.
Industry
Background
Indirect goods and services procurement is the purchase of the
day-to-day
necessities of the workplace such as office supplies, laboratory
supplies, furniture, computers, MRO (maintenance, repair and
operations) supplies, and food and beverages. Indirect goods and
services tend to be low cost but are usually bought in high
volumes by a wide variety of employees throughout an
organization.
Our target market for strategic procurement of indirect goods
and services is a subset of the broader supply procurement and
sourcing application chain management market, which AMR Research
estimates in a July 2009 report entitled The Global
Enterprise Application Market Sizing Report,
2008-2013
as a $2.9 billion global opportunity in 2010, growing at an
8% compounded annual growth rate from 2010 through 2013. Based
on our own internal analysis, we believe that our current
addressable market is approximately $1.0 billion within our
current target markets as follows: higher education
($305 million), life sciences ($300 million),
healthcare ($175 million) and state and local government
($250 million).
1
The procurement process for indirect goods and services is often
not well-managed or controlled. Characteristics of traditional
procurement processes include:
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Lack of clearly defined procurement guidelines and awareness
of preferred suppliers. In many cases, because
processes are cumbersome, ill-defined and time consuming, many
employees have difficulty following the procurement approval
processes and fail to purchase from preferred suppliers.
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Limited ability to analyze spend. Given the
lack of automation and centralized reporting, organizations have
difficulty analyzing what they are buying from suppliers.
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Dissatisfied employees. Manual, non-integrated
processes often lead to excess costs, delays and errors,
resulting in a frustrating experience for the employee.
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Efforts to automate the procurement function for indirect goods
and services initially consisted of add-on modules to enterprise
resource planning, or ERP, systems and first generation
procurement systems developed 10 to 15 years ago. The
introduction of Software-as-a-Service, or SaaS, strategic
procurement solutions within the past few years has enabled
buyers and suppliers to transact with each other online more
efficiently. However, these offerings still suffer from the fact
that they are primarily horizontal solutions that neither
provide functionality and content specific to vertical markets
nor have a robust supplier network that drives economies of
scale.
Our
Solution
We offer an on-demand strategic procurement and supplier
enablement solution that enables organizations to more
efficiently source indirect goods and services, manage their
spend and obtain the benefits of compliance with purchasing
policies and negotiating power with suppliers. Our on-demand
strategic procurement software suite coupled with our managed
supplier network forms our integrated solution, which is
designed to achieve rapid and sustainable savings. Our solution
provides customers with a set of products and services that
enable them to optimize existing procurement processes by
automating the entire
source-to-settle
process. The SciQuest Supplier Network acts as a communications
hub that connects our customers to their suppliers.
Our solution provides the following key benefits:
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Significant return on investment
(ROI). Our customers are able to
achieve significant returns on investment through savings from
negotiated discounts, automated requisition/order processing,
contract lifecycle management, settlement automation and
sourcing.
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Content and functionality specific to our vertical
markets. Our software has specific configurable
content and functionality that meets the unique needs of our
targeted vertical markets.
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Easier access to customers supplier
network. Customers can easily access their
preferred suppliers using a single solution and avoid the costs
and inefficiencies associated with traditional
one-to-one
supplier management.
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Greater adoption by employees. Our intuitive
shopping interface provides employees with easy and automated
visibility and access to goods and services.
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Greater adoption by suppliers. Suppliers
typically are motivated to join our network due to ease of
enablement and lack of supplier fees.
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Visibility into spending patterns and
activity. Our solution provides granular detail
into user spending behavior and provides detailed analytics that
allow organizations to continually improve their purchasing
practices.
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Ease of deployment via integration with existing
systems. Our highly-configurable solution
integrates with many leading ERP systems to speed deployment and
facilitate the interchange of transaction, accounting,
settlement and user data.
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2
Our
Business Strengths
In addition to our differentiated customer solution, we believe
our market approach and business model offer specific benefits
that are instrumental to our successful growth. These include:
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Focus on customer value. We focus extensively
on ensuring that customers achieve maximum benefit from our
solution, and we proactively engage with our customers to
continually improve our software and services.
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Expertise in our targeted vertical
markets. Our domain expertise allows us to
provide our customers with a highly tailored and differentiated
solution that is difficult for our competitors to replicate.
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Extensive content and supplier
network. Suppliers are not charged any fees or
transaction costs for purchases consummated through the SciQuest
Supplier Network, which facilitates the growth of our network of
over 30,000 unique suppliers servicing the higher education,
life sciences, healthcare and state and local government markets.
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Ability to manage costs. Our culture of lean
management principles that extends from our senior management
throughout our company has kept our capital expenditures low and
helped lower our operating expenses as a percentage of revenues
from 95% in 2007 to 72% in 2009.
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High visibility business model. The recurring
nature of our revenues provides high visibility into future
performance, and the upfront payments result in cash flow
generation in advance of revenue recognition. For each of the
last three fiscal years, greater than 80% of our revenues were
recognized from contracts that were in place at the beginning of
the year.
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Our
Growth Strategy
We seek to become the leading provider of strategic procurement
solutions for indirect goods and services. Our key strategic
initiatives include:
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Further penetrating our existing vertical
markets. We will continue to focus our efforts on
acquiring new customers in our newer healthcare and state and
local government markets while increasing our emphasis on
mid-sized customer acquisition opportunities in our core higher
education and life sciences markets.
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Capitalizing on cross-selling opportunities into our
installed customer base. We plan to develop
and/or
acquire additional modules and products to sell to our existing
customers by leveraging our position as a trusted strategic
procurement solution vendor in our targeted verticals.
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Selectively expanding into new vertical
markets. We may pursue new vertical expansion
through internal product development, sales and marketing
initiatives or strategic acquisitions.
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Investing in international expansion to acquire new
customers. We intend to continue our
international expansion by increasing our international direct
sales force and establishing additional third-party sales
relationships.
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Selectively pursuing acquisitions. We may
pursue acquisitions to accelerate our growth, enhance the
capabilities of our existing solution, broaden our solution
offerings or expand into new verticals or geographies.
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Risks
That We Face
Our business is subject to a number of risks that you should
understand before making an investment decision. These risks are
discussed more fully in the Risk Factors section of
this prospectus and include but are not limited to the following:
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our failure to sustain our historical renewal rates, pricing and
terms of our customer contracts would adversely affect our
operating results;
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if we are unable to attract new customers, or if our existing
customers do not purchase additional products or services, the
growth of our business and cash flows will be adversely affected;
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continued economic weakness and uncertainty, which may result in
a significant reduction in spending in our target markets, could
adversely affect our business, lengthen our sales cycles and
make it difficult for us to forecast operating results
accurately;
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we may experience service failures or interruptions due to
defects in the hardware, software, infrastructure, third-party
components or processes that comprise our solution, any of which
could adversely affect our business;
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if we do not successfully maintain the SciQuest brand in our
existing vertical markets or successfully market the SciQuest
brand in new vertical markets, our revenues and earnings could
be materially adversely affected;
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if we are unable to adapt our products and services to rapid
technological change, our revenues and profits could be
materially and adversely affected;
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the market for on-demand strategic procurement and supplier
enablement solutions is at a relatively early stage of
development; if the market for our solution develops more slowly
than we expect, our revenues may decline or fail to grow and we
may incur operating losses;
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our customers are concentrated in our targeted vertical markets,
and adverse trends or events affecting these markets could
adversely affect our revenue growth and profits; and
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we have been, and may continue to be, subject to claims that we
or our technologies infringe upon the intellectual property or
other proprietary rights of a third party. Any such claims may
require us to incur significant costs, to enter into royalty or
licensing agreements or to develop or license substitute
technology, which may harm our business.
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Our
Corporate Information
We were originally incorporated in November 1995. Our principal
executive offices are located at 6501 Weston Parkway,
Suite 200, Cary, North Carolina 27513, and our telephone
number is
(919) 659-2100.
Our website address is www.sciquest.com. Information contained
on our website is not a part of this prospectus and the
inclusion of our website address in this prospectus is an
inactive textual reference only.
4
THE
OFFERING
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Common stock offered by us |
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shares |
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Common stock offered by selling stockholders |
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shares |
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Common stock to be outstanding after this offering |
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shares |
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Over-allotment option |
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shares |
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Use of proceeds |
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We estimate that the net proceeds from our sale of shares of
common stock in this offering will be approximately
$ million, or approximately
$ million if the underwriters
exercise their
over-allotment
option in full. This estimate is based upon an assumed initial
public offering price of $ per
share, the mid-point of our filing range, less estimated
underwriting discounts and commissions and offering expenses
payable by us. We will not receive any proceeds from the sale of
shares of our common stock by the selling stockholders. |
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We intend to use approximately $36.2 million of these net
proceeds to redeem all outstanding shares of our preferred
stock. We intend to use the remaining net proceeds for working
capital and general corporate purposes. We may also use a
portion of the proceeds to acquire complementary businesses,
products or technologies. We have no agreements or commitments
with respect to any acquisitions at this time. By establishing a
public market for our common stock, this offering is also
intended to facilitate our future access to public markets. |
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Pending the uses described above, we intend to invest the net
proceeds of this offering in short- to medium-term,
investment-grade, interest-bearing securities, certificates of
deposit or direct or guaranteed obligations of the U.S.
government. |
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Symbol on the NASDAQ Global Market |
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SQI |
The number of shares of our common stock outstanding after this
offering is based on 28,612,008 shares outstanding as of
June 30, 2010 and excludes:
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an aggregate of 1,423,362 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $1.16 per share;
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an aggregate of 443,361 shares issuable upon the exercise
of then outstanding warrants at a weighted average exercise
price of $0.04 per share;
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an aggregate of 644,073 shares reserved for issuance under
our 2004 Stock Incentive Plan, subject to increase on an annual
basis and subject to increase for shares subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares; and
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the shares
of common stock subject to the underwriters over-allotment
option.
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Except as otherwise indicated, information in this prospectus
assumes no exercise of the underwriters overallotment
option to purchase up
to
additional shares of our common stock from us and up
to
additional shares of common stock from the selling stockholders.
5
SUMMARY
FINANCIAL DATA
The following tables summarize the financial data for our
business. You should read this summary financial data in
conjunction with Selected Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and related notes, all included elsewhere in this
prospectus.
The summary financial data under the heading Statements of
Operations Data for each of the three years ended
December 31, 2007, 2008 and 2009, under the heading
Non-GAAP Operating Data relating to Adjusted EBITDA
and Adjusted Free Cash Flow for each of the three years ended
December 31, 2007, 2008 and 2009 have been derived from our
audited annual financial statements, which are included
elsewhere in this prospectus.
The summary financial data under the heading Statements of
Operations Data for each of the six months ended
June 30, 2009 and 2010, under the heading
Non-GAAP Operating Data relating to Adjusted
EBITDA and Adjusted Free Cash Flow for each of the six months
ended June 30, 2009 and 2010 and under the heading
Balance Sheet Data as of June 30, 2010 have
been derived from our unaudited financial statements. In the
opinion of management, our unaudited financial statements
include all adjustments, consisting only of normal recurring
items, except as noted in the notes to the financial statements,
necessary for a fair statement of interim periods. The financial
information presented for the interim periods has been prepared
in a manner consistent with our accounting policies described
elsewhere in this prospectus and should be read in conjunction
therewith.
The pro forma balance sheet data as of June 30, 2010 is
unaudited and gives effect to (1) our receipt of estimated
net proceeds of $ million
from this offering, based on an assumed initial public offering
price of $ per share, which is the
mid-point of our filing range, after deducting estimated
underwriting discounts and offering expenses payable by us, and
(2) the redemption of all of our outstanding preferred
stock immediately after the consummation of this offering. The
pro forma summary financial data is not necessarily indicative
of what our financial position or results of operations would
have been if this offering had been completed as of the date
indicated, nor is this data necessarily indicative of our
financial position or results of operations for any future date
or period.
6
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Year Ended December 31,
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Six Months Ended June 30,
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2007
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2008
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2009
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2009
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2010
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(In thousands, except per share data)
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Statements of Operations Data:
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Revenues
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$
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20,107
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$
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29,784
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$
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36,179
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$
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17,406
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$
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20,688
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Cost of revenues(1)(2)
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6,101
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6,723
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7,494
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3,748
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4,446
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Gross profit
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14,006
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|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
13,658
|
|
|
|
16,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,908
|
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
4,360
|
|
|
|
3,919
|
|
Sales and marketing
|
|
|
7,213
|
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
5,346
|
|
|
|
5,969
|
|
General and administrative
|
|
|
2,717
|
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
1,945
|
|
|
|
2,635
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
201
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,124
|
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
11,952
|
|
|
|
12,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,118
|
)
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,706
|
|
|
|
3,568
|
|
Interest and other income, net
|
|
|
118
|
|
|
|
113
|
|
|
|
27
|
|
|
|
31
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,000
|
)
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
1,737
|
|
|
|
5,256
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
9
|
|
|
|
16,821
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,000
|
)
|
|
|
1,117
|
|
|
|
19,429
|
|
|
|
1,737
|
|
|
|
3,204
|
|
Dividends on redeemable preferred stock
|
|
|
2,207
|
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
1,261
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
476
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.60
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.58
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,122
|
|
|
|
28,016
|
|
|
|
28,157
|
|
Diluted
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,900
|
|
|
|
28,794
|
|
|
|
29,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Six Months Ended June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
(In thousands)
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(3)
|
|
$
|
(2,099
|
)
|
|
$
|
2,666
|
|
|
$
|
7,349
|
|
|
$
|
2,603
|
|
|
$
|
4,842
|
|
Adjusted Free Cash Flow(4)
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
(640
|
)
|
|
$
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:(5)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,195
|
|
|
|
|
|
Working capital excluding deferred revenues
|
|
|
25,089
|
|
|
|
|
|
Total assets
|
|
|
59,807
|
|
|
|
|
|
Deferred revenues
|
|
|
35,508
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
35,436
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(14,771
|
)
|
|
|
|
|
7
|
|
|
(1) |
|
Amounts include stock-based compensation expense, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
18
|
|
|
$
|
31
|
|
Research and development
|
|
|
56
|
|
|
|
53
|
|
|
|
86
|
|
|
|
42
|
|
|
|
175
|
|
Sales and marketing
|
|
|
42
|
|
|
|
150
|
|
|
|
83
|
|
|
|
37
|
|
|
|
118
|
|
General and administrative
|
|
|
9
|
|
|
|
158
|
|
|
|
163
|
|
|
|
88
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110
|
|
|
$
|
386
|
|
|
$
|
365
|
|
|
$
|
185
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Cost of revenues includes amortization of capitalized software
development costs of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Amortization of capitalized software development costs
|
|
$
|
114
|
|
|
$
|
154
|
|
|
$
|
167
|
|
|
$
|
86
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
EBITDA consists of net income (loss) plus depreciation and
amortization, less interest and other income, net and less
income tax benefit (expense). Adjusted EBITDA consists of EBITDA
plus our non-cash, stock-based compensation expense and
settlement and legal costs related to a patent infringement
lawsuit settled in 2009. We use Adjusted EBITDA as a measure of
operating performance because it assists us in comparing
performance on a consistent basis, as it removes from our
operating results the impact of our capital structure, the
one-time costs associated with a non-recurring event and such
items as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets. We believe
Adjusted EBITDA is useful to an investor in evaluating our
operating performance because it and similar measures are widely
used by investors, securities analysts and other interested
parties in our industry to measure a companys operating
performance without regard to items such as depreciation and
amortization, which can vary depending upon accounting methods
and the book value of assets, and to present a meaningful
measure of corporate performance exclusive of our capital
structure and the method by which assets were acquired. |
|
|
|
Our use of Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are: |
|
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash
expenditure requirements for such replacements;
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
Adjusted EBITDA does not reflect tax payments that may represent
a reduction in cash available to us; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted
EBITDA alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted EBITDA along with these
other measures in order to fully evaluate our financial
performance. |
8
|
|
|
|
|
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
Depreciation and amortization
|
|
|
2,909
|
|
|
|
1,285
|
|
|
|
1,214
|
|
|
|
612
|
|
|
|
518
|
|
Interest and other income, net
|
|
|
(118
|
)
|
|
|
(113
|
)
|
|
|
(27
|
)
|
|
|
(31
|
)
|
|
|
(1,688
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(9
|
)
|
|
|
(16,821
|
)
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(2,209
|
)
|
|
|
2,280
|
|
|
|
3,795
|
|
|
|
2,318
|
|
|
|
4,086
|
|
Non-cash, stock-based compensation expense
|
|
|
110
|
|
|
|
386
|
|
|
|
365
|
|
|
|
185
|
|
|
|
756
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,099
|
)
|
|
$
|
2,666
|
|
|
$
|
7,349
|
|
|
$
|
2,603
|
|
|
$
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
Free Cash Flow consists of net cash provided by operating
activities, less purchases of property and equipment and less
capitalization of software development costs. Adjusted Free Cash
Flow consists of Free Cash Flow plus one-time settlement and
legal costs related to a patent infringement lawsuit in 2009 as
well as public stock offering costs incurred in 2010. We use
Adjusted Free Cash Flow as a measure of liquidity because it
assists us in assessing the companys ability to fund its
growth through its generation of cash. We believe Adjusted Free
Cash Flow is useful to an investor in evaluating our liquidity
because Adjusted Free Cash Flow and similar measures are widely
used by investors, securities analysts and other interested
parties in our industry to measure a companys liquidity
without regard to revenue and expense recognition, which can
vary depending upon accounting methods. |
|
|
|
|
|
Our use of Adjusted Free Cash Flow has limitations as an
analytical tool, and you should not consider it in isolation or
as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are: |
|
|
|
|
|
Adjusted Free Cash Flow does not reflect the interest expense or
the cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
Adjusted Free Cash Flow does not reflect one-time litigation
expense payments, which reduced the cash available to us;
|
|
|
|
|
|
Adjusted Free Cash Flow does not include public stock offering
costs;
|
|
|
|
|
|
Adjusted Free Cash Flow removes the impact of accrual basis
accounting on asset accounts and non-debt liability
accounts; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Free Cash Flow differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted Free
Cash Flow alongside other liquidity measures, including various
cash flow metrics, net income and our other GAAP results. Our
management reviews Adjusted Free Cash Flow along with these
other measures in order to fully evaluate our liquidity. |
9
|
|
|
|
|
The following table provides a reconciliation of net cash
provided by operating activities to Adjusted Free Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
4,693
|
|
|
$
|
6,582
|
|
|
$
|
4,501
|
|
|
$
|
(278
|
)
|
|
$
|
2,373
|
|
Purchase of property and equipment
|
|
|
(695
|
)
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(462
|
)
|
|
|
(379
|
)
|
Capitalization of software development costs
|
|
|
(362
|
)
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
3,636
|
|
|
|
6,003
|
|
|
|
3,596
|
|
|
|
(740
|
)
|
|
|
1,572
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Public stock offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
(640
|
)
|
|
$
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share would increase
(decrease) cash and cash equivalents, working capital excluding
deferred revenues, total assets and total stockholders
equity (deficit) after this offering by approximately
$ million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discount and estimated offering expenses payable by
us. |
10
RISK
FACTORS
An investment in shares of our common stock involves
significant risks. In addition to other information in this
prospectus, you should carefully consider the following risks
before investing in shares of our common stock offered by this
prospectus. The occurrence of any of the following risks could
materially and adversely affect our business, prospects,
financial condition and results of operations, which could cause
you to lose all or a significant portion of your investment in
shares of our common stock. Some statements in this prospectus,
including statements in the following risk factors, constitute
forward-looking statements. See the section of this prospectus
entitled Special Note Regarding Forward-Looking Statements
and Industry Data for a discussion of forward-looking
statements.
Risks
Related to Our Business and Industry
Our failure to sustain our historical renewal rates, pricing
and terms of our customer contracts would adversely affect our
operating results.
We derive, and expect to continue to derive, substantially all
of our revenues from our on-demand strategic procurement and
supplier enablement solution in the higher education, life
sciences, healthcare and state and local government markets.
Should our current customers lose confidence in the value or
effectiveness of our solution, the demand for our products and
services will likely decline, which could materially and
adversely affect our renewal rates, pricing and contract terms.
Our subscription agreements with customers are typically for a
term of three to five years. Over the past three years,
customers have renewed at an average annual rate of over 94%. On
a dollar basis, our annual renewal rate has been 106% over this
same time period solely as a result of pricing increases at the
time of renewal. If our customers choose not to renew their
subscription agreements with us at similar rates and on similar
or more favorable terms, our business, operating results and
financial condition may be materially and adversely affected.
If we are unable to attract new customers, or if our existing
customers do not purchase additional products or services, the
growth of our business and cash flows will be adversely
affected.
To increase our revenues and cash flows, we must regularly add
new customers and, to a somewhat lesser extent, sell additional
products and services to our existing customers. If we are
unable to hire or retain quality sales personnel, unable to sell
our products and services to companies that have been referred
to us, unable to generate sufficient sales leads through our
marketing programs, or if our existing or new customers do not
perceive our solution to be of sufficiently high value and
quality, we may not be able to increase sales and our operating
results would be adversely affected. In addition, if we fail to
sell new products and services to existing or new customers, our
operating results will suffer, and our revenue growth, cash
flows and profitability may be materially and adversely affected.
Continued economic weakness and uncertainty, which may result
in a significant reduction in spending in our target markets,
could adversely affect our business, lengthen our sales cycles
and make it difficult for us to forecast operating results
accurately.
Our revenues depend significantly on economic conditions in our
target markets as well as the economy as a whole. We have
experienced, and may experience in the future, reduced spending
by our customers and potential customers due to the current
financial turmoil and economic weakness affecting the
U.S. and global economy, and other macroeconomic factors
affecting spending behavior. Many of our customers and potential
customers, particularly in the higher education market, have
been facing significant budgetary constraints that have limited
spending on technology solutions. Continued spending constraints
in our target markets may result in slower growth, or
reductions, in revenues and profits in the future. In addition,
economic conditions or uncertainty may cause customers and
potential customers to reduce or delay technology purchases,
including purchases of our solution. Our sales cycle may
lengthen if purchasing decisions are delayed as a result of
uncertain budget availability or if contract negotiations become
more protracted or difficult as customers institute additional
internal approvals for information technology purchases. These
economic conditions could result in reductions in sales of our
products and services, longer sales cycles, difficulties in
collecting accounts receivable
11
or delayed payments, slower adoption of new technologies and
increased price competition. Any of these events or any
significant reduction in spending in the higher education, life
sciences, healthcare and state and local government markets
would likely harm our business, financial condition, operating
results and cash flows.
We may experience service failures or interruptions due to
defects in the hardware, software, infrastructure, third-party
components or processes that comprise our solution, any of which
could adversely affect our business.
A technology solution as complex as ours may contain undetected
defects in the hardware, software, infrastructure, third-party
components or processes that are part of the solution we
provide. If these defects lead to service failures, we could
experience delays or lost revenues during the period required to
correct the cause of the defects. Furthermore, from time to
time, we have experienced immaterial service disruptions in the
ordinary course of business. We cannot be certain that defects
will not be found in new products or upgraded modules or that
service disruptions will not occur in the future, resulting in
loss of, or delay in, market acceptance, which could have an
adverse effect on our business, results of operations and
financial condition.
Because customers use our on-demand strategic procurement and
supplier enablement solution for critical business processes,
any defect in our solution, any disruption to our solution or
any error in execution could cause customers to not renew their
contracts with us, prevent potential customers from purchasing
our solution and harm our reputation. Although most of our
contracts with our customers limit our liability to our
customers for these defects, disruptions or errors, we
nonetheless could be subject to litigation for actual or alleged
losses to our customers businesses, which may require us
to spend significant time and money in litigation or arbitration
or to pay significant settlements or damages. We do not
currently maintain any warranty reserves. Defending a lawsuit,
regardless of its merit, could be costly and divert
managements attention and could cause our business to
suffer.
The insurers under our existing liability insurance policy could
deny coverage of a future claim for actual or alleged losses to
our customers businesses that results from an error or
defect in our technology or a resulting disruption in our
solution, or our existing liability insurance might not be
adequate to cover all of the damages and other costs of such a
claim. Moreover, we cannot be assured that our current liability
insurance coverage will continue to be available to us on
acceptable terms or at all. The successful assertion against us
of one or more large claims that exceeds our insurance coverage,
or the occurrence of changes in our liability insurance policy,
including an increase in premiums or imposition of large
deductible or co-insurance requirements, could have an adverse
effect on our business, financial condition and operating
results. Even if we succeed in litigation with respect to a
claim, we are likely to incur substantial costs and our
managements attention will be diverted from our operations.
If we do not successfully maintain the SciQuest brand in our
existing vertical markets or successfully market the SciQuest
brand in new vertical markets, our revenues and earnings could
be materially adversely affected.
We believe that developing, maintaining and enhancing the
SciQuest brand in a cost-effective manner is critical in
expanding our customer base. Some of our competitors have
well-established brands. Although we believe that the SciQuest
brand is well established in the higher education and life
sciences markets where we have a significant operating history,
our brand is less well known in the healthcare and state and
local government markets. Promotion of our brand will depend
largely on continuing our sales and marketing efforts and
providing
high-quality
products and services to our customers. We cannot be assured
that these efforts will be successful in marketing the SciQuest
brand, particularly beyond the higher education and life
sciences markets. If we are unable to successfully promote our
brand, or if we incur substantial expenses in attempting to do
so, our revenues and earnings could be materially and adversely
affected.
If we are unable to adapt our products and services to rapid
technological change, our revenues and profits could be
materially and adversely affected.
Rapid changes in technology, products and services, customer
requirements and operating standards occur frequently. These
changes could render our proprietary technology and systems
obsolete. Any technological
12
changes that reduce or eliminate the need for a solution that
connects purchasing organizations with their suppliers could
harm our business. We must continually improve the performance,
features and reliability of our products and services,
particularly in response to our competition.
Our success will depend, in part, on our ability to:
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enhance our existing products and services;
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develop new products, services and technologies that address the
increasingly sophisticated and varied needs of our target
markets; and
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respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
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We cannot be certain of our success in accomplishing the
foregoing. If we are unable, for technical, legal, financial or
other reasons, to adapt to changing market conditions or buyer
requirements, our market share, business and operating results
could be materially and adversely affected.
The market for on-demand strategic procurement and supplier
enablement solutions is at a relatively early stage of
development. If the market for our solution develops more slowly
than we expect, our revenues may decline or fail to grow and we
may incur operating losses.
We derive, and expect in the near-term to continue to derive,
substantially all of our revenues from our
on-demand
strategic procurement and supplier enablement solution in the
higher education, life sciences, healthcare and state and local
government markets. Our current expectations with respect to
growth may not prove to be correct. The market for our solution
is at a relatively early stage of development, making our
business and future prospects difficult to evaluate. In
particular, we have only recently entered the healthcare and
state and local government markets, and our penetration of these
vertical markets is at a substantially lower level than our
penetration of the higher education and life sciences vertical
markets.
Should our prospective customers fail to recognize, or our
current customers lose confidence in, the value or effectiveness
of our solution, the demand for our products and services will
likely decline. Any significant price compression in our
vertical markets as a result of newly introduced solutions or
consolidation among our competitors could have a material
adverse effect on our business. A number of factors could affect
our customers assessment of the value or effectiveness of
our solution, including the following:
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their comfort with current purchasing and asset management
procedures;
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the costs and resources required to adopt new business
procedures;
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reductions in capital expenditures or technology spending
budgets;
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the price, performance and availability of competing solutions;
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security and privacy concerns; or
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general reticence about technology or the Internet.
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Our customers are concentrated in our targeted vertical
markets, which could make us vulnerable to adverse trends or
events affecting those markets. The occurrence of any such
adverse trends or events in our vertical markets could adversely
affect our business.
We are also subject to certain risks because of our
concentration of customers in the higher education and life
sciences markets. For example, approximately 64% of our
customers and approximately 56% of our 2009 revenues came from
the higher education market. Many of our customers and potential
customers in the higher education market have been facing
significant budgetary constraints that have limited spending on
technology solutions. Continued spending constraints in the
higher education market may result in slower growth, or
reductions, in our revenues and profits in the future. In
addition, the number of potential customers in the higher
education market is relatively finite, which could limit our
growth prospects. Moreover, our brand is less well known among
mid-sized higher education institutions, and unless we are
successful in promoting and marketing our brand in this market
segment, our sales within the higher education market may not
increase. Furthermore, many of our sales opportunities are
generated by referrals from existing customers in the higher
education market. We believe that institutions in this market
are collaborative in nature, and therefore, our failure to
provide
13
a beneficial solution to our existing customers could adversely
impact our reputation in the higher education market and our
ability to generate new referral customers. With respect to the
life sciences market, approximately 23% of our customers and
approximately 31% of our 2009 revenues came from the life
sciences market. The life sciences industry has been
experiencing a period of consolidation, during which many of the
large domestic and international pharmaceutical companies have
been acquiring mid-sized pharmaceutical companies. The potential
consolidation of our life sciences customers may diminish our
negotiating leverage and exert downward pressure on our prices
or cause us to lose the business of valuable customers who are
consolidated with other pharmaceutical companies that are not
our customers. If the circumstances described above result in
decreased revenues or profitability from our existing customers
in the higher education and life sciences markets or reduce our
ability to generate new customers in these markets, this would
have a material and adverse effect on our overall revenues and
profits.
In addition, we face certain risks related to the state and
local government and healthcare markets which we have recently
entered. Approximately 2% of our customers and approximately 4%
of our 2009 revenues came from the state and local government
market and approximately 11% of our customers and approximately
9% of our 2009 revenues came from the healthcare market. We plan
to continue to invest in sales and marketing efforts in these
markets, which we believe are important to our future revenue
growth. However, we cannot provide assurances that these efforts
will be successful. If we are not successful in selling our
solution in these markets, or if we incur substantial expenses
in attempting to do so, our ability to increase our revenues and
earnings could be materially and adversely affected.
Furthermore, with respect to the healthcare market, healthcare
costs have risen significantly over the past decade and numerous
initiatives and reforms initiated by legislators, regulators and
third-party payors to curb these costs have resulted in a
consolidation trend in the healthcare industry, including
hospitals. This has resulted in greater pricing and other
competitive pressures and the exclusion of certain suppliers
from important market segments. We expect that market demand,
government regulation, third-party reimbursement policies and
societal pressures will continue to change the national and
worldwide healthcare industry, resulting in further business
consolidations and alliances among customers and competitors.
Healthcare reform legislation may exacerbate these potential
challenges and impact our relationship with our healthcare
customers in unanticipated ways. To the extent that our sales
are concentrated in these markets, consolidation may reduce
competition, exert downward pressure on the prices of our
products and adversely impact our business, financial condition
or results of operations.
We have been, and may continue to be, subject to claims that
we or our technologies infringe upon the intellectual property
or other proprietary rights of a third party. Any such claims
may require us to incur significant costs, to enter into royalty
or licensing agreements or to develop or license substitute
technology, which may harm our business.
The on-demand strategic procurement and supplier enablement
market is characterized by the existence of a large number of
patents, copyrights, trademarks and trade secrets and by
litigation based on allegations of infringement or other
violations of intellectual property rights. As we seek to extend
our solution, we could be constrained by the intellectual
property rights of others. We have been, and may in the future
be, subject to claims that our technologies infringe upon the
intellectual property or other proprietary rights of a third
party. While we believe that our products do not infringe upon
the proprietary rights of third parties, we cannot guarantee
that third parties will not assert infringement claims against
us in the future, particularly with respect to technology that
we acquire through acquisitions of other companies.
In February 2010, we received a letter from a company offering
us a license to certain of its patent rights. We have reviewed
the offer and do not believe that a license is required or that
our products infringe that companys patent rights. We
cannot guarantee that this company will not assert a patent
infringement claim against us in the future or that we would
prevail should a patent infringement claim be asserted.
We might not prevail in any intellectual property infringement
litigation, given the complex technical issues and inherent
uncertainties in such litigation. Defending such claims,
regardless of their merit, could be time-consuming and
distracting to management, result in costly litigation or
settlement, cause development delays, or require us to enter
into royalty or licensing agreements. We generally provide in
our customer agreements that
14
we will indemnify our customers against third-party infringement
claims relating to our technology provided to the customer,
which could obligate us to fund significant additional amounts.
If our products are found to have violated any third-party
proprietary rights, we could be required to withdraw those
products from the market,
re-develop
those products or seek to obtain licenses from third parties,
which might not be available on reasonable terms or at all. Any
efforts to re-develop our products, obtain licenses from third
parties on favorable terms or license a substitute technology
might not be successful and, in any case, might substantially
increase our costs and harm our business, financial condition
and operating results. Withdrawal of any of our products from
the market could have a material adverse effect on our business,
financial condition and operating results.
We are subject to a lengthy sales cycle and delays or
failures to complete sales may harm our business and result in
slower growth.
Our sales cycle may take several months to over a year.
Furthermore, we expect to experience relatively longer sales
cycles as we expand into the healthcare and state and local
government markets. During this sales cycle, we may expend
substantial resources with no assurance that a sale will
ultimately result. The length of a customers sales cycle
depends on a number of factors, many of which we may not be able
to control, including the following:
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potential customers internal approval processes;
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budgetary constraints for technology spending;
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customers concerns about implementing new procurement
methods and strategies; and
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seasonal and other timing effects.
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Any lengthening of the sales cycle could delay our revenue
recognition and cash generation and could cause us to expend
more resources than anticipated. If we are unsuccessful in
closing sales or if we experience delays, it could have a
material adverse effect on our operating results.
Our cash flows, quarterly revenues and operating results have
fluctuated in the past and may fluctuate in the future due to a
number of factors. As a result, we may fail to meet or exceed
the expectations of securities analysts or investors, which
could cause our stock price to decline.
Our cash flows, quarterly revenues and operating results have
varied in the past and may fluctuate in the future. As a result,
you should not rely on the results of any one quarter as an
indication of future performance and
period-to-period
comparisons of our revenues and operating results may not be
meaningful.
Fluctuations in our quarterly results of operations may be due
to a number of factors including, but not limited to, those
listed below and others identified throughout this Risk
Factors section:
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concentrated sales to large customers;
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our ability to retain and increase sales to existing customers
and to attract new customers;
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the timing and success of new product and module introductions
or upgrades by us or our competitors;
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changes in our pricing policies or those of our competitors;
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renewal rates of existing customers;
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potential consolidation among our customers within the life
sciences market;
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potential foreign currency exchange gains and losses associated
with expenses and sales denominated in currencies other than the
U.S. dollar;
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the amount and timing of expenditures related to development,
adaptation or acquisition of technologies, products or
businesses;
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competition, including entry into the industry by new
competitors and new offerings by existing competitors; and
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general economic, industry and market conditions that impact
expenditures for technology solutions in our target markets.
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Such fluctuations might lead analysts to change their models for
valuing our common stock. As a result, our stock price could
decline rapidly and we could face costly securities class action
suits or other unanticipated issues.
15
Our future profitability and cash flows are dependent upon
our ability to control expenses.
Our operating plan to maintain profitability is based upon
estimates of our future expenses. For instance, we expect our
operating expenses to increase in 2010 as compared to 2009 in
order to support anticipated revenue growth. Furthermore, as a
public company upon completion of this offering, we will incur
significant legal, accounting and other expenses that we have
not incurred as a private company. If our future expenses are
greater than anticipated, our ability to maintain profitability
may be negatively impacted. Greater than anticipated expenses
may negatively impact our cash flows, which could cause us to
expend our capital faster than anticipated. Also, a large
percentage of our expenses are relatively fixed, which may make
it difficult to reduce expenses significantly in the future.
Our future revenue growth could be impaired if our investment
in direct and indirect sales channels for our products is
unsuccessful.
We have invested significant time and resources in developing
our direct sales force and our indirect sales channels. Sales
through our direct sales force represent the primary source of
our revenues. We supplement our direct sales force with indirect
sales channels for our products through relationships with
suppliers, enterprise resource planning, or ERP, providers,
technology providers and purchasing consultants and consortia.
We cannot be assured that our direct or indirect sales channels
will be successful or that we will be able to develop additional
indirect sales channels to support our direct sales channel. If
our direct sales efforts, and to a lesser extent our indirect
sales efforts, are not effective, our ability to achieve revenue
growth may be impaired. As we develop additional indirect sales
channels, we may experience conflicts with our direct sales
force to the extent that these sales channels target the same
customer bases. Successful management of these potential
conflicts will be necessary in order to maximize our revenue
growth.
If we are unable to facilitate the use of our implementation
services by our customers in an optimal manner, the
effectiveness of our customers use of our solution would
be negatively impacted, resulting in harm to our reputation,
business and financial performance.
The use of our solution typically includes implementation
services to facilitate the optimal use of our solution. For
example, in delivering our services, we typically work closely
with customer personnel to improve the customers
procurement process, enable the customers suppliers on the
SciQuest Supplier Network, assist suppliers in loading product
catalogs and support organizational activities to assist our
customers transition to our strategic procurement and
supplier enablement solution. These activities require
substantial involvement and cooperation from both our customers
and their suppliers. If we do not receive sufficient support
from either the customer or its suppliers, then the optimal use
of our services by the customer may be adversely impacted,
resulting in lower customer satisfaction and negatively
affecting our business, reputation and financial performance.
If we are not able to successfully create internal
efficiencies for our customers and their suppliers, our
operating costs and relationships with our customers and their
suppliers will be adversely affected.
A key component of our products and services is the efficiencies
created for our customers and their suppliers. In order to
create these efficiencies, it is typically necessary for our
solution to work together with our customers internal
systems such as inventory, customer service, technical service,
ERP systems and financial systems. If these systems do not
create the anticipated efficiencies, relationships with our
customers will be adversely affected, which could have a
material adverse affect on our financial condition and results
of operations.
We expect to develop and acquire new product and service
offerings with no guarantee of success.
Expanding our product and service offerings is an important
component of our business strategy. Any new offerings that are
not favorably received by prospective customers could damage our
reputation or brand name. Expansion of our services will require
us to devote a significant amount of time and money and may
strain our management, financial and operating resources. We
cannot be assured that our development or acquisition efforts
will result in commercially viable products or services. In
addition, we may bear development and
16
acquisition costs in current periods that do not generate
revenues until future periods, if at all. To the extent that we
incur expenses that do not result in increased current or future
revenues, our earnings may be materially and adversely affected.
Our failure to raise additional capital or generate cash
flows necessary to expand our operations and invest in new
technologies could reduce our ability to compete successfully
and adversely affect our results of operations.
We have funded our business through our cash flows from
operations since the going private transaction in 2004. We may
need to raise additional funds to achieve our future strategic
objectives, and we may not be able to obtain additional debt or
equity financing on favorable terms, if at all. If we raise
additional equity financing, our security holders may experience
significant dilution of their ownership interests and the value
of shares of our common stock could decline. If we engage in
debt financing, we may be required to accept terms that restrict
our ability to incur additional indebtedness, force us to
maintain specified liquidity or other ratios or restrict our
ability to pay dividends or make acquisitions. If we need
additional capital and cannot raise it on acceptable terms, we
may not be able to, among other things:
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develop and enhance our solution;
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continue to expand our technology development, sales
and/or
marketing organizations;
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hire, train and retain employees; or
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respond to competitive pressures or unanticipated working
capital requirements.
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Our inability to do any of the foregoing could reduce our
ability to compete successfully and adversely affect our results
of operations.
Product development delays could damage our reputation and
sales efforts.
Developing new products and updated versions of our existing
products for release at regular intervals is important to our
business efforts. At times, we may experience delays in our
development process that result in new releases being delayed or
lacking expected features or functionality. New product or
version releases that are delayed or do not meet expectations
may result in customer dissatisfaction, which in turn could
damage significantly our reputation and sales efforts. Such
damage to our reputation and sales efforts could negatively
impact our operating results.
The market for on-demand strategic procurement and supplier
enablement solutions is highly competitive, which makes
achieving market share and profitability more difficult.
The market for on-demand strategic procurement and supplier
enablement solutions is rapidly evolving and intensely
competitive. We experience competition from multiple sources,
which makes it difficult for us to develop a comprehensive
business strategy that addresses all of these competitive
factors. We face competition from other on-demand strategic
procurement and supplier enablement solution providers, large
enterprise application providers, smaller market-specific
vendors and internally developed and maintained solutions.
Competition is likely to intensify as this market matures.
As competitive conditions intensify, competitors may:
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devote greater resources to marketing and promotional campaigns;
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devote substantially more resources to product development;
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secure exclusive arrangements with indirect sales channels that
impede our sales;
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develop more extensive client bases and broader client
relationships than we have; and
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enter into strategic or commercial relationships with larger,
more established and well-financed companies.
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In addition, some of our competitors may have longer operating
histories and greater name recognition than we have. New
technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased
competition, we may experience reduced operating margins, as
well as loss of market share and brand recognition. We may not
be able to compete successfully against current and future
competitors.
17
These competitive pressures could have a material adverse effect
on our revenue growth and results of operations.
Mergers or other strategic transactions involving our
competitors could weaken our competitive position, limit our
growth prospects or reduce our revenues.
We believe that our industry is highly fragmented and that there
is likely to be consolidation, which could lead to increased
price competition and other forms of competition. Increased
competition may cause pricing pressure and loss of market share,
either of which could have a material adverse effect on our
business, limit our growth prospects or reduce our revenues. Our
competitors may establish or strengthen cooperative
relationships with strategic partners or other parties.
Established companies may not only develop their own products
but may also merge with or acquire our current competitors. It
is also possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share. Any of these circumstances could materially and adversely
affect our business and operating results.
Interruptions or delays from third-party data centers could
impair the delivery of our solution, which could cause our
business to suffer.
We use two third-party data centers, our primary operating
center located in Raleigh, North Carolina and a fully redundant
disaster recovery platform located in Scottsdale, Arizona, to
conduct our operations. Our solution resides on hardware that we
own and operate in these locations. Our operations depend on the
protection of the equipment and information we store in these
third-party data centers against damage or service interruptions
that may be caused by fire, flood, severe storm, power loss,
telecommunications failures, unauthorized intrusion, computer
viruses and disabling devices, natural disasters, war, criminal
acts, military action, terrorist attacks and other similar
events beyond our control. A prolonged service disruption
affecting our solution for any of the foregoing reasons could
damage our reputation with current and potential customers,
expose us to liability and cause us to lose recurring revenue
customers or otherwise adversely affect our business. We may
also incur significant costs for using alternative equipment or
taking other actions in preparation for, or in reaction to,
events that damage the data centers we use.
Our on-demand strategic procurement and supplier enablement
solution is accessed by a large number of customers at the same
time. As we continue to expand the number of our customers and
products and services available to our customers, we may not be
able to scale our technology to accommodate the increased
capacity requirements, which may result in interruptions or
delays in service. In addition, the failure of our third-party
data centers to meet our capacity requirements could result in
interruptions or delays in our solution or impede our ability to
scale our operations. In the event that our data center
arrangements are terminated, or there is a lapse of service or
damage to such facilities, we could experience interruptions in
our solution as well as delays and additional expenses in
arranging new facilities and services.
If we are unable to protect our intellectual property rights,
our business could be materially and adversely affected.
Any misappropriation of our technology or the development of
competing technology could seriously harm our business. We
regard a substantial portion of our software products as
proprietary and rely on a combination of patent, copyright,
trademark, trade secrets, customer license agreements and
employee and third-party confidentiality agreements to protect
our intellectual property rights. These protections may not be
adequate, and we cannot be assured that they will prevent
misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect proprietary
rights as fully as do the laws of the U.S. Other companies could
independently develop similar or competing technology without
violating our proprietary rights. The process of enforcing our
intellectual property rights through legal proceedings would
likely be burdensome and expensive, and our ultimate success
cannot be assured. Our failure to protect adequately our
intellectual property and proprietary rights could adversely
affect our business, financial condition and results of
operations.
18
We utilize proprietary technology licensed from third
parties, the loss of which could be costly.
We license a portion of the proprietary technology for our
products and services from third parties. These
third-party
licenses may not be available to us on favorable terms, or at
all, in the future. In addition, we must be able to integrate
successfully this proprietary technology in a timely and
cost-effective manner to create an effective finished product.
If we fail to obtain the necessary third-party licenses on
favorable terms or are unable to integrate successfully this
proprietary technology on favorable terms, it could have a
material adverse effect on our business operations.
Our SciQuest Supplier Network incorporates content from
suppliers that is critical to the effectiveness of our
products.
A critical component of our solution is the SciQuest Supplier
Network, which is the single integration point between our
customers and all of their suppliers that provides customers
with on-demand access to comprehensive and
up-to-date
multi-commodity supplier catalogs. These catalogs and other
content are provided to us by each supplier for integration into
our platform, which requires a high degree of involvement and
cooperation from the suppliers. We must be able to integrate
successfully this content in a timely manner in order for our
customers to realize the full benefit of our solution. Also, any
errors or omissions in the content provided by the suppliers may
reflect poorly on our solution. If we are unable to successfully
incorporate supplier content into our platform or if such
content contains errors or omissions, then our products may not
meet customer needs or expectations, and our business and
reputation may be materially and adversely affected.
A failure to protect the integrity and security of our
customers information could expose us to litigation,
materially damage our reputation and harm our business, and the
costs of preventing such a failure could adversely affect our
results of operations.
Our business involves the collection and use of confidential
information of our customers and their trading partners. We
cannot be assured that our efforts to protect this confidential
information will be successful. If any compromise of this
information security were to occur, we could be subject to legal
claims and government action, experience an adverse effect on
our reputation and need to incur significant additional costs to
protect against similar information security breaches in the
future, each of which could adversely affect our financial
condition, results of operations and growth prospects. In
addition, because of the critical nature of data security, any
perceived breach of our security measures could cause existing
or potential customers not to use our solution and could harm
our reputation.
Our use of open source software could negatively
affect our ability to sell our solution and subject us to
possible litigation.
A portion of the technologies licensed by us incorporate
so-called open source software, and we may
incorporate open source software in the future. Such open source
software is generally licensed by its authors or other third
parties under open source licenses. If we fail to comply with
these licenses, we may be subject to certain conditions,
including requirements that we offer the portion of our solution
that incorporates the open source software for no cost, that we
make available source code for modifications or derivative works
we create based upon, incorporating or using the open source
software
and/or that
we license such modifications or derivative works under the
terms of the particular open source license. If an author or
other third party that distributes such open source software
were to allege that we had not complied with the conditions of
one or more of these licenses, we could incur significant legal
expenses defending against such allegations and could be subject
to significant damages, enjoined from the sale of our solution
that contained the open source software and required to comply
with the foregoing conditions, which could disrupt the
distribution and sale of our solution.
Further, the terms of many open source licenses to which we are
subject have not been interpreted by U.S. or foreign
courts, and although we believe we comply with the terms of
those licenses, there is a risk that those licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our solution. In
that event, we could be required to (i) seek licenses from third
parties,
19
(ii) re-develop
our solution, (iii) discontinue sales of our solution, or
(iv) release our proprietary software code under the terms of an
open source license, any of which could adversely affect our
business.
If we fail to attract and retain key personnel, our business
may suffer.
Given the complex nature of the technology on which our business
is based and the speed with which such technology advances, our
future success is dependent, in large part, upon our ability to
attract and retain highly qualified managerial, technical and
sales personnel. In particular, Stephen Wiehe, our President and
Chief Executive Officer, Rudy Howard, our Chief Financial
Officer, James Duke, our Chief Operating Officer, Jeffrey
Martini, our Senior Vice President of Worldwide Sales, Jennifer
Kaelin, our Vice President of Finance and Gamble Heffernan, our
Vice President of Marketing and Strategy, are critical to the
management of our business and operations. A key factor of our
success will be the continued services and performance of our
executive officers and other key personnel. If we lose the
services of any of our executive officers, our financial
condition and results of operations could be materially and
adversely affected. Our success also depends upon our ability to
identify, hire and retain other highly skilled technical,
managerial, editorial, sales, marketing and customer service
professionals. Competition for such personnel is intense. We
cannot be certain of our ability to identify, hire and retain
adequately qualified personnel. Failure to identify, hire and
retain necessary key personnel could have a material adverse
effect on our business and results of operations.
Our growth could strain our personnel resources and
infrastructure, and if we are unable to implement appropriate
controls and procedures to manage our growth, we will not be
able to implement our business plan successfully.
We have experienced a period of growth in our operations and
personnel, which places a significant strain on our management,
administrative, operational and financial infrastructure. Our
success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. If
our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees,
or if we are not successful in retaining our existing employees,
our business would be harmed. To manage the expected growth of
our operations and personnel, we will need to continue to
improve our operational, financial and management controls and
our reporting systems and procedures. The additional headcount
we may add will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by
reducing expenses in the short term. If we fail to successfully
manage our growth, we will be unable to execute our business
plan.
The failure to integrate successfully businesses that we may
acquire could adversely affect our business.
An element of our strategy is to broaden the scope and content
of our products and services through the acquisition of existing
products, technologies, services and businesses. Acquisitions
entail numerous risks, including:
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the integration of new operations, products, services and
personnel;
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the diversion of resources from our existing businesses, sites
and technologies;
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the inability to generate revenues from new products and
services sufficient to offset associated acquisition costs;
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the maintenance of uniform standards, controls, procedures and
policies;
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accounting effects that may adversely affect our financial
results;
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the impairment of employee and customer relations as a result of
any integration of new management personnel;
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dilution to existing stockholders from the issuance of equity
securities; and
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liabilities or other problems associated with an acquired
business.
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We may have difficulty in effectively assimilating and
integrating these businesses, or any future joint ventures,
acquisitions or alliances, into our operations, and such
integration may require a significant amount of time and effort
by our management team. To the extent we do not successfully
avoid or overcome the risks or problems related to any
acquisitions, our business, results of operations and financial
condition could be adversely
20
affected. Future acquisitions also could impact our financial
position and capital needs and could cause substantial
fluctuations in our quarterly and yearly results of operations.
Acquisitions could include significant goodwill and intangible
assets, which may result in future impairment charges that would
reduce our stated earnings.
Our international sales efforts will require financial
resources and management attention and could have a negative
effect on our earnings.
We are investing resources and capital to expand our sales
internationally. This will require financial resources and
management attention and may subject us to new or increased
levels of regulatory, economic, tax and political risks, all of
which could have a negative effect on our earnings. We cannot be
assured that we will be successful in creating international
demand for our products and services. In addition, our
international business may be subject to a variety of risks,
including, among other things, increased costs associated with
maintaining international marketing efforts, applicable
government regulation, conflicting and changing tax laws,
economic and political conditions and potential instability in
various parts of the world, fluctuations in foreign currency,
increased financial accounting and reporting burdens and
complexities, difficulties in collecting international accounts
receivable and the enforcement of intellectual property rights.
If we continue to expand our business globally, our success will
depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our
international operations. Our failure to manage any of these
risks successfully could adversely affect our operating results
as a result of increased operating costs.
Our actual operating results may differ significantly from
our guidance.
From time to time, we may release guidance in our quarterly
earnings releases, quarterly earnings conference call, or
otherwise, regarding our future performance that represents our
managements estimates as of the date of release. This
guidance, which includes forward-looking statements, will be
based on projections prepared by our management.
Neither our independent registered public accounting firm nor
any other independent expert or outside party compiles or
examines the projections. Accordingly, no such person expresses
any opinion or any other form of assurance with respect thereto.
Projections are based upon a number of assumptions and estimates
that, while presented with numerical specificity, are inherently
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our
control. These projections are also based upon specific
assumptions with respect to future business decisions, some of
which will change. We may state possible outcomes as high and
low ranges, which are intended to provide a sensitivity analysis
as variables are changed but are not intended to represent that
actual results could not fall outside of the suggested ranges.
The principal reason that we release guidance is to provide a
basis for our management to discuss our business outlook with
analysts and investors. We do not accept any responsibility for
any projections or reports published by analysts.
Guidance is necessarily speculative in nature, and it can be
expected that some or all of the assumptions underlying the
guidance furnished by us will not materialize or will vary
significantly from actual results. Accordingly, our guidance is
only an estimate of what management believes is realizable as of
the date of release. Actual results will vary from our guidance,
and the variations may be material. In light of the foregoing,
investors are urged not to rely upon, or otherwise consider, our
guidance in making an investment decision regarding our common
stock.
Any failure to implement our operating strategy successfully or
the occurrence of any of the events or circumstances set forth
under Risk Factors in this prospectus could result
in our actual operating results being different from our
guidance, and those differences may be adverse and material.
21
If we fail to maintain proper and effective internal
controls, our ability to produce accurate and timely financial
statements could be impaired, which could harm our operating
results, our ability to operate our business and investor views
of us.
Ensuring that we have adequate internal financial and accounting
controls and procedures in place so that we can produce accurate
financial statements on a timely basis is a costly and
time-consuming effort that needs to be re-evaluated frequently.
Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements in accordance with generally accepted
accounting principles. In 2010, our independent registered
public accounting firm identified a material weakness in our
internal controls, related to the failure to properly consider
all subsequent event information available related to the
recognition of deferred tax assets. The material weakness was
subsequently remedied by the design and implementation of
procedures to review and analyze subsequent event information.
We cannot assure you that we will not experience future material
weaknesses in internal controls. We are in the process of
documenting, reviewing and improving our internal controls and
procedures for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which
requires annual management assessment of the effectiveness of
our internal control over financial reporting and a report by
our independent auditors addressing this assessment. To the
extent that we are not currently in compliance with
Section 404, we may be required to implement new internal
control procedures and re-evaluate our financial reporting. We
may experience higher than anticipated operating expenses as
well as increased independent auditor fees during the
implementation of these changes and thereafter. Further, we may
need to hire additional qualified personnel in order for us to
comply with Section 404. If we fail to maintain proper and
effective internal controls, our ability to produce accurate and
timely financial statements could be impaired, which could harm
our operating results, harm our ability to operate our business
and reduce the trading price of our stock.
Changes in financial accounting standards or practices may
cause adverse, unexpected financial reporting fluctuations and
affect our reported results of operations.
A change in accounting standards or practices can have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change is
effective. New accounting pronouncements and varying
interpretations of accounting pronouncements have occurred and
may occur in the future. Changes to existing rules or the
questioning of current practices may adversely affect our
reported financial results or the way in which we conduct our
business.
Our costs and demands upon management may continue to
increase as a result of complying with the laws and regulations
affecting public companies, which could harm our operating
results.
We expect to incur significant legal, accounting, investor
relations and other expenses as a public company that we have
not incurred as a private company, including costs associated
with public company reporting requirements. We also have
incurred and will incur costs associated with current corporate
governance requirements, including requirements under
Section 404 and other provisions of the Sarbanes-Oxley Act,
as well as rules implemented by the Securities and Exchange
Commission, or SEC, and the NASDAQ Listing Rules. The expenses
incurred by public companies for reporting and corporate
governance purposes have increased dramatically over the past
several years. These rules and regulations have increased our
legal and financial compliance costs substantially and have made
some activities more time-consuming and costly. We are unable
currently to estimate these future costs with any degree of
certainty.
Our business and financial performance could be negatively
impacted by changes in tax laws or regulations.
New sales, use or other tax laws, statutes, rules, regulations
or ordinances could be enacted at any time. Those enactments
could adversely affect our domestic and international business
operations, and our business and financial performance. Further,
existing tax laws, statutes, rules, regulations or ordinances
could be interpreted, changed, modified or applied adversely to
us. These events could require us or our customers to pay
additional tax amounts on a prospective or retroactive basis, as
well as require us or our customers to pay fines
and/or
penalties and interest for past amounts deemed to be due. If we
raise our product and maintenance prices to
22
offset the costs of these changes, existing customers may elect
not to renew their agreements and potential customers may elect
not to purchase our services. Additionally, new, modified or
newly interpreted or applied tax laws could increase our
customers and our compliance, operating and other costs,
as well as the costs of our services. Further, these events
could decrease the capital we have available to operate our
business. Any or all of these events could adversely impact our
business and financial performance.
Government regulation of the Internet and
e-commerce
is evolving, and unfavorable changes or our failure to comply
with regulations could harm our operating results.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign agencies becomes more likely. For
example, we believe increased regulation is likely in the area
of data privacy, and laws and regulations applying to the
solicitation, collection, processing or use of personal or
consumer information could affect our customers ability to
use and share data, potentially reducing demand for our
products. In addition, taxation of products and services
provided over the Internet or other charges imposed by
government agencies or by private organizations for accessing
the Internet may also be imposed. Any regulation imposing
greater fees for Internet use or restricting information
exchange over the Internet could result in a decline in the use
of the Internet and the viability of Internet-based services and
product offerings, which could harm our business and operating
results.
Our ability to use U.S. net operating loss carryforwards
might be limited.
As of June 30, 2010, we had net operating loss
carryforwards of approximately $192 million for
U.S. federal tax purposes, the use of which may be
substantially limited. These loss carryforwards will begin to
expire in 2014. To the extent these net operating loss
carryforwards are available, we intend to use them to reduce the
corporate income tax liability associated with our operations.
Section 382 of the U.S. Internal Revenue Code
generally imposes an annual limitation on the amount of net
operating loss carryforwards that might be used to offset
taxable income when a corporation has undergone significant
changes in stock ownership. As a result, prior or future changes
in ownership could put limitations on the availability of our
net operating loss carryforwards. In addition, our ability to
utilize the current net operating loss carryforwards might be
further limited by the issuance of common stock in this
offering. To the extent our use of net operating loss
carryforwards is significantly limited, our income could be
subject to corporate income tax earlier than it would if we were
able to use net operating loss carryforwards, which could result
in lower profits.
Risks Related to this Offering and Ownership of Our Common
Stock
Our common stock could trade at prices below the initial
public offering price.
There has not been a public trading market for shares of our
common stock since August 2004. An active trading market may not
develop or be sustained after this offering. If an active
trading market does not develop, investors may have difficulty
selling any of our common stock that they buy. The initial
public offering price for the shares of common stock sold in
this offering was determined by negotiations between
representatives of the underwriters and us. This price may not
be indicative of the price at which our common stock will trade
after this offering, and our common stock could easily trade
below the initial public offering price.
Our stock price may be volatile, and investors may be unable
to sell their shares at or above the initial public offering
price.
The market price of our common stock has been and could be
subject to wide fluctuations in response to, among other things,
the factors described in this Risk Factors section
or elsewhere in this prospectus, and other factors beyond our
control, including the following:
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variations in our quarterly operating results;
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decreases in market valuations of similar companies;
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the failure of securities analysts to cover our common stock
after this offering or changes in financial estimates by
analysts who cover us, our competitors or our industry;
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23
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failure by us or our competitors to meet analysts
projections or guidance that we or our competitors may give to
the market; and
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fluctuations in stock market prices and volumes.
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Furthermore, the stock markets have experienced price and volume
fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These
fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. These broad market
fluctuations, as well as general economic, political and market
conditions, such as recessions, interest rate changes and
international currency fluctuations, may negatively affect the
market price of our common stock.
In the past, many companies that have experienced volatility in
the market price of their stock have become subject to
securities class action litigation. We may be the target of this
type of litigation in the future. Securities litigation against
us could result in substantial costs and divert our
managements attention from other business concerns, which
could seriously harm our business. All of these factors could
cause the market price of our stock to decline, and you may lose
some or all of your investment.
The continued concentration of our capital stock ownership
with insiders upon completion of this offering will limit your
ability to influence corporate matters.
We anticipate that our directors, executive officers and holders
of more than 5% of our common stock, together with their
affiliates, will beneficially own, in the aggregate,
approximately % of our common stock
after this offering. These stockholders may have interests that
differ from yours, and they may vote in a way with which you
disagree and that may be adverse to your interests. This
concentration of share ownership may adversely affect the
trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with
controlling stockholders. Also, these stockholders, acting
together, will be able to control the outcome of matters
submitted to our stockholders for approval, including the
election of directors and the approval of significant corporate
transactions, such as mergers, consolidations or the sale of
substantially all of our assets. In addition, these
stockholders, acting together, would have the ability to control
the management and affairs of our company. Accordingly, this
concentration of ownership might harm the market price of our
common stock by:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business
combination involving us; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
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Our stock price could decline due to the large number of
outstanding shares of our common stock eligible for future
sale.
Sales of substantial amounts of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. These sales could also make it more difficult
for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Upon completion of this offering, we will
have
outstanding shares of common stock, assuming no exercise of the
underwriters option to purchase additional shares and no
exercise of outstanding options after June 30, 2010. The
shares sold in this offering will be immediately tradable
without restriction. Of the remaining shares:
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no shares will be eligible for sale immediately upon the
completion of this offering; and
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shares
will be eligible for sale upon the expiration of
lock-up
agreements, subject in some cases to volume and other
restrictions of Rule 144 and Rule 701 under the
Securities Act of 1933, as amended, or the Securities Act.
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The lock-up
agreements expire 180 days after the date of this
prospectus, except that the
180-day
period may be extended under certain circumstances where we
announce or pre-announce earnings or a material event occurs
within approximately 17 days prior to, or approximately
15 days after, the termination of the
180-day
24
period. The representatives of the underwriters may, in their
sole discretion and at any time without notice, release all or
any portion of the securities subject to
lock-up
agreements.
Following this offering, holders of substantially all of the
shares of our common stock not sold in this offering will be
entitled to rights with respect to the registration of these
shares under the Securities Act. See Description of
Capital Stock Registration Rights. If we
register their shares of common stock following the expiration
of the
lock-up
agreements, these stockholders could sell those shares in the
public market without being subject to the volume and other
restrictions of Rule 144 and Rule 701.
After the closing of this offering, we intend to register
approximately shares
of common stock that have been issued or reserved for future
issuance under our stock incentive plans. Of these
shares, shares
will be eligible for sale upon the exercise of vested options
after the expiration of the
lock-up
agreements.
Investors in this offering will experience immediate and
substantial dilution in the net tangible book value of the
common stock they purchase in this offering.
Investors in this offering will experience immediate dilution of
$ per share, because the price
that they pay will be substantially greater than the net
tangible book value per share of common stock that they acquire.
This dilution is due in large part to the fact that our earlier
investors paid substantially less than the price of the shares
being sold in this offering when they purchased their shares of
our capital stock. If outstanding options to purchase our common
stock are exercised, investors in this offering will experience
additional dilution.
We have broad discretion in the use of the proceeds of this
offering.
Approximately $36.2 million of the net proceeds to us from
this offering will be used to redeem all outstanding shares of
our preferred stock. The remainder of the net proceeds will be
used, as determined by management in its sole discretion, for
working capital and general corporate purposes. We have not,
however, determined the allocation of those remaining net
proceeds among such uses. Our management will have broad
discretion over the use and investment of these net proceeds,
and, accordingly, you will need to rely upon the judgment of our
management with respect to our use of these net proceeds, with
only limited information concerning managements specific
intentions. You will not have the opportunity, as part of your
investment decision, to assess whether our proceeds are being
used appropriately. We may place the net proceeds in investments
that do not produce income or that lose value, which may cause
our stock price to decline.
Our charter documents and Delaware law could prevent a
takeover that stockholders consider favorable and could also
reduce the market price of our stock.
Our amended and restated certificate of incorporation and our
amended and restated bylaws contain provisions that could delay
or discourage a change in control of our company. These
provisions could also make it more difficult for stockholders to
elect directors and take other corporate actions. These
provisions include:
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a classified board of directors with three-year staggered terms;
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not providing for cumulative voting in the election of directors;
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authorizing the board of directors to issue, without stockholder
approval, preferred stock with rights senior to those of our
common stock;
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prohibiting stockholder action by written consent; and
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requiring advance notification of stockholder nominations and
proposals.
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These and other provisions in our amended and restated
certificate of incorporation and our amended and restated bylaws
and under Delaware law could discourage potential takeover
attempts, reduce the price that investors might be willing to
pay in the future for shares of our common stock and result in
the market price of our common stock being lower than it would
be without these provisions. See Description of Capital
Stock Preferred Stock, Description of
Capital Stock Anti-Takeover Effects of Our Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws, and Description of Capital
Stock Delaware Anti-Takeover Statute.
25
Our rights and the rights of our stockholders to take action
against our directors and officers are limited, which could
limit your recourse in the event of actions not in your best
interests.
Our amended and restated certificate of incorporation provides
that we will indemnify and advance expenses to our directors,
officers, employees and other agents to the fullest extent
permitted by the Delaware General Corporation Law. Therefore, we
will be obligated to indemnify such persons if they acted in
good faith and in a manner they reasonably believed to be in, or
not opposed to, the best interests of the company and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful, except that, in the
case of an action by or in right of the company, no
indemnification may generally be made in respect of any claim as
to which such person is adjudged to be liable to the company.
Furthermore, our amended and restated certificate of
incorporation provides that our directors are not personally
liable for breaches of fiduciary duties to the fullest extent
permitted by the Delaware General Corporation Law. Therefore,
our directors shall not be personally liable to the company or
its stockholders for monetary damages for breach of fiduciary
duties as a director, except for liability for any:
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breach of a directors duty of loyalty to the corporation
or its stockholders;
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act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
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unlawful payment of dividends or redemption of shares; or
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transaction from which the director derives an improper personal
benefit.
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As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise
exist absent the current provisions in our amended and restated
certificate of incorporation or that might exist with other
companies.
If securities analysts do not continue to publish research or
reports about our business or if they publish negative
evaluations of our stock, the price of our stock could
decline.
We believe that the trading price for our common stock will be
affected by research or reports that industry or financial
analysts publish about us or our business. If one or more of the
analysts who may elect to cover us downgrade their evaluations
of our stock, the price of our stock could decline. If one or
more of these analysts cease coverage of our company, we could
lose visibility in the market for our stock, which in turn could
cause our stock price to decline.
We do not intend to pay dividends on our common stock in the
foreseeable future.
We do not anticipate paying any cash dividends on our common
stock in the foreseeable future. We currently anticipate that we
will retain all of our available cash, if any, for working
capital and other general corporate purposes. Any payment of
future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our
earnings, financial condition, capital requirements, debt
levels, statutory and contractual restrictions applying to the
payment of dividends and other considerations that our board of
directors deems relevant. Investors seeking cash dividends
should not purchase our common stock.
26
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This prospectus contains forward-looking statements that are
based on our managements beliefs and assumptions and on
information currently available to our management. The
forward-looking statements are contained principally in the
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Our
Business and Executive Compensation sections
of this prospectus. Forward-looking statements include
information concerning our possible or assumed future results of
operations, business strategies, financing plans, competitive
position, industry environment, potential growth opportunities,
potential market opportunities and the effects of competition.
Forward-looking statements include all statements that are not
historical facts and can be identified by terms such as
anticipates, believes,
could, seeks, estimates,
expects, intends, may,
plans, potential, predicts,
projects, should, will,
would or similar expressions and the negatives of
those terms.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by the forward-looking statements. We discuss these
risks in greater detail in the Risk Factors section
and elsewhere in this prospectus. Given these uncertainties, you
should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our
managements beliefs and assumptions only as of the date of
this prospectus. You should read this prospectus and the
documents that we have filed as exhibits to the registration
statement, of which this prospectus is a part, completely and
with the understanding that our actual future results may be
materially different from what we expect.
Except as required by law, we assume no obligation to update
these forward-looking statements publicly or to update the
reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new
information becomes available in the future.
In this prospectus, we also rely on and refer to information and
statistics regarding the industries and the markets in which we
compete. We obtained this information and these statistics from
various third-party sources. We believe that these sources and
the estimates contained therein are reliable, but we have not
independently verified them. Such information involves risks and
uncertainties and is subject to change based on various factors,
including those discussed in the Risk Factors
section of this prospectus.
27
USE OF
PROCEEDS
We estimate that the net proceeds from our sale of shares of
common stock in this offering will be approximately
$ million, or approximately
$ million if the underwriters
exercise their over-allotment option in full. This estimate is
based upon an assumed initial public offering price of
$ per share, the
mid-point of
our filing range, less estimated underwriting discounts and
commissions and offering expenses payable by us. We will not
receive any proceeds from the sale of shares of our common stock
by our selling stockholders. A $1.00 increase (decrease) in the
assumed initial public offering price of
$ per share would increase
(decrease) the net proceeds to us from this offering by
approximately $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and estimated
offering expenses payable by us.
We intend to use approximately $36.2 million of these net
proceeds to redeem all outstanding shares of our preferred
stock. We intend to use the remaining net proceeds for working
capital and general corporate purposes. We may also use a
portion of the proceeds to acquire complementary businesses,
products or technologies. We have no agreements or commitments
with respect to any acquisitions at this time. By establishing a
public market for our common stock, this offering is also
intended to facilitate our future access to public markets.
Pending the uses described above, we intend to invest the net
proceeds of this offering in short- to
medium-term,
investment-grade, interest-bearing securities, certificates of
deposit, or direct or guaranteed obligations of the
U.S. government.
The amount and timing of what we actually spend may vary
significantly and will depend on a number of factors, including
future cash generated from operations as well as other factors
described in the section titled Risk Factors.
28
DIVIDEND
POLICY
We have not historically declared or paid dividends on our
common stock, and we do not expect to declare or pay dividends
on our common stock for the foreseeable future. Instead, we
anticipate that all of our earnings will be used for the
operation and growth of our business. Any future determination
to pay dividends on our common stock would be subject to the
discretion of our board of directors and would depend upon
various factors, including our earnings, financial condition,
capital requirements, debt levels, statutory and contractual
restrictions applying to the payment of dividends and other
considerations that our board of directors deems relevant.
29
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2010:
|
|
|
on an actual basis; and
|
|
|
|
on a pro forma basis to reflect (i) our sale of shares in this
offering at an assumed initial public offering price of
$ per share, which is the
mid-point of our filing range, after deducting estimated
underwriting discounts and commissions and offering expenses
payable by us, and (ii) the redemption of all outstanding
preferred stock immediately after the consummation of this
offering, as if each had occurred as of June 30, 2010.
|
The information below is illustrative only and our
capitalization following the completion of this offering will be
adjusted based on the actual initial public offering price and
other terms of this offering determined at pricing. You should
read this table together with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our financial statements and the related
notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
Actual
|
|
|
Pro Forma(1)
|
|
|
|
(Unaudited; in thousands, except share and
|
|
|
|
per share data)
|
|
|
Cash and cash equivalents
|
|
$
|
20,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities excluding current portion of deferred
revenues
|
|
$
|
2,821
|
|
|
|
|
|
Deferred revenues
|
|
|
35,508
|
|
|
|
|
|
Deferred tax liability
|
|
|
813
|
|
|
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
Redeemable preferred stock: $0.001 par value;
500,000 shares authorized and 222,073 shares issued
and outstanding, actual; and 500,000 shares authorized and
0 shares issued and outstanding, pro forma
|
|
|
35,436
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value; 32,000,000 shares
authorized and 28,612,008 shares issued and outstanding,
actual;
and shares
authorized
and issued
and outstanding, pro forma
|
|
|
29
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Notes receivable from stockholders
|
|
|
(15
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(14,785
|
)
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(14,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
59,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) cash and cash equivalents, additional
paid-in
capital, total stockholders equity (deficit) and total
capitalization by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriter discount and estimated offering expenses
payable by us. |
The table and calculations above are based on the number of
shares of common stock outstanding as of June 30, 2010 and
exclude:
|
|
|
an aggregate of 1,423,362 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $1.16 per share;
|
|
|
|
an aggregate of 443,361 shares issuable upon the exercise
of then outstanding warrants at a weighted average exercise
price of $0.04 per share;
|
|
|
|
an aggregate of 644,073 shares reserved for issuance under
our 2004 Stock Incentive Plan, subject to increase on an annual
basis and subject to increase for shares subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares; and
|
|
|
|
the shares
of common stock subject to the underwriters over-allotment
option.
|
30
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock and the
adjusted net tangible book value per share of our common stock
immediately after completion of this offering. Net tangible book
value per share represents total tangible assets less total
liabilities and redeemable preferred stock, divided by the
number of shares of common stock outstanding. As of
June 30, 2010, the net tangible book value of our common
stock was approximately $(22.7) million, or approximately
$(0.79) per share.
After giving effect to our sale of shares at an assumed initial
public offering price of $ per
share, which is the mid-point of our filing range, deducting
estimated underwriting discounts and commissions and offering
expenses payable by us, and applying the net proceeds from this
sale (including the redemption of all of our outstanding shares
of preferred stock), the pro forma net tangible book value of
our common stock, as of December 31, 2009, would have been
approximately $ million, or
$ per share. This amount
represents an immediate increase in net tangible book value to
our existing stockholders of $ per
share and an immediate dilution to new investors of
$ per share. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Net tangible book value per share as of June 30, 2010
|
|
$
|
(0.79
|
)
|
|
|
|
|
Pro forma increase per share attributable to new investors
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
$
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, there will be an increase in pro forma net tangible book
value to existing stockholders of
$ per share and an immediate
dilution in pro forma net tangible book value to new investors
of $ per share based on the
assumed initial public offering price per share. A $1.00
increase or decrease in the assumed initial public offering
price per share would increase or decrease, respectively, the
pro forma net tangible book value per share of common stock
after this offering by $ per share
and increase or decrease, respectively, the pro forma dilution
per share of common stock to new investors in this offering by
$ per share, in each case
calculated as described above and assuming that the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same.
The following table summarizes, as of June 30, 2010, on a
pro forma basis, the number of shares of common stock purchased
from us, the total consideration paid to us and the average
price per share paid by our existing stockholders and by new
investors, based upon an assumed initial public offering price
of $ per share and before
deducting estimated underwriting discounts and commissions and
offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
100
|
%
|
|
$
|
|
|
The discussion and tables above are based on
28,612,008 shares of common stock outstanding as of
June 30, 2010 and exclude:
|
|
|
an aggregate of 1,423,362 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $1.16 per share;
|
|
|
|
an aggregate of 443,361 shares issuable upon the exercise
of then outstanding warrants at a weighted average exercise
price of $0.04 per share;
|
|
|
|
an aggregate of 644,073 shares reserved for issuance under
our 2004 Stock Incentive Plan, subject to increase on an annual
basis and subject to increase for shares subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares; and
|
|
|
|
the shares
of common stock subject to the underwriters over-allotment
option.
|
31
Sales by the selling stockholders in this offering will cause
the number of shares held by existing stockholders to be reduced
to shares
or % of the total number of shares
of our common stock outstanding after this offering. If the
underwriters overallotment option is exercised in full,
the number of shares held by the existing stockholders after
this offering would be reduced to %
of the total number of shares of our common stock outstanding
after this offering, and the number of shares held by new
investors would increase to % of
the total number of shares of our common stock outstanding after
this offering.
If all our outstanding options and warrants had been exercised,
our pro forma net tangible book value (deficit) as of
June 30, 2010 would have been
$ million, or
$ per share, and the pro forma as
adjusted net tangible book value after this offering would have
been $ million, or
$ per share, causing dilution to
new investors of $ per share.
32
SELECTED
FINANCIAL DATA
You should read the following selected financial data together
with our financial statements and the related notes appearing at
the end of this prospectus and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which follows immediately after this section.
Our historical results are not necessarily indicative of our
results to be expected in any future period.
The selected financial data under the heading Statements
of Operations Data for each of the three years ended
December 31, 2007, 2008 and 2009, under the heading
Non-GAAP Operating Data relating to Adjusted EBITDA
and Adjusted Free Cash Flow for each of the three years ended
December 31, 2007, 2008 and 2009 and under the heading
Balance Sheet Data as of December 31, 2008 and
2009 have been derived from our audited financial statements,
which are included elsewhere in this prospectus. The selected
financial data under the heading Statements of Operations
Data for each of the two years ended December 31,
2005 and 2006, under the heading Non-GAAP Operating
Data relating to Adjusted EBITDA and Adjusted Free Cash
Flow for each of the two years ended December 31, 2005 and
2006 and under the heading Balance Sheet Data as of
December 31, 2005, 2006 and 2007 have been derived from our
audited financial statements not included in this prospectus.
The selected financial data under the heading Statements
of Operations Data for each of the six months ended
June 30, 2009 and 2010, under the heading Non-GAAP
Operating Data relating to Adjusted EBITDA and Adjusted
Free Cash Flow for each of the six months ended June 30,
2009 and 2010 and under the heading Balance Sheet
Data as of June 30, 2010 have been derived from our
unaudited financial statements. In the opinion of management,
our unaudited financial statements include all adjustments,
consisting only of normal recurring items, except as noted in
the notes to the financial statements, necessary for a fair
statement of interim periods. The financial information
presented for the interim periods has been prepared in a manner
consistent with our accounting policies described elsewhere in
this prospectus and should be read in conjunction therewith.
The pro forma balance sheet data as of June 30, 2010 is
unaudited and gives effect to (1) our receipt of estimated
net proceeds of $ million
from this offering, based on an assumed initial public offering
price of $ per share, which is the
mid-point of our filing range, after deducting estimated
underwriting discounts and offering expenses payable by us and
(2) the redemption of all of the outstanding preferred
stock immediately after the consummation of this offering. The
pro forma summary financial data is not necessarily indicative
of what our financial position or results of operations would
have been if this offering had been completed as of the date
indicated, nor is this data necessarily indicative of our
financial position or results of operations for any future date
or period.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,805
|
|
|
$
|
15,183
|
|
|
$
|
20,107
|
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
17,406
|
|
|
$
|
20,688
|
|
Cost of revenues(1)(2)
|
|
|
3,701
|
|
|
|
4,766
|
|
|
|
6,101
|
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
3,748
|
|
|
|
4,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,104
|
|
|
|
10,417
|
|
|
|
14,006
|
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
13,658
|
|
|
|
16,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,316
|
|
|
|
6,124
|
|
|
|
6,908
|
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
4,360
|
|
|
|
3,919
|
|
Sales and marketing
|
|
|
4,543
|
|
|
|
5,954
|
|
|
|
7,213
|
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
5,346
|
|
|
|
5,969
|
|
General and administrative
|
|
|
2,546
|
|
|
|
2,531
|
|
|
|
2,717
|
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
1,945
|
|
|
|
2,635
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
3,877
|
|
|
|
3,631
|
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
201
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,282
|
|
|
|
18,240
|
|
|
|
19,124
|
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
11,952
|
|
|
|
12,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(11,178
|
)
|
|
|
(7,823
|
)
|
|
|
(5,118
|
)
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,706
|
|
|
|
3,568
|
|
Interest and other income (expense), net
|
|
|
(304
|
)
|
|
|
(78
|
)
|
|
|
118
|
|
|
|
113
|
|
|
|
27
|
|
|
|
31
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(11,482
|
)
|
|
|
(7,901
|
)
|
|
|
(5,000
|
)
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
1,737
|
|
|
|
5,256
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
16,821
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(11,482
|
)
|
|
|
(7,901
|
)
|
|
|
(5,000
|
)
|
|
|
1,117
|
|
|
|
19,429
|
|
|
|
1,737
|
|
|
|
3,204
|
|
Dividends on redeemable preferred stock
|
|
|
1,877
|
|
|
|
2,038
|
|
|
|
2,207
|
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
1,261
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(13,359
|
)
|
|
$
|
(9,939
|
)
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
476
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.53
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.60
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.58
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,248
|
|
|
|
26,116
|
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,122
|
|
|
|
28,016
|
|
|
|
28,157
|
|
Diluted
|
|
|
25,248
|
|
|
|
26,116
|
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,900
|
|
|
|
28,794
|
|
|
|
29,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year Ended December 31,
|
|
Ended June 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
(In thousands)
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(3)
|
|
$
|
(6,626
|
)
|
|
$
|
(3,557
|
)
|
|
$
|
(2,099
|
)
|
|
$
|
2,666
|
|
|
$
|
7,349
|
|
|
$
|
2,603
|
|
|
$
|
4,842
|
|
Adjusted Free Cash Flow(4)
|
|
$
|
(2,403
|
)
|
|
$
|
1,636
|
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
(640
|
)
|
|
$
|
2,632
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Actual
|
|
Pro Forma
|
|
|
(In thousands)
|
|
Balance Sheet Data:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,041
|
|
|
$
|
5,218
|
|
|
$
|
7,791
|
|
|
$
|
13,502
|
|
|
$
|
17,132
|
|
|
$
|
20,195
|
|
|
|
|
|
Working capital excluding deferred revenues
|
|
|
1,779
|
|
|
|
4,899
|
|
|
|
7,631
|
|
|
|
14,273
|
|
|
|
19,964
|
|
|
|
25,089
|
|
|
|
|
|
Total assets
|
|
|
24,309
|
|
|
|
24,883
|
|
|
|
26,332
|
|
|
|
32,922
|
|
|
|
55,211
|
|
|
|
59,807
|
|
|
|
|
|
Deferred revenues
|
|
|
9,853
|
|
|
|
19,164
|
|
|
|
26,124
|
|
|
|
31,590
|
|
|
|
34,275
|
|
|
|
35,508
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
24,646
|
|
|
|
26,778
|
|
|
|
28,985
|
|
|
|
31,477
|
|
|
|
34,072
|
|
|
|
35,436
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(16,487
|
)
|
|
|
(26,403
|
)
|
|
|
(33,461
|
)
|
|
|
(34,391
|
)
|
|
|
(17,158
|
)
|
|
|
(14,771
|
)
|
|
|
|
|
|
|
|
(1) |
|
Amounts include stock-based compensation expense, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
18
|
|
|
$
|
31
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
53
|
|
|
|
86
|
|
|
|
42
|
|
|
|
175
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
150
|
|
|
|
83
|
|
|
|
37
|
|
|
|
118
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
158
|
|
|
|
163
|
|
|
|
88
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
110
|
|
|
$
|
386
|
|
|
$
|
365
|
|
|
$
|
185
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Cost of revenues includes amortization of capitalized software
development costs of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Amortization of capitalized software development costs
|
|
$
|
227
|
|
|
$
|
235
|
|
|
$
|
114
|
|
|
$
|
154
|
|
|
$
|
167
|
|
|
$
|
86
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
EBITDA consists of net income (loss) plus depreciation and
amortization, less interest and other income, net and less
income tax benefit (expense). Adjusted EBITDA consists of EBITDA
plus our non-cash, stock-based compensation expense and
settlement and legal costs related to a patent infringement
lawsuit settled in 2009. We use Adjusted EBITDA as a measure of
operating performance because it assists us in comparing
performance on a consistent basis, as it removes from our
operating results the impact of our capital structure, the
one-time costs associated with a non-recurring event and such
items as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets. We believe
Adjusted EBITDA is useful to an investor in evaluating our
operating performance because it and similar measures are widely
used by investors, securities analysts and other interested
parties in our industry to measure a companys operating
performance without regard to items such as depreciation and
amortization, which can vary depending upon accounting methods
and the book value of assets, and to present a meaningful
measure of corporate performance exclusive of our capital
structure and the method by which assets were acquired. |
35
|
|
|
|
|
Our use of Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are: |
|
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash
expenditure requirements for such replacements;
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
Adjusted EBITDA does not reflect tax payments that may represent
a reduction in cash available to us; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted
EBITDA alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted EBITDA along with these
other measures in order to fully evaluate our financial
performance. |
|
|
|
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(11,482
|
)
|
|
$
|
(7,901
|
)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
Depreciation and amortization
|
|
|
4,552
|
|
|
|
4,266
|
|
|
|
2,909
|
|
|
|
1,285
|
|
|
|
1,214
|
|
|
|
612
|
|
|
|
518
|
|
Interest and other expense (income), net
|
|
|
304
|
|
|
|
78
|
|
|
|
(118
|
)
|
|
|
(113
|
)
|
|
|
(27
|
)
|
|
|
(31
|
)
|
|
|
(1,688
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(16,821
|
)
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(6,626
|
)
|
|
|
(3,557
|
)
|
|
|
(2,209
|
)
|
|
|
2,280
|
|
|
|
3,795
|
|
|
|
2,318
|
|
|
|
4,086
|
|
Non-cash, stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
386
|
|
|
|
365
|
|
|
|
185
|
|
|
|
756
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(6,626
|
)
|
|
$
|
(3,557
|
)
|
|
$
|
(2,099
|
)
|
|
$
|
2,666
|
|
|
$
|
7,349
|
|
|
$
|
2,603
|
|
|
$
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
Free Cash Flow consists of net cash provided by (used in)
operating activities, less purchases of property and equipment
and less capitalization of software development costs. Adjusted
Free Cash Flow consists of Free Cash Flow plus one-time
settlement and legal costs related to a patent infringement
lawsuit in 2009 as well as public stock offering costs incurred
in 2010. We use Adjusted Free Cash Flow as a measure of
liquidity because it assists us in assessing the companys
ability to fund its growth through its generation of cash. We
believe Adjusted Free Cash Flow is useful to an investor in
evaluating our liquidity because Adjusted Free Cash Flow and
similar measures are widely used by investors, securities
analysts and other interested parties in our industry to measure
a companys liquidity without regard to revenue and expense
recognition, which can vary depending upon accounting methods. |
36
|
|
|
|
|
Our use of Adjusted Free Cash Flow has limitations as an
analytical tool, and you should not consider it in isolation or
as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are: |
|
|
|
|
|
Adjusted Free Cash Flow does not reflect the interest expense or
the cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
|
|
|
Adjusted Free Cash Flow does not reflect one-time litigation
settlement expense payments, which reduced the cash available to
us;
|
|
|
|
|
|
Adjusted Free Cash Flow does not include public stock offering
costs;
|
|
|
|
|
|
Adjusted Free Cash Flow removes the impact of accrual basis
accounting on asset accounts and non-debt liability accounts; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Free Cash Flow differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted Free
Cash Flow alongside other liquidity measures, including various
cash flow metrics, net income and our other GAAP results. Our
management reviews Adjusted Free Cash Flow along with these
other measures in order to fully evaluate our liquidity. |
|
|
|
The following table provides a reconciliation of net cash
provided by (used in) operating activities to Adjusted Free Cash
Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1,748
|
)
|
|
$
|
2,227
|
|
|
$
|
4,693
|
|
|
$
|
6,582
|
|
|
$
|
4,501
|
|
|
$
|
(278
|
)
|
|
$
|
2,373
|
|
Purchase of property and equipment
|
|
|
(594
|
)
|
|
|
(531
|
)
|
|
|
(695
|
)
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(462
|
)
|
|
|
(379
|
)
|
Capitalization of software development costs
|
|
|
(61
|
)
|
|
|
(60
|
)
|
|
|
(362
|
)
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
(2,403
|
)
|
|
|
1,636
|
|
|
|
3,636
|
|
|
|
6,003
|
|
|
|
3,596
|
|
|
|
(740
|
)
|
|
|
1,572
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Public stock offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
(2,403
|
)
|
|
$
|
1,636
|
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
(640
|
)
|
|
$
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share would increase
(decrease) cash and cash equivalents, working capital excluding
deferred revenues, total assets and total stockholders
equity (deficit) after this offering by approximately
$ million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discount and estimated offering expenses payable by
us. |
37
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our financial statements and related notes that
appear elsewhere in this prospectus. In addition to historical
financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in
Risk Factors.
Overview
We provide a leading on-demand strategic procurement and
supplier enablement solution that integrates our customers with
their suppliers to improve procurement of indirect goods and
services. Our on-demand software enables organizations to
realize the benefits of strategic procurement by identifying and
establishing contracts with preferred suppliers, driving spend
to those contracts and promoting process efficiencies through
electronic transactions. Strategic procurement is the
optimization of tasks throughout the cycle of finding,
procuring, receiving and paying for indirect goods and services,
which can result in increased efficiency, reduced costs and
increased insight into an organizations buying patterns.
Using our managed SciQuest Supplier Network, our customers do
business with more than 30,000 unique suppliers and spend
billions of dollars annually.
We derive our revenues primarily from subscription fees and
associated implementation services from the sale of our solution
to entities in the higher education, life sciences, healthcare
and state and local government markets. Our contracts are
typically three to five years in length, with total subscription
fees typically ranging from $450,000 to $1.5 million
($150,000 to $300,000 per year) and the associated one-time
implementation service fees typically ranging from $150,000 to
$300,000. We sell primarily through our direct sales channel
and, to a very limited extent, through indirect sales channels.
We have over 160 customers operating in 16 countries and offer
our solution in five languages and 22 currencies. Our revenue
growth is driven primarily through the sale of our solution to
new customers. For the six months ended June 30, 2010,
revenues increased 19% to $20.7 million from
$17.4 million for the six months ended June 30, 2009.
For the fiscal year ended December 31, 2009, revenues
increased 21% to $36.2 million from $29.8 million for
the year ended December 31, 2008. For the fiscal year ended
December 31, 2008, revenues increased 48% from
$20.1 million for the year ended December 31, 2007.
Revenues, expenses and cash flow are the key measures we use to
analyze our business and results of operations for both the
short and long-term. Key elements of our revenue analysis
include revenues from new customers and renewal revenues from
existing customers. Our expense analysis focuses heavily on
headcount by function, as compensation expense is our primary
expense item. We also monitor the impact of expenses on Adjusted
EBITDA. To analyze cash flow, we primarily use Adjusted Free
Cash Flow.
For the years ended December 31, 2007, 2008 and 2009, the
higher education market accounted for approximately 57%, 54% and
56%, respectively, of our revenues, the life sciences market
accounted for approximately 36%, 35% and 31%, respectively, of
our revenues, the healthcare market accounted for approximately
6%, 9% and 9%, respectively, of our revenues and the state and
local government markets accounted for approximately 0%, 2% and
4%, respectively, of our revenues. To date, the higher education
and life sciences markets have been our primary markets,
generally as a result of our historical focus and past success
in these markets, and we have achieved greater market
penetration in these markets as compared to our newer healthcare
and state and local government markets. Historically, we enter
new markets largely based on their similarities to our then
existing markets in terms of customer profiles, procurement
characteristics and market opportunity. For example, we expanded
into the healthcare and state and local government markets
because they are both adjacent to and have similar procurement
characteristics as the higher education and life sciences
markets, thus allowing us to leverage our market expertise.
Since we sell a single set of products and services to vertical
markets with similar characteristics, we view our business on an
integrated basis and manage our business as a single unit rather
than as separate lines of business. Accordingly, we generally do
not analyze our
38
business performance by vertical market, nor do we manage our
revenues, earnings or cash flows by vertical market. Further, we
do not establish separate revenue targets for each vertical
market.
Maintaining and managing revenue growth is a primary operating
focus for us, and therefore, we will continue to focus our
efforts on acquiring new customers and expanding our
relationships with existing customers. Expanding our customer
base in the higher education and life sciences markets to
include more mid-sized organizations as well as expanding our
product offerings to our existing customers in all our markets
will be important to maintain revenue growth. We plan to
continue to invest in sales and marketing efforts, particularly
in our newer healthcare and state and local government markets,
to take advantage of what we believe are significant growth
opportunities in these newer markets. We tailor our sales and
marketing efforts to each of our vertical markets through
industry-specific marketing events, and we have hired, and will
continue to hire, personnel with experience and relationships in
these markets. We cannot provide assurances, however, that these
efforts will be successful in achieving revenue growth. If we
are unable to market our solution successfully, or if we incur
substantial expenses in attempting to do so, our revenues and
earnings could be materially and adversely affected.
We believe Adjusted EBITDA and Adjusted Free Cash Flow are the
primary non-GAAP financial metrics upon which to measure our
business. EBITDA consists of net income (loss) plus depreciation
and amortization, less (plus) interest and other income
(expense), net and plus (less) income tax expense (benefit).
Adjusted EBITDA consists of EBITDA plus our non-cash,
stock-based compensation expense and settlement and legal costs
related to a patent infringement lawsuit settled in 2009.
Because Adjusted EBITDA excludes certain non-cash expenses such
as depreciation, amortization and stock-based compensation, as
well as the one-time impact of the settlement of a patent
litigation suit in 2009, we believe that this measure provides
us with additional useful information to measure and understand
our performance on a consistent basis, particularly with respect
to changes in performance from period to period. Free Cash Flow
consists of net cash provided by (used in) operating activities,
less purchases of property and equipment and less capitalization
of software development costs. Adjusted Free Cash Flow consists
of Free Cash Flow plus one-time settlement and legal costs
related to a patent infringement lawsuit in 2009 as well as
public stock offering costs incurred in 2010. Because Adjusted
Free Cash Flow measures the ability of the company to generate
cash from operations, after investment in software development
and property and equipment, we believe this is a meaningful
measurement in which to gauge our ability to fund future growth.
Our Adjusted Free Cash Flow normally fluctuates quarterly due to
the combination of the timing of new business and the payment of
annual bonuses. We use Adjusted EBITDA and Adjusted Free Cash
Flow in the preparation of our budgets and to measure and
monitor our financial performance. Adjusted EBITDA and Adjusted
Free Cash Flow are not determined in accordance with GAAP and
are not substitutes for or superior to financial measures
determined in accordance with GAAP. For further discussion
regarding Adjusted EBITDA and a reconciliation of Adjusted
EBITDA to net income, see Key Financial Terms and
Metrics, below. For further discussion regarding Adjusted
Free Cash Flow and a reconciliation of Adjusted Free Cash Flow
to cash flows from operations, see footnote 4 to the table in
Selected Financial Data included elsewhere in this
prospectus.
We were founded in 1995 as an
e-commerce
business-to-business
exchange for scientific products and conducted an initial public
offering in 1999. In 2001, we brought in a new management team,
exited the
business-to-business
exchange model and began selling our on-demand strategic
procurement and supplier enablement solution. Our company was
subsequently taken private in 2004. Since 2001, we have focused
on developing our current
on-demand
business model, building out our technology, acquiring a
critical mass of customers in our higher education and life
sciences vertical markets, and selectively expanding our
solution to serve the healthcare and state and local government
markets. We have funded our operations since the going private
transaction through our cash flow from operations. We generated
Adjusted EBITDA of $(2.1) million, $2.7 million,
$7.3 million and $4.8 million in 2007, 2008, 2009 and
the six months ended June 30, 2010, respectively. We
generated Adjusted Free Cash Flow of $3.6 million,
$6.0 million, $6.8 million and $1.6 million in
2007, 2008, 2009 and the six months ended June 30, 2010,
respectively. We generated a net loss of $(5.0) million for
2007 and net income of $1.1 million, $19.4 million and
$3.2 million in 2008, 2009 and the six months ended
June 30, 2010, respectively. No customer accounted for more
than 10% of our total revenues in 2007, 2008, 2009
39
and the six months ended June 30, 2010. Our ten largest
customers accounted for no more than 25% of our total revenues
in 2009 and the six months ended June 30, 2010.
We plan to continue the growth of our customer base by expanding
our direct and indirect distribution channels and increasing our
international market penetration. As a result, we plan to hire
additional personnel, particularly in sales and implementation
services, and expand our domestic and international sales and
marketing activities. We also intend to identify and acquire
companies that would either expand our solutions
functionality, provide access to new customers or markets, or
both.
Key
Financial Terms and Metrics
Sources
of Revenues
We primarily derive our revenues from sales of our on-demand
strategic procurement and supplier enablement software solution
and associated implementation services. Revenues are generated
from subscription agreements that permit customers to access and
utilize our procurement solution and related services.
Our subscription agreements generally contain multiple service
elements and deliverables. These elements include access to our
on-demand software, implementation services and, on limited
occasions, perpetual licenses for certain software modules and
related maintenance and support. The typical term of our
subscription agreements is three to five years, and we generally
invoice our customers in advance of their annual subscription,
with payment terms that require our customers to pay us within
thirty days of invoice. We recognize revenues, both from
subscription and perpetual licenses and related maintenance and
support, ratably on a daily basis over the term of the
agreement. Our agreements are generally non-cancelable, though
customers have the right to terminate their agreements for cause
if we materially breach our obligations under the agreement.
Implementation services revenues consist primarily of
configuration, integration, training and change management
services sold in conjunction with the initial subscription
agreement as part of a multiple-element arrangement. Typically,
our implementation services engagements are billed on a fixed
fee, performance milestone basis with payment terms requiring
our customers to pay us within thirty days of invoice. Revenues
from implementation services sold as part of the initial
agreement are recognized ratably over the remaining subscription
term once the performance milestones have been met. Revenues
from services sold separately from subscription agreements are
recognized as the services are performed and have not been
material to our business.
Historically, we have increased the price of our subscriptions
upon the renewal of our customers subscription agreements
to reflect the increased feature functionality inherent in the
solution since the initial subscription agreement. Our annual
customer renewal rate has been over 94% over the last three
fiscal years. On a dollar basis, our annual renewal rate has
been 106% over this same time period solely as a result of
pricing increases at the time of renewal. We believe these
customer and dollar renewal rates reflect our customers
satisfaction with our solution and improve the visibility of our
revenues.
Cost of
Revenues and Operating Expenses
We allocate certain overhead expenses, such as rent, utilities,
and depreciation of general office assets to cost of revenues
and operating expense categories based on headcount. As a
result, an overhead expense allocation is reflected in cost of
revenues and each operating expense category.
Cost of Revenues. Cost of revenues consists
primarily of compensation and related expenses for
implementation services, supplier enablement services, customer
support staff and client partners, costs related to hosting the
subscription software, amortization of capitalized software
development costs and allocated overhead. Costs of
implementation services are expensed as incurred. We expect cost
of revenues to increase in absolute dollars as we continue to
increase the number of customers over time but remain relatively
consistent as a percentage of revenues.
40
Research and Development. Research and
development expenses consist primarily of wages and benefits for
software application development personnel and allocated
overhead. We have focused our research and development efforts
on both improving ease of use and functionality of our existing
products as well as developing new offerings. We primarily
expense research and development costs. The small percentage of
direct development costs related to on-demand software
enhancements that add functionality are capitalized and
depreciated as a component of cost of revenues. We expect that
research and development expenses will increase in absolute
dollars as we continue to enhance and expand our product
offerings but decrease as a percentage of revenues over time.
Sales and Marketing. Sales and marketing
expenses consist primarily of wages and benefits for our sales
and marketing personnel, sales commissions, marketing programs,
including lead generation, events and other brand building
expenses and allocated overhead. We capitalize our sales
commissions at the time a subscription agreement is executed by
the customer, and we expense the commissions as a component of
sales and marketing ratably over the subscription period,
matching the recognition period of the subscription revenues for
which the commissions were incurred. In order to continue to
grow our business and brand awareness, we expect that we will
continue to invest in our sales and marketing efforts. We expect
that sales and marketing expenses will increase in absolute
dollars but decrease as a percentage of revenues over time.
General and Administrative. General and
administrative expenses consist of compensation and related
expenses for administrative, human resources, finance and
accounting personnel, professional fees, other taxes and other
corporate expenses. We expect that general and administrative
expenses will increase as we continue to add personnel in
connection with the growth of our business. In addition, we
anticipate that we will also incur additional personnel expense,
professional fees, including auditing and legal, and insurance
costs related to operating as a public company. Therefore, we
expect that our general and administrative expenses will
increase in absolute dollars. Over the next two years, we expect
that our general and administrative expenses also will increase
as a percentage of revenues.
Amortization of Intangible Assets. Amortized
intangible assets consist of acquired technology and customer
relationships from the going private transaction in 2004. The
acquired technology was amortized on a straight-line basis over
the estimated life of three years, and the customer
relationships are amortized over a ten-year estimated life in a
pattern consistent with which the economic benefit is expected
to be realized.
Adjusted EBITDA. EBITDA, a non-GAAP operating
measure, consists of net income (loss) plus depreciation and
amortization, less interest and other income, net and less
income tax benefit. Adjusted EBITDA, a non-GAAP operating
measure, consists of EBITDA plus our non-cash,
stock-based
compensation expense and settlement and legal costs related to a
patent infringement lawsuit in 2009. We use Adjusted EBITDA as a
measure of operating performance because it assists us in
comparing performance on a consistent basis, as it removes from
our operating results the impact of our capital structure, the
one-time costs associated with a non-recurring event and such
items as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets. We believe
Adjusted EBITDA is useful to an investor in evaluating our
operating performance because it is widely used by investors,
securities analysts and other interested parties in our industry
to measure a companys operating performance without regard
to items such as depreciation and amortization, which can vary
depending upon accounting methods and the book value of assets,
and to present a meaningful measure of corporate performance
exclusive of our capital structure and the method by which
assets were acquired. Our use of Adjusted EBITDA has limitations
as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash
expenditure requirements for such replacements;
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of equity-based compensation;
|
|
Adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our indebtedness;
|
41
|
|
|
Adjusted EBITDA does not reflect tax payments that may represent
a reduction in cash available to us; and
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA differently, which reduces its
usefulness as a comparative measure.
|
Because of these limitations, you should consider Adjusted
EBITDA alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted EBITDA along with these
other measures in order to fully evaluate our financial
performance.
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income (loss)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
Depreciation and amortization
|
|
|
2,909
|
|
|
|
1,285
|
|
|
|
1,214
|
|
|
|
612
|
|
|
|
518
|
|
Interest and other income (expense), net
|
|
|
(118
|
)
|
|
|
(113
|
)
|
|
|
(27
|
)
|
|
|
(31
|
)
|
|
|
(1,688
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(9
|
)
|
|
|
(16,821
|
)
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(2,209
|
)
|
|
|
2,280
|
|
|
|
3,795
|
|
|
|
2,318
|
|
|
|
4,086
|
|
Non-cash, stock-based compensation expense
|
|
|
110
|
|
|
|
386
|
|
|
|
365
|
|
|
|
185
|
|
|
|
756
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,099
|
)
|
|
$
|
2,666
|
|
|
$
|
7,349
|
|
|
$
|
2,603
|
|
|
$
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses and related
disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our actual results may differ from these
estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which
are described in Note 2 to the financial statements, the
following accounting policies involve a greater degree of
judgment and complexity. A critical accounting policy is one
that is both material to the preparation of our financial
statements and requires us to make difficult, subjective or
complex judgments for uncertain matters that could have a
material effect on our financial condition and results of
operations. Accordingly, these are the policies we believe are
the most critical to aid in fully understanding and evaluating
our financial condition and results of operations.
Revenue
Recognition
We primarily derive our revenues from subscription fees for our
on-demand strategic procurement and supplier enablement software
solution and associated implementation services. Revenue is
generated from subscription agreements and related services
permitting customers to access and utilize our hosted software.
Customers may on occasion also purchase a perpetual license for
certain software modules. Revenue is recognized when there is
persuasive evidence of an agreement, the service has been
provided or delivered to the customer, the collection of the fee
is probable and the amount of the fee to be paid by the customer
is fixed or determinable.
Our contractual agreements generally contain multiple service
elements and deliverables. These elements include access to the
hosted software, implementation services and, on a limited
basis, perpetual licenses for certain software modules and
related maintenance and support. Subscription agreements do not
provide customers the right to take possession of the hosted
software at any time, with the exception of a triggering event
in source code escrow arrangements. In applying the multiple
element revenue recognition guidance, we determined that we do
not have objective and reliable evidence of the fair value of
the subscription agreement and related services. We therefore
account for fees received under multiple-element agreements as a
single unit
42
of accounting and recognize the agreement consideration ratably
over the term of the subscription agreement, which is generally
three to five years. The term of the subscription agreement
commences on the start date specified in the subscription
agreement, which is the date access to the software is provided
to the customer provided all other revenue recognition criteria
have been met. Fees for professional services that are
contingent upon future performance are recognized ratably over
the remaining subscription term once the performance milestones
have been met. We recognize revenue from any professional
services that are sold separately as the services are performed.
Deferred revenue primarily consists of billings or payments
received in advance of revenue recognition from our software and
services described above. For multiple year subscription
agreements, we generally invoice our customers in annual
installments. Accordingly, the deferred revenue balance does not
represent the total contract value of these multi-year
subscription agreements. Our services, such as implementation,
are generally sold in conjunction with subscription agreements.
These services are recognized ratably over the remaining term of
the subscription agreement once any contingent performance
milestones have been satisfied. The portion of deferred revenue
that we anticipate will be recognized after the succeeding
12-month
period is recorded as non-current deferred revenue and the
remaining portion is recorded as current deferred revenue.
Stock-Based Compensation. As of
January 1, 2006, we adopted new stock-based compensation
accounting guidance using the prospective application method,
which requires that all stock-based payments to employees,
including grants of employee stock options, are recognized in
the statements of operations based on their fair values.
Stock-based compensation costs are measured at the grant date
based on the fair value of the award and are recognized as
expense on a straight-line basis over the requisite service
period, which is the vesting period.
Stock-based compensation costs are calculated using the
Black-Scholes option-pricing model. Determining the appropriate
fair value model and related assumptions requires judgment,
including estimating stock price volatility, forfeiture rates
and expected term. The assumptions used in determining the fair
value of stock-based awards represent managements best
estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based
compensation could be materially different in the future.
Because there has not been a public market for our common stock
since 2004, we have lacked company-specific historical and
implied volatility information. Therefore, we estimate our
expected stock volatility based on that of publicly-traded peer
companies, and we expect to continue to use this methodology
until such time as we have adequate historical data regarding
the volatility of our publicly-traded stock price. We do not
have information available that is indicative of future exercise
and post-vesting behavior to estimate the expected term.
Therefore, the expected term used in our estimated fair value
calculation represents the average time that options that vest
are expected to be outstanding based on the mid-point between
the vesting date and the end of the contractual term of the
award. We have not paid dividends and do not anticipate paying
dividends in the foreseeable future and, accordingly, use an
expected dividend yield of zero. The risk-free interest rate is
based on the rate of U.S. Treasury securities with
maturities consistent with the estimated expected term of the
awards. Pre-vesting forfeiture rates are estimated based on our
historical forfeiture data.
The assumptions used in calculating the fair value of common
stock options granted in 2008, 2009 and 2010 are set forth below:
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
Estimated dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected stock price volatility
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Weighted-average risk-free interest rate
|
|
2.6% 3.6%
|
|
1.9% 2.8%
|
|
2.6% 3.0%
|
Expected life of award (in years)
|
|
6.25
|
|
6.25
|
|
6.25
|
43
We typically grant options on a semi-annual basis. The following
table summarizes by grant date the number of stock options
granted from January 1, 2008 through June 30, 2010,
the per share exercise price of options and the fair value per
option on each grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Subject
|
|
Per Share Exercise
|
|
Fair Value
|
Grant Date
|
|
to Options Granted
|
|
Price of Option(1)
|
|
per Option(2)
|
|
January 23, 2008(3)
|
|
|
147,125
|
|
|
$
|
1.30
|
|
|
$
|
1.05
|
|
July 23, 2008(3)
|
|
|
63,000
|
|
|
$
|
1.58
|
|
|
$
|
1.28
|
|
January 22, 2009
|
|
|
349,099
|
|
|
$
|
1.02
|
|
|
$
|
0.82
|
|
July 22, 2009
|
|
|
35,000
|
|
|
$
|
0.95
|
|
|
$
|
0.77
|
|
January 21, 2010
|
|
|
447,198
|
|
|
$
|
1.13
|
|
|
$
|
0.71
|
|
April 20, 2010
|
|
|
159,000
|
|
|
$
|
4.09
|
|
|
$
|
3.30
|
|
|
|
|
(1) |
|
The per share exercise price of option represents the
determination by our board of directors of the fair value of our
common stock on the date of grant, as determined by taking into
account our most recent valuation of common stock. |
|
(2) |
|
As described above, the fair value per share of each option was
estimated for the date of grant using the Black-Scholes
option-pricing model. This model estimates the fair value by
applying a series of factors including the exercise price of the
option, a risk free interest rate, the expected term of the
option, expected share price volatility of the underlying common
stock and expected dividends on the underlying common stock.
Additional information regarding the valuation of our common
stock and option awards is set forth in Note 8 to our
financial statements included elsewhere in this prospectus. |
|
(3) |
|
Represents stock options that were amended to reduce the
exercise price for substantially all of the shares subject to
stock options granted on January 23, 2008 and July 23,
2008. The amendments reduced the exercise price of the
previously granted options to $1.02 per share, which was the
fair value of our common stock on the date of the amendments.
The amendments did not affect the vesting provisions or the
number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as being forfeited and the amendments as new option
grants. |
As part of our stock incentive plan, and as set forth in
Note 8 to our financial statements, we have also allowed
certain employees to purchase shares of our restricted stock. We
hold subscription notes receivable for the aggregate purchase
price of the shares. Upon employee termination, we have the
option to repurchase the shares. The repurchase price is the
original purchase price plus interest for unvested restricted
stock and the current fair value (as determined by our board of
directors) for vested restricted stock. The shares generally
vest ratably over two to four years. As of June 30, 2010,
there were 4,401,129 shares of vested and unvested
restricted stock outstanding. The following table summarizes by
grant date the number of shares of restricted stock granted from
January 1, 2008 through June 30, 2010, the per share
purchase price of restricted stock and the fair value per share
of restricted stock on each grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
Number of Shares of
|
|
Purchase Price(s) of
|
|
Fair Value(s)
|
Grant Date
|
|
Restricted Stock Granted
|
|
Restricted Stock(1)
|
|
per Share(2)
|
|
January 23, 2008
|
|
|
584,275
|
|
|
$
|
1.30
|
|
|
$
|
0.69 $0.91
|
|
January 22, 2009
|
|
|
318,053
|
|
|
$
|
1.02
|
|
|
$
|
0.71 $1.02
|
|
January 21, 2010
|
|
|
191,724
|
|
|
$
|
1.13
|
|
|
|
$0.59
|
|
|
|
|
(1) |
|
The per share purchase price of restricted stock represents the
determination by our board of directors of the fair value of our
common stock on the date of grant, as determined by taking into
account our most recent valuation of common stock. |
|
(2) |
|
As described above, the fair value per share of restricted stock
was estimated for the date of grant using the Black-Scholes
option-pricing model since the notes receivable are deemed
non-recourse for accounting purposes. This model estimates the
fair value by applying a series of factors including the
exercise price of |
44
|
|
|
|
|
the option, a risk free interest rate, the expected term of the
option, expected share price volatility of the underlying common
stock and expected dividends on the underlying common stock. |
Significant
Factors Used in Determining the Fair Value of Our Common
Stock
We have historically granted stock-based awards at exercise or
purchase prices equivalent to the fair value of our common stock
as of the date of grant, as determined by our board of directors
taking into account our most recently available valuation of
common stock.
Prior to June 2008, the annual common stock valuations were
prepared using the income and market approaches. Under the
income approach, the fair value of our common stock was
estimated based upon the present value of a future stream of
income that can reasonably be expected to be generated by the
company. Under the market approach, the guideline market
multiple methodology was applied, which involved the
multiplication of free cash flows by risk-adjusted multiples.
Multiples were determined through an analysis of certain
publicly traded companies, which were selected on the basis of
operational and economic similarity with our principal business
operations.
Commencing in June 2008, we moved to semi-annual common stock
valuations prepared using the probability-weighted
expected return method. Under this methodology, the fair
value of our common stock is estimated based upon an analysis of
future values assuming various outcomes. The fair value is based
on the probability-weighted present value of expected future
investment returns considering each of the possible outcomes
available to us as well as the rights of each share class. The
possible outcomes considered were continued operation as a
private company, an initial public offering and a sale of the
company.
The private company scenario analysis utilized averages of the
market and income approaches. Under the market approach, we
estimated our enterprise value using the guideline public
company method, which compares our company to publicly traded
companies in our industry group after applying a discount for
lack of marketability. The companies used for comparison under
the guideline public company method were selected based on a
number of factors, including but not limited to, the similarity
of their industry, business model and financial risks. The
multiples selected were adjusted for differences in expected
growth, profitability and risk between the company and the
comparable public companies. Under the income approach, we
estimated our enterprise value using the discounted future cash
flow method, which involves applying appropriate discount rates
to estimated cash flows that are based on forecasts of revenues,
costs and capital requirements. Our assumptions underlying the
estimates were consistent with the plans and estimates that we
use to manage our business. The risks associated with achieving
our forecasts were assessed in selecting the appropriate
discount rates.
The initial public offering scenario analysis utilized the
guideline public company method. We estimated our enterprise
value by comparing our company to publicly traded companies in
our industry group. The companies used for comparison under the
guideline public company method were selected based on a number
of factors, including, but not limited to, the similarity of
their industry, business model and financial risks to those of
ours.
The sale scenario analysis utilized the guideline transaction
enterprise value method. We estimated our enterprise value based
on a range of values from guideline transactions. The companies
used for comparison under the guideline transaction method were
selected based on a number of factors, including, but not
limited to, the similarity of their industry, business model and
financial risks to those of ours.
Finally, the present values calculated under each scenario were
weighted based on our managements estimates of the
probability of each scenario occurring. The resulting values
represented the estimated fair value of our common stock at each
valuation date.
Specific information related to option grants is as follows:
January
2008 Grants
In January 2008, we granted 147,125 stock options with an
exercise price of $1.30. Additionally, we issued
584,275 shares of restricted stock with a purchase price of
$1.30. In the absence of a public trading market for our
45
common stock, our board of directors, with input from
management, considered the factors described below and
determined the fair value of our common stock in good faith to
be $1.30 per share.
We performed a contemporaneous valuation of the fair value of
our common stock as of December 31, 2007 using the income
and market approaches. The income approach used a discounted
cash flow analysis by applying a risk-adjusted discount rate of
17.1% to estimated debt-free cash flows, based on forecasted
revenues. The projections used in connection with the income
approach were based on our expected operating performance over
the forecast period. There is inherent uncertainty in these
estimates; if different discount rates or assumptions had been
used, the valuation would have been different. Under the market
approach, we reviewed an analysis of comparable publicly traded
companies to apply the guideline market multiple methodology. In
this analysis, we applied an average multiple of free cash flow
to our free cash flow. We then applied a 25% discount for lack
of marketability. We also considered the rights, preferences and
privileges of the preferred stock relative to the common stock.
Based on this analysis, the aggregate fair value of our common
stock was determined to be $36.9 million, with a per share
value of $1.30.
July 2008
Grants
In July 2008, we granted 63,000 stock options with an exercise
price of $1.58. In the absence of a public trading market for
our common stock, our board of directors, with input from
management, considered the factors described below and
determined the fair value of our common stock in good faith to
be $1.58 per share.
We performed a contemporaneous valuation of the fair value of
our common stock as of July 1, 2008 using the
probability-weighted expected return methodology discussed above.
Under the private company scenario, we applied the income and
market approaches. Under the income approach, we used a
discounted cash flow analysis. Under the market approach, we
used a weighted-average of the public guideline company method
and the guideline transaction method. We then subtracted debt
and the aggregate preferred stock liquidation preference. We
then applied a 25% discount rate for lack of marketability. This
resulted in a common equity valuation of $42.8 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted trailing 12 months revenue as of
the estimated future date of an initial public offering. The
multiple was based on a review of guideline public companies. We
then subtracted debt and the aggregate preferred stock
liquidation preference. We then applied a discount rate of 20%.
This resulted in an aggregate common equity value of
$57.3 million.
Under the sale scenario, we reviewed an analysis of selected
guideline transactions and applied a median revenue multiple to
determine our enterprise value. We then subtracted debt and the
aggregate preferred stock liquidation preference. We then
applied a discount rate of 20%. This resulted in an aggregate
common equity value of $28.8 million.
We then estimated the probability of each scenario occurring. We
assigned a 5% probability to the sale scenario, a 50%
probability to the initial public offering scenario and a 45%
probability to the private company scenario. Based on these
approaches, the fair value of our common equity was determined
to be $1.58 per share.
January
2009 Grants
In January 2009, we granted 349,099 stock options with an
exercise price of $1.02. Additionally, we issued
318,053 shares of restricted stock with a purchase price of
$1.02. In the absence of a public trading market for our common
stock, our board of directors, with input from management,
considered the factors described below and determined the fair
value of our common stock in good faith to be $1.02 per share.
We performed a contemporaneous valuation of the fair value of
our common stock as of December 31, 2008 using the
probability-weighted expected return methodology discussed above.
Under the private company scenario, we applied the income and
market approaches. Under the income approach, we used a
discounted cash flow analysis. Under the market approach, we
used a weighted-average of the public guideline company method
and the guideline transaction method. We then subtracted debt
and the
46
aggregate preferred stock liquidation preference. We then
applied a 25% discount rate for lack of marketability. This
resulted in a common equity valuation of $29.0 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted trailing 12 months revenue as of
the estimated future date of an initial public offering. The
multiple was based on a review of guideline public companies. We
then subtracted debt and the aggregate preferred stock
liquidation preference. We then applied a discount rate of 35%.
This resulted in an aggregate common equity value of
$37.2 million.
Under the sale scenario, we reviewed an analysis of selected
guideline transactions and applied a median revenue multiple to
determine our enterprise value. We then subtracted debt and the
aggregate preferred stock liquidation preference. We then
applied a discount rate of 35%. This resulted in an aggregate
common equity value of $38.7 million.
We then estimated the probability of each scenario occurring. We
assigned a 10% probability to the sale scenario, a 20%
probability to the initial public offering scenario and a 70%
probability to the private company scenario. Based on these
approaches, the fair value of our common equity was determined
to be $1.02 per share.
July 2009
Grants
In July 2009, we granted 35,000 stock options with an exercise
price of $0.95. In the absence of a public trading market for
our common stock, our board of directors, with input from
management, considered the factors described below and
determined the fair value of our common stock in good faith to
be $0.95 per share.
We performed a contemporaneous valuation of the fair value of
our common stock as of July 1, 2009 using the
probability-weighted expected return methodology discussed above.
Under the private company scenario, we applied the income and
market approaches. Under the income approach, we used a
discounted cash flow analysis. Under the market approach, we
used a weighted-average of the public guideline company method
and the guideline transaction method. We then subtracted debt
and the aggregate preferred stock liquidation preference. We
then applied a 25% discount rate for lack of marketability. This
resulted in a common equity valuation of $25.1 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted trailing 12 months revenue as of
the estimated future date of an initial public offering. The
multiple was based on a review of guideline public companies. We
then subtracted debt and the aggregate preferred stock
liquidation preference. We then applied a discount rate of 35%.
This resulted in an aggregate common equity value of
$36.9 million.
Under the sale scenario, we reviewed an analysis of selected
guideline transactions and applied a median revenue multiple to
determine our enterprise value. We then subtracted debt and the
aggregate preferred stock liquidation preference. We then
applied a discount rate of 35%. This resulted in an aggregate
common equity value of $36.4 million.
We then estimated the probability of each scenario occurring. We
assigned a 10% probability to the sale scenario, a 25%
probability to the initial public offering scenario and a 65%
probability to the private company scenario. Based on these
approaches, the fair value of our common equity was determined
to be $0.95 per share.
January 2010
Grants
In January 2010, we granted 447,198 stock options with an
exercise price of $1.13. Additionally, we issued
191,724 shares of restricted stock with a purchase price of
$1.13. In the absence of a public trading market for our common
stock, our board of directors, with input from management,
considered the factors described below and determined the fair
value of our common stock in good faith to be $1.13 per share.
We performed a contemporaneous valuation of the fair value of
our common stock as of December 31, 2009 using the
probability-weighted expected return methodology discussed above.
Under the private company scenario, we applied the income and
market approaches. Under the income approach, we used a
discounted cash flow analysis. Under the market approach, we
used a weighted-average of the public guideline company method
and the guideline transaction method. We then subtracted debt
and the
47
aggregate preferred stock liquidation preference. We then
applied a 25% discount rate for lack of marketability. This
resulted in a common equity valuation of $31.1 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted trailing 12 months revenue as of the
estimated future date of an initial public offering. The
multiple was based on a review of guideline public companies. We
then subtracted debt and the aggregate preferred stock
liquidation preference. We then applied a discount rate of 35%.
This resulted in an aggregate common equity value of
$43.9 million.
Under the sale scenario, we reviewed an analysis of selected
guideline transactions and applied a median revenue multiple to
determine our enterprise value. We then subtracted debt and the
aggregate preferred stock liquidation preference. We then
applied a discount rate of 35%. This resulted in an aggregate
common equity value of $44.2 million.
We then estimated the probability of each scenario occurring. We
assigned a 5% probability to the sale scenario, a 25%
probability to the initial public offering scenario and a 70%
probability to the private company scenario. Based on these
approaches, the fair value of our common equity was determined
to be $1.13 per share.
April
2010 Grants
In April 2010, we granted 159,000 stock options with an exercise
price of $4.09. In the absence of a public trading market for
our common stock, our board of directors, with input from
management, considered the factors described below and
determined the fair value of our common stock in good faith to
be $4.09 per share. The increase from the fair value that was
used for the January 2010 grants is primarily a result of the
increased probabilities of an initial public offering or a sale
of the company, as well as an increased multiple under the
initial public offering scenario based on a review of guideline
public companies, each as described below. To a lesser extent,
the increase was also attributable to the use of forecasted
fiscal year 2011 revenue in the initial public offering scenario
as opposed to using the trailing 12 months revenue as of
December 31, 2010, as discussed below. Changes in revenue
assumptions due to developments in our business and a decrease
in the discount rate from 35% to 28% for the initial public
offering scenario and the sale scenario also contributed
slightly to the increase. We believe that any further increases
in the fair value of our common stock prior to this offering
would result from increasing the probability of the initial
public offering scenario.
We performed a contemporaneous valuation of the fair value of
our common stock as of March 31, 2010 using the
probability-weighted expected return methodology discussed above.
Under the private company scenario, we applied the income and
market approaches. Under the income approach, we used a
discounted cash flow analysis. Under the market approach, we
used a weighted-average of the public guideline company method
and the guideline transaction method. We then subtracted debt
and the aggregate preferred stock liquidation preference. We
then applied a 25% discount rate for lack of marketability. This
resulted in a common equity valuation of $37.3 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted fiscal year 2011 revenue, which
represented an increase from the trailing 12 months revenue as
of December 31, 2010 used in the initial public offering
scenario with respect to our January 2010 grants. We used
forecasted fiscal year 2011 revenue for the April 2010
grants as we believe this provides greater consistency with the
expected valuation methodology for an initial public offering
occurring after the mid-point of the current year. The multiple
was based on a review of guideline public companies, with such
multiple having increased between December 31, 2009 and
March 31, 2010. The multiple increase resulted primarily
from updating the enterprise values for the guideline public
companies and to a lesser extent from narrowing the guideline
public companies used to the upper quartile revenue multiple,
which we believed to be more comparable to our company. We then
subtracted debt and the aggregate preferred stock liquidation
preference. We then applied a discount rate of 28%. This
resulted in an aggregate common equity value of
$189.6 million.
Under the sale scenario, we reviewed an analysis of selected
guideline transactions and applied a median revenue multiple to
determine our enterprise value. We then subtracted debt and the
aggregate preferred stock
48
liquidation preference. We then applied a discount rate of 28%.
This resulted in an aggregate common equity value of
$83.8 million.
We then estimated the probability of each scenario occurring. We
assigned a 30% probability to the sale scenario, a 50%
probability to the initial public offering scenario and a 20%
probability to the private company scenario. Based on these
approaches, the fair value of common equity was determined to be
$4.09 per share.
Deferred Project Costs. We capitalize sales
commission costs that are directly related to the execution of
our subscription agreements. The commissions are deferred and
amortized over the contractual term of the related subscription
agreement. The deferred commission amounts are recoverable from
the future revenue streams under the subscription agreements. We
believe this is the appropriate method of accounting, as the
commission costs are so closely related to the revenues from the
subscription agreements that they should be recorded as an asset
and charged to expense over the same period that the
subscription revenues are recognized. Amortization of deferred
commissions is included in sales and marketing expense in the
statements of operations. The deferred commissions are reflected
within deferred project costs in the balance sheets.
Goodwill. Goodwill represents the excess of
the cost of an acquired entity over the net fair value of the
identifiable assets acquired and liabilities assumed. We review
the carrying value of goodwill at least annually to assess
impairment since it is not amortized. Additionally, we review
the carrying value of goodwill whenever events or changes in
circumstances indicate that its carrying amount may not be
recoverable. We have concluded that we have one reporting unit
for purposes of our annual goodwill impairment testing. To
assess goodwill impairment, the first step is to identify if a
potential impairment exists by comparing the fair value of a
reporting unit with its carrying amount, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered to have a
potential impairment and the second step of the impairment test
is not necessary.
However, if the carrying amount of the reporting unit exceeds
its fair value, the second step is performed to determine if
goodwill is impaired and to measure the amount of impairment
loss to recognize, if any. The second step compares the implied
fair value of goodwill with the carrying amount of goodwill. If
the implied fair value of goodwill exceeds the carrying amount,
then goodwill is not considered impaired. However, if the
carrying amount of goodwill exceeds the implied fair value, an
impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business
combination. The fair value of the reporting unit is allocated
to all the assets and liabilities, including any previously
unrecognized intangible assets, as if the reporting unit had
been acquired in a business combination and the fair value of
the reporting unit was the purchase price paid to acquire the
reporting unit. We performed our annual assessment on
December 31, 2009. The estimated fair value of our
reporting unit exceeded its carrying amount, including goodwill,
and as such, no goodwill impairment was recorded.
Income Taxes. Deferred income taxes are
provided using tax rates enacted for periods of expected
reversal on all temporary differences. Temporary differences
relate to differences between the book and tax basis of assets
and liabilities, principally intangible assets, property and
equipment, deferred subscription revenue, pension assets,
accruals and stock-based compensation. Valuation allowances are
established to reduce deferred tax assets to the amount that
will more likely than not be realized. To the extent that a
determination is made to establish or adjust a valuation
allowance, the expense or benefit is recorded in the period in
which the determination is made.
Our company recognizes a tax benefit when it is
more-likely-than-not, based on the technical merits, that the
position would be sustained upon examination by a taxing
authority. The amount to be recognized is measured as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. Our company
records interest or penalties accrued in relation to
unrecognized tax benefits as income tax expense.
49
Results
of Operations
The following table sets forth, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
20,107
|
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
17,406
|
|
|
$
|
20,688
|
|
Cost of revenues
|
|
|
6,101
|
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
3,748
|
|
|
|
4,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,006
|
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
13,658
|
|
|
|
16,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,908
|
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
4,360
|
|
|
|
3,919
|
|
Sales and marketing
|
|
|
7,213
|
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
5,346
|
|
|
|
5,969
|
|
General and administrative
|
|
|
2,717
|
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
1,945
|
|
|
|
2,635
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
201
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,124
|
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
11,952
|
|
|
|
12,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,118
|
)
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,706
|
|
|
|
3,568
|
|
Interest and other income net
|
|
|
118
|
|
|
|
113
|
|
|
|
27
|
|
|
|
31
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,000
|
)
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
1,737
|
|
|
|
5,256
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
9
|
|
|
|
16,821
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, our
results of operations expressed as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Six Months Ended June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
30
|
|
|
|
23
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70
|
|
|
|
77
|
|
|
|
79
|
|
|
|
79
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
34
|
|
|
|
28
|
|
|
|
22
|
|
|
|
25
|
|
|
|
19
|
|
Sales and marketing
|
|
|
36
|
|
|
|
31
|
|
|
|
30
|
|
|
|
31
|
|
|
|
29
|
|
General and administrative
|
|
|
14
|
|
|
|
13
|
|
|
|
10
|
|
|
|
11
|
|
|
|
13
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
1
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
11
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
95
|
|
|
|
74
|
|
|
|
72
|
|
|
|
69
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(25
|
)
|
|
|
3
|
|
|
|
7
|
|
|
|
10
|
|
|
|
17
|
|
Interest and other income, net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(25
|
)
|
|
|
4
|
|
|
|
7
|
|
|
|
10
|
|
|
|
25
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(25
|
)%
|
|
|
4
|
%
|
|
|
54
|
%
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Revenues. Revenues for the six months ended
June 30, 2010 were $20.7 million, an increase of
$3.3 million, or 19%, over revenues of $17.4 million
for the six months ended June 30, 2009. The increase in
revenues resulted primarily from an increase in the number of
customers from 133 as of June 30, 2009 to 168 as of
June 30, 2010, as well as recognition of revenue for a full
six-month period for the new customers added in the three months
ended June 30, 2009. We have increased our customer count
through our continued efforts to enhance brand awareness and our
sales and marketing efforts.
Cost of Revenues. Cost of revenues for the six
months ended June 30, 2010 was $4.4 million, an
increase of $0.7 million, or 19%, over cost of revenues of
$3.7 million for the six months ended June 30, 2009.
As a percentage of revenues, cost of revenues was 21% for both
the six months ended June 30, 2010 and 2009. The increase
in dollar amount primarily resulted from a $0.6 million
increase in employee-related costs attributable to our existing
personnel and additional implementation service personnel. We
had 70 full-time equivalents in our implementation
services, supplier enablement services, customer support and
client partner organizations at June 30, 2010, compared to
55 full-time equivalents at June 30, 2009.
Research and Development Expenses. Research
and development expenses for the six months ended June 30,
2010 were $3.9 million, a decrease of $0.5 million, or
11%, from research and development expenses of $4.4 million
for the six months ended June 30, 2009. As a percentage of
revenues, research and development expenses decreased to 19% for
the six months ended June 30, 2010 from 25% for the six
months ended June 30, 2009. The decrease in dollar amount
was primarily due to a decrease of $0.1 million in
employee-related costs attributable to our existing personnel
and an increase in capitalization of research and development
costs of $0.4 million in 2010 and was partially offset by an
increase in stock compensation expense of $0.1 million. We
had 54 full-time equivalents in our research and
development organization at June 30, 2010, compared to
52 full-time equivalents at June 30, 2009.
Sales and Marketing Expenses. Sales and
marketing expenses for the six months ended June 30, 2010
were $6.0 million, an increase of $0.7 million, or
13%, over sales and marketing expenses of $5.3 million for
the six months ended June 30, 2009. As a percentage of
revenues, sales and marketing expenses decreased to 29% for the
six months ended June 30, 2010 from 31% for the six months
ended June 30, 2009. The increase in dollar amount is
primarily due to an increase of $0.3 million in marketing
costs, an increase of $0.1 million in stock compensation
expense and an increase of $0.2 million in amortized
commission expense. We had 46 full-time equivalents in our
sales and marketing organization at June 30, 2010, compared
to 47 full-time equivalents at June 30, 2009.
General and Administrative Expenses. General
and administrative expenses for the six months ended
June 30, 2010 were $2.6 million, an increase of
$0.7 million, or 37%, over general and administrative
expenses of $1.9 million for the six months ended
June 30, 2009. As a percentage of revenues, general and
administrative expenses increased to 13% for the six months
ended June 30, 2010, from 11% for the six months ended
June 30, 2009. The increase in dollar amount is primarily
due to an increase of $0.3 million in stock compensation
expense and an increase of $0.2 million in employee-related
costs attributable to existing personnel and additional general
and administrative headcount. We had 13 full-time
equivalents in our general and administrative organization at
June 30, 2010, compared to 11 full-time equivalents at
June 30, 2009.
Litigation and Settlement and Associated Legal
Expenses. Litigation settlement and associated
legal expenses for the six months ended June 30, 2010 were
none, compared to $0.1 million, or 1% of revenues for the
six months ended June 30, 2009. In 2009, a company filed a
patent infringement action against us and other, unrelated
companies. We entered into a settlement agreement in 2009, and
there were $0.1 million of the total settlement and related
legal costs of $3.2 million recognized as operating
expenses in the six months ended June 30, 2009.
Amortization of Intangible
Assets. Amortization of intangible assets for the
six months ended June 30, 2010 and June 30, 2009 was
$0.2 million. As a percentage of revenues, amortization of
intangible assets was 1% for both the six months ended
June 30, 2010 and 2009.
51
Income from Operations. Income from operations
for the six months ended June 30, 2010 was
$3.6 million, an increase of $1.9 million, or 112%,
over income from operations of $1.7 million for the six
months ended June 30, 2009. As a percentage of revenues,
income from operations increased to 17% for the six months ended
June 30, 2010 from 10% for the six months ended
June 30, 2009. The increase in dollar amount was a result
of our increase in revenues partially offset by our increased
expenses required to support the additional revenues.
Interest and Other Income. Interest and other
income for the six months ended June 30, 2010 was
$1.7 million compared to no interest and other income for
the six months ended June 30, 2009. This increase was due
to a gain on the sale of warrants we had in an unaffiliated
private company during the six months ended June 30, 2010.
Income Tax Expense. Income tax expense for the
six months ended June 30, 2010 was $2.1 million
compared to no income tax expense for the six months ended
June 30, 2009. The increase in income tax expense was due
to the reversal of our valuation reserve against our deferred
tax assets in December 2009 and the subsequent recognition of
tax expense for the six months ended June 30, 2010 at our
effective tax rate of 39% of our income before income taxes.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues. Revenues for 2009 were
$36.2 million, an increase of $6.4 million, or 21%,
over revenues of $29.8 million for 2008. The increase in
revenues resulted primarily from an increase in the number of
customers from 127 as of December 31, 2008 to 156 as of
December 31, 2009, as well as recognition of a full
years revenues for the new customers added in 2008.
Revenues in 2008 included $0.8 million for a one-time
termination fee received for the cancellation of a reseller
agreement recognized in that year. We have increased our
customer count through our continued efforts to enhance brand
awareness and our sales and marketing efforts.
Cost of Revenues. Cost of revenues in 2009 was
$7.5 million, an increase of $0.8 million, or 12%,
over cost of revenues of $6.7 million in 2008. As a
percentage of revenues, cost of revenues decreased to 21% in
2009 from 22% in 2008. The increase in dollar amount primarily
resulted from a $0.5 million increase in employee-related
costs attributable to our existing personnel and additional
implementation service personnel, as well as a $0.1 million
increase in allocated overhead due to increases in leased square
footage of office space. We had 56 full-time employee
equivalents in our implementation services, supplier enablement
services, customer support and client partner organizations at
December 31, 2009, compared to 55 full-time employee
equivalents at December 31, 2008.
Research and Development Expenses. Research
and development expenses for 2009 were $8.1 million, a
decrease of $0.2 million, or 2%, from research and
development expenses of $8.3 million for 2008. As a
percentage of revenues, research and development expenses
decreased to 22% in 2009 from 28% in 2008. The decrease in
dollar amount was due to an increase in capitalization of
research and development costs of $0.1 million in 2009 and
a reduction of $0.1 million in employee-related costs
attributable to our existing personnel. We had 50 full-time
employee equivalents in our research and development
organization at December 31, 2009, compared to
53 full-time
employee equivalents at December 31, 2008.
Sales and Marketing Expenses. Sales and
marketing expenses for 2009 were $10.8 million, an increase
of $1.5 million, or 16%, over sales and marketing expenses
of $9.3 million for 2008. As a percentage of revenues,
sales and marketing expenses decreased slightly to 30% in 2009
from 31% in 2008. The increase in dollar amount is primarily due
to an increase of $1.0 million in employee-related costs
from our existing personnel and additional sales and marketing
headcount, an increase of $0.4 million in amortized
commission expense and an increase of $0.1 million of
allocated overhead. We had 45 full-time employee
equivalents in our sales and marketing organization at
December 31, 2009, compared to 43 employee equivalents
at December 31, 2008.
General and Administrative Expenses. General
and administrative expenses for 2009 were $3.7 million, a
decrease of $0.2 million, or 5%, from general and
administrative expenses of $3.9 million for 2008. As a
percentage of revenues, general and administrative expenses
decreased to 10% in 2009 from 13% in 2008. The decrease in
dollar amount is due to a reduction in legal expenses of
$0.4 million primarily due to efforts in 2008 to
52
file 13 patent applications, a reduction of $0.1 million in
auditing fees due to the performance of a three-year audit in
2008 and a reduction of $0.2 million in recruiting costs
due to bringing our recruiting efforts inside the business
instead of relying on outside recruiting firms in 2009, offset
by an increase of $0.4 million in
employee-related
costs attributable to existing general and administrative
personnel. We had 11 full-time employee equivalents in our
general and administrative organization at December 31,
2009 and December 31, 2008.
Litigation Settlement and Associated Legal
Expenses. Litigation settlement and associated
legal expenses for 2009 were $3.2 million, or 9% of
revenues, compared to no litigation settlement and associated
legal expenses for 2008. In 2009, a company filed a patent
infringement action against us and other, unrelated companies.
We entered into a settlement agreement in 2009, and the
settlement and related legal costs of $3.2 million were
paid and recognized as operating expenses in the year ended
December 31, 2009.
Amortization of Intangible
Assets. Amortization of intangible assets for
2009 was $0.4 million, a decrease of $0.1 million, or
20%, over amortization of intangible assets of $0.5 million
for 2008. As a percentage of revenues, amortization of
intangible assets decreased to 1% in 2009 from 2% in 2008. The
decrease in dollar amount was the result of the declining
amortization recognized on the customer relationships asset over
the 10-year
estimated life. The customer relationships asset was recorded as
a result of the going private transaction in 2004.
Income from Operations. Income from operations
for 2009 was $2.6 million, an increase of
$1.6 million, or 160%, over income from operations of
$1.0 million for 2008. As a percentage of revenues, income
from operations increased to 7% in 2009 from 3% in 2008. The
increase in dollar amount was the result of our increase in
revenues offset by our increased expenses required to support
the additional revenues, as well as the one-time impact of the
litigation settlement and associated legal expenses.
Income tax benefit (expense). Income tax
benefit (expense) for the year ended December 31, 2009 was
$16.8 million compared to $0.0 million for the year
ended December 31, 2008. The increase in income tax benefit
was due to the reversal of our valuation reserve against our
deferred tax asset of $16.8 million in December 2009. This
reversal was due to our attaining sufficient positive evidence
to support the likelihood of realizing the deferred tax asset.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Revenues. Revenues for 2008 were
$29.8 million, an increase of $9.7 million, or 48%,
over revenues of $20.1 million for 2007. The increase in
revenues resulted primarily from an increase in the number of
customers from 105 as of December 31, 2007 to 127 as of
December 31, 2008, as well as recognition of a full
years revenues for the new customers added in 2007.
Revenues in 2008 included $0.8 million due to a one-time
termination fee received for the cancellation of a reseller
agreement recognized in that year. We have increased our
customer count through our continued efforts to enhance brand
awareness and our sales and marketing efforts.
Cost of Revenues. Cost of revenues in 2008 was
$6.7 million, an increase of $0.6 million, or 10%,
over cost of revenues of $6.1 million in 2007. As a
percentage of revenues, cost of revenues decreased to 22% in
2008 from 30% in 2007. The increase in dollar amount primarily
resulted from a $0.6 million increase in employee-related
costs attributable to our existing personnel and additional
implementation service personnel. We had 55 full-time
employee equivalents in our implementation services, supplier
enablement services, customer support and client partner
organizations at December 31, 2008, compared to
51 full-time employee equivalents at December 31, 2007.
Research and Development Expenses. Research
and development expenses for 2008 were $8.3 million, an
increase of $1.4 million, or 20%, over research and
development expenses of $6.9 million for 2007. As a
percentage of revenues, research and development expenses
decreased to 28% in 2008 from 34% in 2007. The increase in
dollar amount was primarily due to an increase of
$1.2 million in employee-related costs attributable to our
existing personnel and additional research and development
personnel as well as a decrease in capitalization of research
and development costs of $0.3 million in 2008. We had
53 full-time employee
53
equivalents in our research and development organization at
December 31, 2008, compared to 48 full-time employee
equivalents at December 31, 2007.
Sales and Marketing Expenses. Sales and
marketing expenses for 2008 were $9.3 million, an increase
of $2.1 million, or 29%, over sales and marketing expenses
of $7.2 million for 2007. As a percentage of revenues,
sales and marketing expenses decreased to 31% in 2008 from 36%
in 2007. The increase in dollar amount is primarily due to an
increase of $0.9 million in employee-related costs from our
existing personnel and additional sales and marketing headcount,
an increase of $0.6 million in amortized commission
expense, an increase of $0.3 million in travel costs and
$0.1 million in allocated overhead due to our additional
personnel and an increase of $0.1 million in additional
marketing costs for tradeshows. We had 43 full-time
employee equivalents in our sales and marketing organization at
December 31, 2008, compared to 30 employee equivalents
at December 31, 2007.
General and Administrative Expenses. General
and administrative expenses for 2008 were $3.9 million, an
increase of $1.2 million, or 44%, from general and
administrative expenses of $2.7 million for 2007. As a
percentage of revenues, general and administrative expenses was
13% in both 2008 and 2007. The increase in dollar amount is due
to an increase in legal expenses of $0.5 million primarily
due to efforts in 2008 to file 13 patent applications, an
increase of $0.2 million in auditing fees due to the
performance of a three-year audit in 2008, an increase of
$0.3 million in employee-related costs attributable to our
existing personnel and additional general and administrative
personnel and an increase of $0.2 million in stock-based
compensation. We had
11 full-time
employee equivalents in our general and administrative
organization at December 31, 2008, compared to eight at
December 31, 2007.
Amortization of Intangible
Assets. Amortization of intangible assets for
2008 was $0.5 million, a decrease of $1.8 million, or
78%, over amortization of intangible assets of $2.3 million
for 2007. As a percentage of revenues, amortization of
intangible assets decreased to 2% in 2008 from 11% in 2007. The
decrease in dollar amount was the result of final amortization
of the acquired technology and the declining amortization
recognized on the customer relationships asset over the
10-year
estimated life. Both the acquired technology and the customer
relationships asset were recorded as a result of the going
private transaction in 2004.
Income from Operations. Income from operations
for 2008 was $1.0 million, an increase of $6.1 million
over the loss from operations of $(5.1) million for 2007.
As a percentage of revenues, income from operations increased to
3% in 2008 from (25%) in 2007. The increase in dollar amount was
the result of our increase in revenues offset by our increased
expenses required to support the additional revenues.
Quarterly
Results of Operations
The following table sets forth our unaudited operating results,
Adjusted EBITDA and Adjusted Free Cash Flow for each of the ten
quarters preceding and including the period ended June 30,
2010 and the percentages of revenues for each line item shown.
The information is derived from our unaudited financial
statements. In the opinion of management, our unaudited
financial statements include all adjustments, consisting only of
normal recurring items, except as noted in the notes to the
financial statements, necessary for a fair statement of interim
periods. The financial information presented for the interim
periods has been prepared in a manner consistent with our
accounting policies described elsewhere in this prospectus and
should be read in conjunction
54
therewith. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a
full-year period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,134
|
|
|
$
|
6,750
|
|
|
$
|
7,674
|
|
|
$
|
8,227
|
|
|
$
|
8,595
|
|
|
$
|
8,811
|
|
|
$
|
9,049
|
|
|
$
|
9,724
|
|
|
$
|
10,126
|
|
|
$
|
10,562
|
|
Cost of revenues
|
|
|
1,694
|
|
|
|
1,603
|
|
|
|
1,666
|
|
|
|
1,760
|
|
|
|
1,847
|
|
|
|
1,901
|
|
|
|
1,879
|
|
|
|
1,867
|
|
|
|
2,109
|
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,440
|
|
|
|
5,147
|
|
|
|
6,008
|
|
|
|
6,467
|
|
|
|
6,748
|
|
|
|
6,910
|
|
|
|
7,170
|
|
|
|
7,857
|
|
|
|
8,017
|
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,101
|
|
|
|
2,083
|
|
|
|
2,014
|
|
|
|
2,109
|
|
|
|
2,230
|
|
|
|
2,130
|
|
|
|
1,968
|
|
|
|
1,731
|
|
|
|
2,037
|
|
|
|
1,882
|
|
Sales and marketing
|
|
|
2,315
|
|
|
|
2,279
|
|
|
|
2,217
|
|
|
|
2,469
|
|
|
|
2,694
|
|
|
|
2,652
|
|
|
|
2,528
|
|
|
|
2,876
|
|
|
|
3,138
|
|
|
|
2,831
|
|
General and administrative
|
|
|
989
|
|
|
|
776
|
|
|
|
1,148
|
|
|
|
1,029
|
|
|
|
1,000
|
|
|
|
945
|
|
|
|
805
|
|
|
|
953
|
|
|
|
1,380
|
|
|
|
1,255
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
134
|
|
|
|
134
|
|
|
|
134
|
|
|
|
135
|
|
|
|
101
|
|
|
|
100
|
|
|
|
101
|
|
|
|
101
|
|
|
|
76
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,539
|
|
|
|
5,272
|
|
|
|
5,513
|
|
|
|
5,742
|
|
|
|
6,025
|
|
|
|
5,927
|
|
|
|
8,491
|
|
|
|
5,661
|
|
|
|
6,631
|
|
|
|
6,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(99
|
)
|
|
|
(125
|
)
|
|
|
495
|
|
|
|
725
|
|
|
|
723
|
|
|
|
983
|
|
|
|
(1,321
|
)
|
|
|
2,196
|
|
|
|
1,386
|
|
|
|
2,182
|
|
Interest and other income (expense), net
|
|
|
58
|
|
|
|
27
|
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
1,687
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(41
|
)
|
|
|
(98
|
)
|
|
|
509
|
|
|
|
739
|
|
|
|
738
|
|
|
|
999
|
|
|
|
(1,321
|
)
|
|
|
2,192
|
|
|
|
3,073
|
|
|
|
2,183
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,821
|
|
|
|
(1,143
|
)
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(41
|
)
|
|
$
|
(98
|
)
|
|
$
|
509
|
|
|
$
|
748
|
|
|
$
|
738
|
|
|
$
|
999
|
|
|
$
|
(1,321
|
)
|
|
$
|
19,013
|
|
|
$
|
1,930
|
|
|
$
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
285
|
|
|
$
|
263
|
|
|
$
|
992
|
|
|
$
|
1,127
|
|
|
$
|
1,113
|
|
|
$
|
1,490
|
|
|
$
|
2,171
|
|
|
$
|
2,575
|
|
|
$
|
2,256
|
|
|
$
|
2,586
|
|
Adjusted Free Cash Flow(2)
|
|
$
|
(1,260
|
)
|
|
$
|
538
|
|
|
$
|
3,678
|
|
|
$
|
3,047
|
|
|
$
|
(2,326
|
)
|
|
$
|
1,686
|
|
|
$
|
2,829
|
|
|
$
|
4,596
|
|
|
$
|
64
|
|
|
$
|
2,568
|
|
|
|
|
(1) |
|
EBITDA consists of net income (loss) plus depreciation and
amortization, less interest and other income, net and less
income tax benefit (expense). Adjusted EBITDA consists of EBITDA
plus our non-cash, stock-based compensation expense and
settlement and legal costs related to a patent infringement
lawsuit settled in 2009. We use Adjusted EBITDA as a measure of
operating performance because it assists us in comparing
performance on a consistent basis, as it removes from our
operating results the impact of our capital structure, the
one-time costs associated with a non-recurring event and such
items as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets. We believe
Adjusted EBITDA is useful to an investor in evaluating our
operating performance because it and similar measures are widely
used by investors, securities analysts and other interested
parties in our industry to measure a companys operating
performance without regard to items such as depreciation and
amortization, which can vary depending upon accounting methods
and the book value of assets, and to present a meaningful
measure of corporate performance exclusive of our capital
structure and the method by which assets were acquired. |
55
|
|
|
|
|
Our use of Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are: |
|
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash
expenditure requirements for such replacements;
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
Adjusted EBITDA does not reflect tax payments that may represent
a reduction in cash available to us; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted
EBITDA alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted EBITDA along with these
other measures in order to fully evaluate our financial
performance. |
|
|
|
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
|
(Unaudited; in thousands)
|
|
Net income (loss)
|
|
$
|
(41
|
)
|
|
$
|
(98
|
)
|
|
$
|
509
|
|
|
$
|
748
|
|
|
$
|
738
|
|
|
$
|
999
|
|
|
$
|
(1,321
|
)
|
|
$
|
19,013
|
|
|
$
|
1,930
|
|
|
$
|
1,274
|
|
Depreciation and amortization
|
|
|
315
|
|
|
|
316
|
|
|
|
322
|
|
|
|
332
|
|
|
|
300
|
|
|
|
312
|
|
|
|
311
|
|
|
|
291
|
|
|
|
262
|
|
|
|
256
|
|
Interest and other expense (income), net
|
|
|
(58
|
)
|
|
|
(27
|
)
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
4
|
|
|
|
(1,687
|
)
|
|
|
(1
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,821
|
)
|
|
|
1,143
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
216
|
|
|
|
191
|
|
|
|
817
|
|
|
|
1,057
|
|
|
|
1,023
|
|
|
|
1,295
|
|
|
|
(1,010
|
)
|
|
|
2,487
|
|
|
|
1,648
|
|
|
|
2,438
|
|
Non-cash, share-based compensation expense
|
|
|
69
|
|
|
|
72
|
|
|
|
175
|
|
|
|
70
|
|
|
|
90
|
|
|
|
95
|
|
|
|
92
|
|
|
|
88
|
|
|
|
608
|
|
|
|
148
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
285
|
|
|
$
|
263
|
|
|
$
|
992
|
|
|
$
|
1,127
|
|
|
$
|
1,113
|
|
|
$
|
1,490
|
|
|
$
|
2,171
|
|
|
$
|
2,575
|
|
|
$
|
2,256
|
|
|
$
|
2,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Free Cash Flow consists of net cash provided by operating
activities, less purchases of property and equipment and less
capitalization of software development costs. Adjusted Free Cash
Flow consists of Free Cash Flow plus one-time settlement and
legal costs related to a patent infringement lawsuit in 2009 as
well as public stock offering costs incurred in 2010. We use
Adjusted Free Cash Flow as a measure of liquidity because it
assists us in assessing the companys ability to fund its
growth through its generation of cash. We believe Adjusted Free
Cash Flow is useful to an investor in evaluating our liquidity
because Adjusted Free Cash Flow and similar measures are widely
used by investors, securities analysts and other interested
parties in our industry to measure a companys liquidity
without regard to revenue and expense recognition, which can
vary depending upon accounting methods. |
|
|
|
|
|
Our use of Adjusted Free Cash Flow has limitations as an
analytical tool, and you should not consider it in isolation or
as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are: |
|
|
|
|
|
Adjusted Free Cash Flow does not reflect the interest expense or
the cash requirements necessary to service interest or principal
payments on our indebtedness;
|
|
|
|
|
|
Adjusted Free Cash Flow does not reflect one-time litigation
expense payments, which reduced the cash available to us;
|
|
|
|
|
|
Adjusted Free Cash Flow does not include public stock offering
costs;
|
56
|
|
|
|
|
Adjusted Free Cash Flow removes the impact of accrual basis
accounting on asset accounts and non-debt liability
accounts; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Free Cash Flow differently, which reduces its
usefulness as a comparative measure.
|
|
|
|
|
|
Because of these limitations, you should consider Adjusted Free
Cash Flow alongside other liquidity measures, including various
cash flow metrics, net income and our other GAAP results. Our
management reviews Adjusted Free Cash Flow along with these
other measures in order to fully evaluate our liquidity. |
|
|
|
The following table provides a reconciliation of net cash
provided by operating activities to Adjusted Free Cash Flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1,146
|
)
|
|
$
|
677
|
|
|
$
|
3,888
|
|
|
$
|
3,163
|
|
|
$
|
(2,055
|
)
|
|
$
|
1,777
|
|
|
$
|
(34
|
)
|
|
$
|
4,813
|
|
|
$
|
368
|
|
|
$
|
2,005
|
|
Purchase of property and equipment
|
|
|
(114
|
)
|
|
|
(139
|
)
|
|
|
(131
|
)
|
|
|
(96
|
)
|
|
|
(271
|
)
|
|
|
(191
|
)
|
|
|
(65
|
)
|
|
|
(158
|
)
|
|
|
(102
|
)
|
|
|
(277
|
)
|
Capitalization of software development costs
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
(125
|
)
|
|
|
(202
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
(1,260
|
)
|
|
|
538
|
|
|
|
3,678
|
|
|
|
3,047
|
|
|
|
(2,326
|
)
|
|
|
1,586
|
|
|
|
(194
|
)
|
|
|
4,530
|
|
|
|
64
|
|
|
|
1,508
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
3,023
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
Public stock offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
(1,260
|
)
|
|
$
|
538
|
|
|
$
|
3,678
|
|
|
$
|
3,047
|
|
|
$
|
(2,326
|
)
|
|
$
|
1,686
|
|
|
$
|
2,829
|
|
|
$
|
4,596
|
|
|
$
|
64
|
|
|
$
|
2,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
24
|
|
|
|
24
|
|
|
|
22
|
|
|
|
21
|
|
|
|
21
|
|
|
|
22
|
|
|
|
21
|
|
|
|
19
|
|
|
|
21
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
76
|
|
|
|
76
|
|
|
|
78
|
|
|
|
79
|
|
|
|
79
|
|
|
|
78
|
|
|
|
79
|
|
|
|
81
|
|
|
|
79
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30
|
|
|
|
31
|
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
|
|
24
|
|
|
|
22
|
|
|
|
18
|
|
|
|
20
|
|
|
|
18
|
|
Sales and marketing
|
|
|
32
|
|
|
|
34
|
|
|
|
29
|
|
|
|
30
|
|
|
|
31
|
|
|
|
30
|
|
|
|
28
|
|
|
|
29
|
|
|
|
31
|
|
|
|
27
|
|
General and administrative
|
|
|
14
|
|
|
|
11
|
|
|
|
15
|
|
|
|
13
|
|
|
|
12
|
|
|
|
11
|
|
|
|
9
|
|
|
|
10
|
|
|
|
14
|
|
|
|
12
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78
|
|
|
|
78
|
|
|
|
72
|
|
|
|
70
|
|
|
|
70
|
|
|
|
67
|
|
|
|
94
|
|
|
|
58
|
|
|
|
66
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
9
|
|
|
|
9
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
23
|
|
|
|
13
|
|
|
|
21
|
|
Interest and other income (expense), net
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
9
|
|
|
|
9
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
23
|
|
|
|
30
|
|
|
|
21
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
(11
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
|
|
(15
|
)%
|
|
|
196
|
%
|
|
|
19
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Revenues increased sequentially in each of the quarters
presented primarily due to the increase in the number of total
customers, with the exception of the three months ended
June 30, 2008. Revenues in the three months ended
June 30, 2008 declined sequentially by $0.8 million
due to a one-time termination fee received for the cancellation
of a reseller arrangement recognized in the three months ended
March 31, 2008.
Gross profit, in absolute dollars, also increased sequentially
for the quarters presented primarily due to revenue growth, with
the exception of the three months ended June 30, 2008. The
decrease in gross profit, in absolute dollars, in the three
months ended June 30, 2008 was due to the $0.8 million
one-time termination fee received for the cancellation of a
reseller arrangement recognized in the three months ended
March 31, 2008.
Total operating expenses, in absolute dollars, have generally
increased over the nine quarters presented, while the quarterly
fluctuations have been as a result of timing of capitalization
of research and development costs, timing of marketing
expenditures and timing of legal and audit fees.
In June 2010, we terminated our Exit Event Bonus Plan and
determined to pay cash bonuses to our executives in connection
with our initial public offering in the aggregate amount of up
to $ in lieu of issuing shares of
common stock under the plan. The payment of these bonuses is
subject to consummation of our initial public offering. We will
incur compensation expense in the amount of such bonuses in the
same quarter in which our initial public offering occurs. As a
result, total operating expenses for such quarter are expected
to increase significantly and gross profit for such quarter is
expected to decrease significantly, each as compared to prior
quarters. We do not expect the payment of these bonuses to
impact the sufficiency of our cash and cash equivalents to meet
our working capital and capital expenditure requirements for at
least the next 12 months.
Liquidity
Since the going private transaction in July 2004, we have funded
our operations through cash flow generated by the operating
activities of our business.
Net Cash
Flows from Operating Activities
Net cash provided by operating activities was $2.4 million
during the six months ended June 30, 2010,
$4.5 million during 2009, $6.6 million during 2008 and
$4.7 million during 2007. The amount of our net cash
provided by operating activities is primarily a result of the
timing of cash payments from our customers, offset by the timing
of our primary cash expenditures, which are employee salaries.
The cash payments from our customers will fluctuate quarterly as
our new business sales normally fluctuate quarterly, primarily
due to the timing of client budget cycles, with the second and
fourth quarters of each year generally having the most sales and
the first and third quarters generally having fewer sales. The
cash payments from customers are typically due annually on the
anniversary date of the initial contract. The cash payments from
customers were approximately $20 million during the six
months ended June 30, 2010, $38 million during 2009,
$36 million during 2008 and $28 million during 2007.
The cash payments to employees are typically ratable throughout
the fiscal year, with the exception of annual incentive
payments, which occur in the first quarter. The cash
expenditures for employee salaries, including incentive
payments, were approximately $11 million during the six
months ended June 30, 2010, $20 million during 2009,
$18 million during 2008 and $14 million during 2007.
For the six months ended June 30, 2010, net cash provided
by operating activities of $2.4 million was primarily the
result of $3.2 million of net income plus a
$1.8 million decrease in deferred taxes and a
$1.2 million increase in deferred revenues, less a
$1.7 million gain on the sale of warrants and a
$1.9 million increase in accounts receivable. Our accounts
receivable and deferred revenues typically decrease in our first
quarter and then increase in our second quarter. As of
June 30, 2010, both accounts receivable and deferred
revenues have increased compared to our fourth quarter due to
our historical occurrence of lower new sales in our first
quarter followed by our historical occurrence of high new sales
in our second quarter.
For 2009, net cash provided by operating activities of
$4.5 million was primarily the result of $19.4 million
of net income, non-cash depreciation and amortization expense of
$1.2 million and a $2.7 million increase in deferred
revenues offset by a $16.8 million increase in deferred
taxes, a $1.3 million increase in accounts
58
receivable and a $0.6 million decrease in accrued
liabilities. Increases in deferred revenues are due to continued
growth in new business, offset by the subscription revenues
recognized ratably over time. Increases in accounts receivable
are primarily due to growth in the number of customer
subscription agreements.
For 2008, net cash provided by operating activities of
$6.5 million was primarily a result of $1.1 million of
net income,
non-cash
depreciation and amortization expense of $1.3 million and a
$5.5 million increase in deferred revenues due to growth in
new business offset by a $0.8 million increase in deferred
project costs due to increased capitalized commissions from new
business in 2008.
For 2007, net cash provided by operating activities of
$4.7 million was primarily a result of a
$(5.0) million net loss, offset by $2.9 million in
non-cash depreciation and amortization expense and a
$7.0 million increase in deferred revenues due to growth in
new business.
Our deferred revenues were $35.5 million at June 30,
2010, $34.3 million at December 31, 2009,
$31.6 million at December 31, 2008 and
$26.1 million at December 31, 2007. The increases in
deferred revenues at the end of each of these fiscal periods
reflects growth in the total number of customers. Customers are
invoiced annually in advance for their annual subscription fee
and the invoices are recorded in accounts receivable and
deferred revenues, which deferred revenues are then recognized
ratably over the term of the subscription agreement. With
respect to implementation services fees, customers are invoiced
as the services are performed, typically within the first three
to eight months of contract execution, and the invoices are
recorded in accounts receivable and deferred revenues, which are
then recognized ratably over the remaining term of the
subscription agreement once the performance milestones have been
met. If our sales increase, we would expect our deferred
revenues balance to increase.
As of June 30, 2010, we had net operating loss
carryforwards of approximately $192 million available to
reduce future federal taxable income. In the future, we may
fully utilize our available net operating loss carryforwards and
would begin making income tax payments at that time. In
addition, the limitations on utilizing net operating loss
carryforwards and other minimum state taxes may also increase
our overall tax obligations. We expect that if we generate
taxable income
and/or we
are not allowed to use net operating loss carryforwards for
federal/state income tax purposes, our cash generated from
operations will be adequate to meet our income tax obligations.
Net Cash
Flows from Investing Activities
For the six months ended June 30, 2010, net cash provided
by investing activities was $1.2 million, consisting of a
gain on the sale of warrants of $1.7 million, various capital
expenditures of $0.4 million and capitalization of
$0.4 million of software development costs, offset by a
decrease in restricted cash of $0.4 million. In general,
our capital expenditures are for our network infrastructure to
support our increasing customer base and growth in new business
and for internal use, such as equipment for our increasing
employee headcount. The restricted cash collateralized our line
of credit, which was obtained in 2008 and repaid and
extinguished in 2010. For 2009, net cash used in investing
activities was $0.9 million, consisting of various capital
expenditures of $0.7 million and capitalization of
$0.2 million of software development costs. Net cash used
in investing activities for 2008 was $0.9 million,
consisting of capital expenditures of $0.5 million,
capitalization of software development costs of
$0.1 million and an increase in restricted cash of
$0.4 million. Net cash used in investing activities for
2007 was $1.1 million, consisting of $0.7 million for
capital expenditures and $0.4 million for capitalization of
software development costs.
Net Cash
Flows from Financing Activities
For the six months ended June 30, 2010, net cash used by
financing activities was $0.6 million, consisting primarily
of a $0.4 million repayment of our line of credit and a
$0.3 million payment for the repurchase of restricted
stock. For 2009, net cash provided by financing activities was
$0.03 million and was primarily for the issuance of common
stock under the 2004 Stock Incentive Plan. For 2008, net cash
provided by financing activities was $0.06 million and was
primarily for the issuance of common stock under the 2004 Stock
Incentive Plan. For 2007, net cash used in financing activities
was $1.1 million and was primarily for the repayment of the
remainder of our note payable from the going private transaction.
59
Line of
Credit
As of June 30, 2010, we had terminated our
$2.5 million line of credit and repaid the
$0.4 million which had been drawn down. This line of credit
was collateralized by a $0.4 million restricted cash
deposit which was maintained at the granting financial
institution and was released upon repayment of the amount drawn
down. This line of credit had renewed annually in October. The
interest rate on the unpaid principal balance was the LIBOR
Market Index Rate plus 1.5%. As of December 31, 2009, the
interest rate was 1.7%.
Off-Balance
Sheet Arrangements
As of December 31, 2007, 2008 and 2009, we did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Other than our operating leases for office space, we do not
engage in off-balance sheet financing arrangements. In addition,
we do not engage in trading activities involving non-exchange
traded contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
Capital
Resources
Our future capital requirements may vary materially from those
now planned and will depend on many factors, including the costs
to develop and implement new products and services, the sales
and marketing resources needed to further penetrate our targeted
vertical markets and gain acceptance of new modules we develop,
the expansion of our operations in the United States and
internationally and the response of competitors to our products
and services. Historically, we have experienced increases in our
expenditures consistent with the growth in our operations and
personnel, and we anticipate that our expenditures will continue
to increase as we grow our business. We expect our research and
development, sales and marketing and capital expenditures to
decline as a percentage of revenues, but increase in absolute
dollars in the future. In the future, we may also acquire
complementary businesses, products or technologies. We have no
agreements or commitments with respect to any acquisitions at
this time.
We believe our cash and cash equivalents, the proceeds from this
offering and cash flows from our operations will be sufficient
to meet our working capital and capital expenditure requirements
for at least the next 12 months.
During the last three years, inflation and changing prices have
not had a material effect on our business, and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Contractual
and Commercial Commitment Summary
The following table summarizes our contractual obligations as of
June 30, 2010. These contractual obligations require us to
make future cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less Than
|
|
|
|
|
|
More Than
|
Contractual Obligations
|
|
Total
|
|
1 Year
|
|
1 3 Years
|
|
3 5 Years
|
|
5 Years
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Operating lease commitments
|
|
$
|
3,089
|
|
|
$
|
756
|
|
|
$
|
1,568
|
|
|
$
|
666
|
|
|
$
|
99
|
|
Quantitative
and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. We bill our
customers predominately in U.S. dollars and receive payment
predominately in U.S. dollars. Accordingly, our results of
operations and cash flows are not materially subject to
fluctuations due to changes in foreign currency exchange rates.
If we grow sales of our solution outside of the United States,
our contracts with foreign customers may be denominated in
foreign currency and may become subject to changes in currency
exchange rates.
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Interest Rate Sensitivity. Interest income and
expense are sensitive to changes in the general level of
U.S. interest rates. However, based on the nature and
current level of our investments, which are primarily cash and
cash equivalents, and our debt obligations, we believe there is
no material risk of exposure.
Seasonality
Our new business sales normally fluctuate as a result of
seasonal variations in our business, principally due to the
timing of client budget cycles. Historically, we have had lower
new sales in our first and third quarters than in the remainder
of our year. Our expenses, however, do not vary significantly as
a result of these factors, but do fluctuate on a quarterly basis
due to varying timing of expenditures. Our Adjusted Free Cash
Flow normally fluctuates quarterly due to the combination of the
timing of new business and the payment of annual bonuses.
Historically, due to lower new sales in our first quarter,
combined with the payment of annual bonuses from the prior year
in our first quarter, our Adjusted Free Cash Flow is lowest in
our first quarter, and due to the timing of client budget
cycles, our Adjusted Free Cash Flow is lower in our second
quarter as compared to our third and fourth quarters. In
addition, deferred revenues can vary on a seasonal basis for the
same reasons. This pattern may change, however, as a result of
acquisitions, new market opportunities or new product
introductions.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB,
issued The FASB Accounting Standards Codification, or
Codification, which is the single source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification
supersedes all
non-SEC
accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification
is non-authoritative. The Codification is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. The Codification did not
change or alter existing GAAP and, therefore, did not have an
impact on our balance sheets, statements of operations and cash
flows.
In October 2009, the FASBs Emerging Issues Task Force
revised its guidance on revenue recognition for
multiple-deliverable revenue arrangements. The amendments in
this update will, in certain circumstances, enable companies to
separately account for multiple revenue-generating activities
(deliverables) that they perform for their customers. Existing
GAAP requires a company to use vendor-specific objective
evidence, or VSOE, or third-party evidence of selling price to
separate deliverables in a multiple-deliverable arrangement. The
update will allow the use of an estimated selling price if
neither VSOE nor third-party evidence is available. The update
will require additional disclosures of information about an
entitys multiple-deliverable arrangements. The
requirements of the update may be applied prospectively for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although
early adoption is permitted. We are currently evaluating the
impact of the update on our financial position and results of
operations and do not plan to early or retroactively adopt the
new guidance.
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OUR
BUSINESS
Overview
We provide a leading on-demand strategic procurement and
supplier enablement solution that integrates our customers with
their suppliers to improve procurement of indirect goods and
services. Our on-demand software enables organizations to
realize the benefits of strategic procurement by identifying and
establishing contracts with preferred suppliers, driving spend
to those contracts and promoting process efficiencies through
electronic transactions. Strategic procurement is the
optimization of tasks throughout the cycle of finding,
procuring, receiving and paying for indirect goods and services,
which can result in increased efficiency, reduced costs and
increased insight into an organizations buying patterns.
Using our managed SciQuest Supplier Network, our customers do
business with more than 30,000 unique suppliers and spend
billions of dollars annually.
Our current target markets are higher education, life sciences,
healthcare and state and local governments, and our customers
are the purchasing organizations and individual employees that
purchase indirect goods and services using our solution. We
tailor our solution for each of the vertical markets we serve by
offering industry-specific functionality, content and supplier
connections. Once connected to our network, customers and
suppliers can easily exchange real-time electronic procurement
information and conduct transactions. We serve more than 160
customers operating in 16 countries and offer our solution in
five languages and 22 currencies. Our value proposition has led
to an average annual customer renewal rate of over 94% over the
last three fiscal years. On a dollar basis, our annual renewal
rate has been 106% over this same time period solely as a result
of pricing increases at the time of renewal. We believe our
renewal rates are among the highest of on-demand model companies.
We deliver our solution over the Internet using a
Software-as-a-Service, or SaaS, model, which enables us to offer
greater functionality, integration and reliability with less
cost and risk to the organization than traditional
on-premise
solutions. Customers pay us subscription fees and implementation
service fees for the use of our solution under multi-year
contracts that are generally three to five years in length. We
typically receive subscription payments annually in advance and
implementation service fees as the services are performed,
typically within the first three to eight months of contract
execution. Unlike many other providers of procurement solutions,
we do not charge suppliers any fees for the use of our network,
because suppliers ultimately may pass on such costs to the
customer.
We were founded in 1995 as an
e-commerce
business-to-business
exchange for scientific products and conducted an initial public
offering in 1999. In 2001, we brought in a new management team,
exited the
business-to-business
exchange model and began selling our on-demand strategic
procurement and supplier enablement solution. Our company was
subsequently taken private in 2004. Since 2001, we have focused
on developing our current
on-demand
business model, building out our technology, acquiring a
critical mass of customers in our higher education and life
sciences vertical markets, and selectively expanding our
solution to serve the healthcare and state and local government
markets. Our revenues have grown to $36.2 million in 2009
from $20.1 million in 2007, and our Adjusted Free Cash Flow
increased to $6.8 million in 2009 from $3.6 million in
2007 (Adjusted Free Cash Flow is not determined in accordance
with GAAP and is not a substitute for or superior to financial
measures determined in accordance with GAAP; for further
discussion regarding Adjusted Free Cash Flow and a
reconciliation of Adjusted Free Cash Flow to cash flows from
operations, see footnote 4 to the table in Selected
Financial Data included elsewhere in this prospectus). No
customer accounted for more than 10% of our revenues during this
period. Our high customer retention, combined with our long-term
contracts, increases the visibility and predictability of our
revenues compared with traditional perpetual license-based
software businesses. We manage our business with three key
principles: focus on customer value, vertical market expertise
and financial stewardship.
Industry
Background
The
Indirect Goods and Services Procurement Market
Procurement is an essential activity for virtually every
organization, encompassing a significant portion of an
organizations spending beyond payroll. The procurement
function is typically split into two categories, direct
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and indirect. Direct goods and services procurement is the
purchase of goods and services that are directly incorporated
into an organizations products or services, while indirect
goods and services procurement is the purchase of the
day-to-day
necessities of the workplace such as office supplies, laboratory
supplies, furniture, computers, MRO (maintenance, repair and
operations) supplies, and food and beverages. Indirect goods and
services tend to be low cost but are usually bought in high
volumes by a wide variety of employees throughout an
organization.
The procurement process for indirect goods and services is often
not well-managed or controlled. Buyers generally follow a
sequential set of processes, referred to as the
source-to-settle
cycle, which is comprised of the following steps:
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identify which suppliers have the required goods and services;
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negotiate purchasing or contractual relationships;
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establish a mechanism to transact business;
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find, compare, approve and order the necessary goods and
services;
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receive, inspect and pay for the goods and services; and
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analyze spending for potential savings and contract compliance.
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Organizations with a procurement department establish purchasing
policies, monitor purchasing activity, designate preferred
suppliers, negotiate volume discounts and other contractual
terms and otherwise manage supplier relationships. Although the
procurement department is responsible for the purchasing
function, most purchasing activity is conducted outside the
procurement department by employees throughout the organization.
These employees are challenged to comply with procurement
policies to acquire their needed goods and services while
performing their
day-to-day
duties. Employees often do not know who the preferred suppliers
are and must work within antiquated systems that are cumbersome
and time consuming. As a result, many purchases are not made
from the available preferred suppliers
and/or the
purchases are conducted off-contract, a behavior
sometimes referred to as maverick spending. This
results in the organization not taking advantage of negotiated
discounts. In many cases, the procurement department has limited
ability to monitor, control or even influence this purchasing
activity. Procurement departments are seeking ways to have
greater visibility and control over the organizations
purchasing activity, reduce maverick spending and better serve
the employees who make purchases for the organization.
Our target market for strategic procurement of indirect goods
and services is a subset of the broader supply procurement and
sourcing application chain management market, which AMR Research
estimates in a July 2009 report entitled The Global
Enterprise Application Market Sizing Report,
2008-2013
as a $2.9 billion global opportunity in 2010, growing at an
8% compounded annual growth rate from 2010 through 2013. Based
on our own internal analysis, we believe that our current
addressable market is approximately $1.0 billion within our
current target markets as follows: higher education
($305 million), life sciences ($300 million),
healthcare ($175 million) and state and local government
($250 million).
Manual
Procurement Processes Are Inefficient
Historically, efforts and investments to streamline the
procurement process have tended to focus on direct goods and
services. The procurement of indirect goods and services, which
are typically lower cost but higher volume and thus still
represent a large percentage of overall expenses, remains
subject to significant inefficiencies. Traditionally,
procurement organizations and employees have relied on manual,
catalog-based processes to procure indirect goods and services,
resulting in inaccuracies, inefficiencies, poor control and
reduced user productivity. For example, in many instances, users
may have to pay
out-of-pocket
for supplies and then seek reimbursement through expense
reports. In addition, there are often long lead times to fulfill
orders and an inability to analyze spending and minimize waste.
Characteristics of these traditional processes include:
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Lack of clearly defined procurement guidelines and awareness
of preferred suppliers. In many cases, because
processes are cumbersome, ill-defined and time consuming, many
employees have difficulty following the procurement approval
processes and fail to purchase from preferred suppliers. As a
result, buying the right goods and services from the right
suppliers at the right prices rarely occurs. Employees
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frequently purchase indirect materials from a local retail
outlet or from a generic online retailer, such as Amazon.com.
This maverick spending can result in the organization purchasing
products at unfavorable prices.
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Limited ability to analyze spend. Given the
lack of automation and centralized reporting, organizations have
difficulty analyzing what they are buying from suppliers. This
limits the ability to negotiate better contracts or understand
the organizations compliance with spending limits.
Additionally, without the proper systems, it is difficult to
enforce supplier compliance with all negotiated contract terms.
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Dissatisfied employees. Employees prefer an
efficient and user-friendly procurement process. Manual,
non-integrated
processes often lead to excess costs, delays and errors,
resulting in a frustrating experience. In addition, employees
are unable to track the goods and supplies already on-hand, thus
leading to excess purchases.
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Traditional
Automated Procurement Solutions Have Had Limited
Effectiveness
Efforts to automate the procurement function for indirect goods
and services initially consisted of add-on modules to enterprise
resource planning, or ERP, systems and first generation
procurement systems. These systems, initially developed 10 to
15 years ago, provide efficiencies by allowing
organizations to automate parts of the procurement process, such
as requisitioning, authorizing, ordering, receiving and payment.
However, providers of these systems often have pricing models
that charge fees to suppliers, which are costs that suppliers
ultimately may pass on to the customer. These supplier fees
discourage suppliers from entering the offering platform and
result in off-platform purchases. Furthermore, most have limited
effectiveness, because they often:
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are implemented on-premise, and thus are expensive to deploy and
maintain;
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are generalized horizontal market solutions with limited
industry-specific supplier participation, content and
functionality;
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require each organization to have its own customized
one-to-one
connections to each supplier; and
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lack managed service capabilities to enable suppliers.
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The introduction of SaaS-based strategic procurement solutions
within the past few years has enabled buyers and suppliers to
transact with each other online more efficiently. These systems
provide better access to suppliers through a basic
hub-and-spoke
architecture and offer lower implementation and ongoing costs
due to their
on-demand
nature. Yet despite their benefits, many other SaaS procurement
offerings still suffer from the fact that they are primarily
horizontal solutions that do not provide functionality and
content specific to vertical markets, nor do they have a robust
supplier network that can benefit from economies of scale. In
addition, existing systems often have complicated interfaces
that are difficult for employees to navigate. We believe there
is a substantial market for focused, easy-to-use solutions that
establish and maintain strong and efficient commercial
relationships between organizations and suppliers.
Our
Solution
We offer an on-demand strategic procurement and supplier
enablement solution that enables organizations to more
efficiently source indirect goods and services, manage their
spend and obtain the benefits of compliance with purchasing
policies and negotiating power with suppliers. Our on-demand
strategic procurement software suite coupled with our managed
supplier network forms our integrated solution, which is
designed to achieve rapid and sustainable savings. Our solution
provides customers with a set of products and services that
enable them to optimize existing procurement processes by
automating the entire
source-to-settle
process. The SciQuest Supplier Network acts as a communications
hub that connects over 160 customers to over 30,000 unique
suppliers.
Our solution provides the following key benefits:
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Significant return on investment
(ROI). Our solution enables
organizations to realize the benefits of strategic procurement
by identifying and establishing contracts with preferred
suppliers, driving spend to those contracts and promoting
process efficiencies through electronic transactions. As a
result, customers are able to achieve significant returns on
investment through savings associated with contract compliance
and
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strategic procurement. These savings result from negotiated
discounts, automated requisition/order processing, contract
lifecycle management, settlement automation and sourcing (such
as the ability to conduct on-line bidding processes).
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Content and functionality specific to our vertical
markets. While we offer a single solution, our
software has specific configurable functionality that meets the
unique needs of our targeted vertical markets. We have a
critical mass of suppliers to achieve economies of scale, and
new suppliers can be readily added as the needs of our customers
dictate.
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Easier access to customers supplier
network. Customers can easily access their
preferred suppliers using a single solution and avoid the costs
and inefficiencies associated with traditional
one-to-one
supplier management.
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Greater adoption by employees. Our intuitive
shopping interface provides employees with easy and automated
visibility and access to goods and services. Streamlining the
procurement process spurs user adoption and increases the level
of spend under management, meaning spend that occurs pursuant to
a
pre-established
contract with the supplier.
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Greater adoption by suppliers. Suppliers
typically are motivated to join our network due to ease of
enablement and lack of supplier fees. This allows our solution
to support a robust supplier network in which our customers
benefit from economies of scale.
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Visibility into spending patterns and
activity. Our solution provides granular detail
into user spending behavior and provides detailed analytics that
allow organizations to continually improve their purchasing
practices.
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Ease of deployment via integration with existing systems.
Our highly-configurable solution integrates with many
leading ERP systems to speed deployment and facilitate the
interchange of transaction, accounting, settlement and user data.
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Our
Business Strengths
In addition to our differentiated customer solution, we believe
our market approach and business model offer specific benefits
that are instrumental to our successful growth. These include:
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Focus on customer value. Delivering value to
our customers is at the core of our business philosophy. We
focus extensively on ensuring that customers achieve maximum
benefit from our solution, and we proactively engage with our
customers to continually improve our software and services. To
this end, each of our customers is partnered with a member of
our client partner organization that proactively assists that
customer to maximize the ROI and related benefits from their
implementation of our solution. This has led to a 36% compound
annual growth rate in the average transaction volume by
customers through our system over the last three years. In
addition, each customer has access to our separate client
support staff. Our
customer-centric
focus, significant domain expertise and integrated solution have
led to the establishment of consistent long-term customer
relationships, exemplified by an average annual customer renewal
rate of over 94% over the last three fiscal years. On a dollar
basis, our annual renewal rate has been 106% over this same time
period solely as a result of pricing increases at the time of
renewal.
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Expertise in our targeted vertical
markets. Because we have developed a solution
that solves specific procurement problems for customers in our
target vertical markets, we are able to differentiate ourselves
from other solution providers that are horizontally focused. As
a result, we are able to drive greater value to customers
through increased cost savings and improved contract compliance.
Additionally, our focus on a core set of vertical markets allows
us to be more efficient in our sales and marketing efforts
through an understanding of the specific needs and requirements
of our customers. Our domain expertise allows us to provide our
customers with a highly tailored and differentiated solution
that is difficult for our competitors to replicate.
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Extensive content and supplier
network. Essential to our solution is building a
critical mass of suppliers within a vertical market. Suppliers
are not charged any fees or transaction costs for purchases
consummated through the SciQuest Supplier Network, which
facilitates the growth of our network of over 30,000 unique
suppliers servicing the higher education, life sciences,
healthcare and state and local government markets. Upon signing
of a new customer, we seek to add that customers suppliers
to our supplier network. We
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charge our customers for each of their suppliers with whom they
interact on our supplier network. Therefore, to the extent that
a customers suppliers are already on our supplier network,
our costs to enable these suppliers are reduced, allowing us to
benefit from improved operating margins and other economies of
scale.
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Ability to manage costs. While we manage our
business to maximize customer benefit, we also seek to optimize
returns to our stockholders and employees by managing our cost
structure. Our culture of lean management principles extends
from our senior management throughout our company, including our
development processes and our professional services engagements.
This lean management of our cost structure has kept our capital
expenditures low and helped lower our operating expenses as a
percentage of revenues from 95% in 2007 to 72% in 2009.
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High visibility business model. Our customers
pay us subscription fees and implementation service fees for the
use of our solution under multi-year contracts that are
generally three to five years in length, and we typically
receive cash payments annually in advance. The recurring nature
of our revenues provides high visibility into future
performance, and the upfront payments result in cash flow
generation in advance of revenue recognition. For each of the
last three fiscal years, greater than 80% of our revenues were
recognized from contracts that were in place at the beginning of
the year.
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Our
Growth Strategy
We seek to become the leading provider of strategic procurement
solutions for indirect goods and services. Our key strategic
initiatives include:
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Further penetrating our existing vertical
markets. Over 80% of our customers currently come
from the higher education and life sciences vertical markets,
where we have a significant operating history, with the
remainder of our customers coming from our newer healthcare and
state and local government markets. We will continue to focus
our efforts on acquiring new customers in our vertical markets,
including investing in sales and marketing to increase our
profile in the healthcare and state and local government markets
while increasing our emphasis on mid-sized customer acquisition
opportunities in the higher education and life sciences markets.
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Capitalizing on cross-selling opportunities into our
installed customer base. As of June 30,
2010, our solution was being used by over 160 customers in our
vertical markets. Our existing customer base provides us with a
significant opportunity to sell additional modules and new
products that we may develop or acquire. For each of the past
three fiscal years, approximately 20% of new sales have
consisted of sales of additional modules and services to
existing customers. We plan to develop
and/or
acquire additional modules and products to sell to our existing
customers by leveraging our position as a trusted strategic
procurement solution vendor in our targeted vertical markets.
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Selectively expanding into new vertical
markets. In the future, we intend to selectively
expand into new vertical markets that are adjacent to, or have
similarities to, our existing verticals and where we can
leverage our market expertise. For instance, we expanded into
the healthcare and state and local government markets because
they are both adjacent to and have similar procurement
characteristics as the higher education and life sciences
markets. Vertical markets where procurement is still
predominately handled through paper processing, with multiple
suppliers of high volume, low-cost goods, offer potential
expansion opportunities. We may pursue such expansion through
internal product development, sales and marketing initiatives or
strategic acquisitions.
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Investing in international expansion to acquire new
customers. We believe that the market outside the
United States offers us significant growth potential. Currently,
we have customers operating in 16 countries and offer our
solution in five languages and 22 currencies, although many of
our international sales have consisted of sales to multinational
organizations based in the United States. To date, sales to
customers that are not based in the United States have
represented an insignificant portion of our annual sales. We
intend to continue our international expansion by increasing our
international direct sales force and establishing additional
third-party
sales relationships in an effort to leverage our leadership
position and reputation as a leading provider of strategic
procurement solutions to organizations with global operations.
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Selectively pursuing acquisitions. We may
pursue acquisitions of businesses, technologies and solutions
that complement our existing offerings in an effort to
accelerate our growth, enhance the capabilities of our
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existing solution and broaden our solution offerings. We also
may pursue acquisitions that allow us to expand into new
verticals or geographies where we do not have a significant
presence.
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Our
Products and Services
Our strategic procurement and supplier enablement solution
automates the
source-to-settle
process. We provide our solution on-demand over the Internet
using a SaaS model, which enables us to offer greater
functionality, integration and reliability with less cost and
risk than traditional on-premise solutions. We continue to
evolve our solution based on our interaction with our customers
around the world.
The following diagram provides an overview of our solution:
Our on-demand strategic procurement software suite provides
customers with a set of products and services that enables them
to automate the entire
source-to-settle
process. These integrated modules maximize the benefits
customers derive from using the SciQuest Supplier Network and
allow our customers to more efficiently communicate and transact
with their suppliers.
Our solution also includes business intelligence features that
enable organizations to analyze spend at the supplier, commodity
and requisition levels. These reporting tools help users
identify and establish contracts with preferred suppliers, drive
spend to those contracts, and promote process efficiencies
through electronic transactions.
SciQuest
Strategic Procurement Software Suite
Our modular strategic procurement software suite optimizes
processes to reduce costs, improve productivity and increase
visibility for enterprise spend management. The individual
modules of our solution can be deployed together or separately
and integrate with many leading ERP systems.
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The following table provides an overview of the modules of our
solution:
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Module
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Key Features
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Sourcing Manager
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Manages and expedites the bid creation process
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Provides ability to create auctions, invite supplier
participants and monitor and control the reverse auction process
in real-time
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Provides self-service access for registered suppliers to view
events, enter responses, review award decisions and manage their
own profiles
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Graphs and highlights key event information
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Spend Director
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Enables a critical mass of suppliers
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Promotes preferred suppliers
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Provides an intuitive procurement user environment
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Provides visibility into spending
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Requisition Manager
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Creates and submits error-free requisitions electronically
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Previews approval workflow and tracks requisitions online
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Routes requisitions electronically based on any requisition
attribute
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Provides buyers and managers flexible approval options and 24/7
remote access
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Consolidates requisitions to minimize shipping fees and maximize
discounts
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Analyzes requisition data to identify savings opportunities and
audit contract compliance
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Order Manager
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Exchanges purchase documents electronically and securely with
suppliers
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Manages purchase documents automatically, eliminating paper
processes
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Communicates order status to requisitioners electronically
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Tracks order status automatically with participating suppliers
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Integrates directly with SciQuest Requisition Manager or
existing ERP and financial systems
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Analyzes order data to identify saving opportunities
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Settlement Manager
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Integrates order/receipt/invoice data
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Automates receipt creation
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Supports automated matching of invoices with purchase orders
and/or receipts
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Streamlines invoice management
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Avoids error-prone manual data entry
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Contract Management
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Creates and manages a detailed, accessible and searchable
contract repository
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Assigns contract numbers to purchases
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Ensures the order price is the best price
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Generates proactive alerts for key dates and contract milestones
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Enhances visibility into contract spending and compliance,
including comparison of contract budget versus contract spending
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Module
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Key Features
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Inventory Materials Management
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Provides comprehensive, stockroom-level inventory management,
reducing backorders and stockouts
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Integrates available onsite inventory with product searches to
avoid redundant purchases
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Maintains trusted inventory count
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Manages multiple inventory locations
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Controls user access to inventory
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Our solution is priced based primarily on the modules purchased
and the size of the organization. An organizations size is
determined based on its operating budget
and/or
number of employees. Our typical total subscription fees over
the three to five year term of the subscription agreement range
from $450,000 to $1.5 million ($150,000 to $300,000 per
year), and our typical one-time implementation service fees
range from $150,000 to $300,000. Customers are not charged based
on the number of users or transaction volume, which encourages
organizations to maximize the number of employees using our
solution, resulting in enhanced efficiencies and customer
satisfaction.
SciQuest
Supplier Network
The SciQuest Supplier Network is a SaaS communications hub that
enables efficient and automated transaction interactions between
our customers and their existing suppliers. It is the single
integration point between our customers and their suppliers that
also provides customers with on-demand access to comprehensive
and
up-to-date
multi-commodity supplier catalogs. By utilizing the SciQuest
Supplier Network, our customers and their suppliers can connect
in a
hub-and-spoke
configuration versus a
one-to-one
configuration, dramatically reducing the cost of integration.
The SciQuest Supplier Network also provides customers with the
infrastructure to add additional suppliers as needed. The dollar
volume of transactions conducted through the SciQuest Supplier
Network has increased from less than $2 billion in 2007 to
over $6 billion in 2009. The SciQuest Supplier Network
includes suppliers of broad commodity categories such as:
|
|
|
IT equipment;
|
|
office supplies;
|
|
laboratory and medical supplies;
|
|
MRO supplies;
|
|
services, such as temporary labor;
|
|
retail (books, CDs, appliances, etc.);
|
|
furniture; and
|
|
food and beverages.
|
While our solution addresses many different commodities and
markets, our experience in the higher education and life
sciences verticals has resulted in the ability to create unique
additional products for these markets such as:
|
|
|
the Science Catalog, which is a list price catalog of
approximately 400 niche and midsize suppliers that support
diverse and specialized scientific research;
|
|
catalog consortium contracts which offer preferred pricing
arrangements with industry-specific buying cooperatives; and
|
|
inventory management solutions for specialty materials.
|
Our
Service Offerings
We offer our customers a number of services, some of which are
included as part of their annual subscription fee and others,
such as implementation services, are billed separately.
69
Client Partners. Our client partner
organization proactively assists customers to maximize the
benefit from their SciQuest solution. Each of our customers is
partnered with a member of our client partner organization, who
monitors the customers utilization of our solution and
tracks performance metrics. Our client partners can identify
underuse of the solution within the organization and proactively
assist customers to better integrate our solution into their
procurement processes.
Supplier Enablement Services. Our supplier
enablement organization manages the SciQuest Supplier Network
and all supplier connections to our customers. This
organizations role is to ease the integration of suppliers
into our network and to increase the efficiency of communication
between our customers and their suppliers. These efforts include
enabling each new customers suppliers on the SciQuest
Supplier Network, assisting suppliers in loading and updating
product catalogs and adding new suppliers of existing customers.
Implementation Services. Our client delivery
organization is responsible for implementing and deploying our
solution with customers. These services are designed primarily
to enhance the usability of the software for our customers and
to assist them with configuration, integration, training and
change management. Our implementation services include analyzing
a customers current procurement processes, identifying
specific
high-value
procurement needs, configuring our software products to the
customers specific business and providing guidance on
implementing and reinforcing best practices for procurement. In
order to provide reliable, repeatable and
cost-effective
implementation and use of our products, we have developed a
standard methodology to deliver implementation services that is
milestone-based and emphasizes early knowledge transfer and
solution usage. We develop project requirements based on the
customers specific needs and set objective project goals,
such as usage levels, in order to measure success.
Customer Support. Our customer support
organization provides technical product support to our customers
by phone, email and through our online Solutions Portal. Our
Solutions Portal provides instant
24-hour
Internet access to a searchable solutions database that includes
release notes, answers to frequently asked questions, links to
release preview webinars and product documentation. The portal
allows customers to notify us of product software defects and
incidents and to track our resolutions of such incidents in a
centralized location.
Customers
We serve more than 160 customers operating in 16 countries and
offer our solution in five languages and 22 currencies. As of
June 30, 2010, we had over 115,000 active users of our
solution within our customer organizations. In 2007, 2008 and
2009, substantially all of our revenues were derived from
customers in the United States or United States-based
multinational companies. No customer accounted for more than 10%
of our total revenues in 2007, 2008, 2009 and the six months
ended June 30, 2010. Our ten largest customers accounted
for no more than 25% of our total revenues in 2009 and the six
months ended June 30, 2010. The markets in which our
customers operate include higher education, life sciences and
more recently, healthcare and state and local governments.
Higher Education. We serve over 100 higher
education institutions, including research intensive
universities, state-wide university systems and mid-market
colleges, at more than 194 campuses. Over 65% of our higher
education customers have annual expenditures in excess of $250
million, with over 25% of these customers having annual
expenditures exceeding $1 billion.
Life Sciences. We serve 38 pharmaceutical and
bio-technology customers, which include 12 of the top 15 global
pharmaceutical companies as measured by revenue. A majority of
our life science customers have over $1 billion in annual
revenue.
Healthcare. We serve 19 healthcare customers
which consist of academic medical centers, healthcare services
and research organizations and group purchasing organizations,
more than half of which have annual revenues exceeding
$500 million.
State and Local Government. We serve four
state and local government customers and are currently
attempting to expand our presence within this market. The State
of Georgia became our first state and local government customer
in June 2008. We are initially targeting all state governments,
all of which have annual
70
expenditures in excess of $3 billion on indirect goods and
services, and the 200 largest city and county governments, which
have annual expenditures in excess of $500 million on
indirect goods and services.
To date, the higher education and life sciences markets have
been our primary markets, although we consider the healthcare
and state and local government markets to be important for our
future revenue growth.
The following table provides an overview of our representative
customers by vertical.
|
|
|
Vertical
|
|
Representative Customers
|
|
Higher Education
|
|
Bryn Mawr College, East Tennessee State University, Emory
University, Tulsa Community College, University of Michigan,
University of Notre Dame, the University of Texas System, Yale
University
|
Life Sciences
|
|
Bristol-Myers Squibb Company, GlaxoSmithKline, Organon
Laboratories, Roche, Sanofi-Aventis, The Scripps Research
Institute, Wyeth
|
Healthcare
|
|
AmSurg, Cincinnati Childrens Hospital, Memorial
Sloan-Kettering Cancer Center, University of Texas Health
Science Center at Houston
|
State and Local Government
|
|
Clint Independent School District, State of Georgia, State of
Iowa
|
Customer
Case Studies
The case studies below demonstrate how we have helped leading
organizations transform procurement into a strategic function
and achieve a return on investment:
Emory University. Emory University, the
largest private employer in Atlanta, is a leading
U.S. research university. Emory purchased our solution to
gain visibility into how much each of its 350 departments was
paying for everything from pens and paper to furniture and MRO
supplies. In 2006, Emory implemented our full
source-to-settle
solution to create an online, one-stop shopping marketplace
where faculty and staff can order most commonly required
products and specific services from university contracts. With
our procurement solution in place, Emory reports the following
benefits:
|
|
|
realized 6-to-1 ROI, meaning that they realized $6 in savings
benefits for every $1 paid to SciQuest for its solution, over
the first three years of their agreement with SciQuest;
|
|
funded the investment in our solution from the existing
procurement budget, generated by realized savings, with no
budget increases or general fund expenses; and
|
|
determined that 45% of realized savings resulted from process
efficiencies and 55% of realized savings resulted from
negotiated discounts and contract compliance.
|
The Scripps Research Institute. The Scripps
Research Institute, or TSRI, is the worlds largest
independent non-profit biomedical research facility with nearly
3,000 researchers, scientific staff members and employees. Prior
to utilizing our solution, TSRI used a manual, paper-based
system for procurement in which lab staff searched catalogs and
websites for necessary products, filled out paper requisitions,
submitted the requests and waited as the procurement department
processed the order a process that could take up to
two weeks. TSRI implemented our Spend Director, Requisition
Manager and Order Manager modules in 2007 and our Settlement
Manager module in 2009 to transform its procurement process and
reports the following benefits:
|
|
|
decreased the time spent ordering supplies and managing orders
by 85%;
|
|
decreased the requisition processing time from 14 days to
two days;
|
|
generated an average savings of 7% on lab material purchases as
a result of negotiating greater supplier discounts and
increasing on-contract spend; and
|
|
exceeded user adoption goal of 450 by 300%, with 1,500 TSRI
staff now using the SciQuest procure-to-pay suite.
|
71
State of Georgia. The State of Georgia is the
ninth most populous state in the country with a
$17.5 billion operating budget. Approximately
$4 billion of this operating budget is spent through the
states purchasing department. Government agencies
typically negotiate sophisticated statewide contracts with
suppliers, but these contracts are complicated and difficult for
state employees to access and utilize. The State of Georgia
first implemented our solution in 2008. The State of Georgia
acquired our solution in order to apply private-sector
procurement strategies to address this problem. After deploying
our solution, the State of Georgia reports the following
benefits:
|
|
|
increased spend under management, meaning spend that occurs
pursuant to a pre-established contract with the supplier, from
6% to nearly 60% within the first 18 months;
|
|
negotiated new discounts from suppliers ranging from 5% to
20%; and
|
|
reduced paper-based expenses, including some departments going
almost 100% paperless upon implementation.
|
East Tennessee State University. East
Tennessee State University, or ETSU, is a mid-sized higher
education institution. A cost-reduction task force identified
paper-based ordering and a fully manual procurement process as
an opportunity for cost savings. The task force found that the
cost to process each purchase order was too high and that the
average order turnaround time from requisition to approval was
9.3 days. ETSU first implemented our solution in 2006. ETSU
licensed our Spend Director, Requisition Manager and Order
Manager modules with our Supplier Network in order to establish
a new automated procurement process. With our procurement
solution in place, ETSU reports the following benefits:
|
|
|
reduced average order turnaround time from 9.3 days to
3.7 days;
|
|
eliminated paper-based purchasing with 100% of purchase orders
being processed electronically;
|
|
reallocated two procurement employees to other departments,
resulting in a 44% reduction in procurement staff; and
|
|
improved ability to direct spending, with 41% of purchase orders
being directed to preferred suppliers and 10% of spending
directed to diversity suppliers.
|
Sales and
Marketing
We market and sell our strategic procurement and supplier
enablement solution through a direct sales force. Our sales
force is organized by our current target markets of higher
education, life sciences, healthcare and state and local
governments, as well as by region. Our sales force also is
divided into two selling groups: a new accounts group that
generates qualified sales leads and sells our solution to
organizations that are not currently our customers, and a sales
group of account executives that sells additional products to
our existing customers. Sales through our direct sales force
represent the largest source of our total revenues.
We supplement our direct sales efforts with strategic partner
relationships principally in order to increase market awareness
and generate sales leads. Our strategic partners generally
consist of suppliers, ERP providers, technology providers and
purchasing consultants and consortia. The relationships include
referral and re-seller relationships. We have a business
development group within our sales organization to manage these
relationships.
Our marketing efforts focus on increasing awareness of our brand
and products, establishing SciQuest as a thought leader for
strategic procurement and generating qualified sales leads. Our
principal marketing initiatives target key executives and
decision makers within our existing and prospective customer
base and include sponsorship of, and participation in, industry
events including user conferences, trade shows and webinars.
Many sales opportunities are generated by referrals from
existing customers, particularly in the higher education market.
We also participate in cooperative marketing efforts with our
strategic partners and other providers of complementary services
or technology.
As of June 30, 2010, our sales and marketing organization
consisted of 46 employees.
We also conduct NextLevel, an annual event that brings the
procurement community, including industry experts, thought
leaders and suppliers, together to discuss the latest thinking,
newest strategies and most
72
innovative solutions. The 2010 NextLevel conference was attended
by approximately 240 customers, prospects, suppliers, partners
and other members of the procurement community.
Our new business sales normally fluctuate as a result of
seasonal variations in our business, principally due to the
timing of client budget cycles. Historically, we have had lower
new sales in our first and third quarters than in the remainder
of our year.
Competition
The market for strategic procurement and supplier enablement
solutions is competitive, rapidly evolving and subject to
changes in technology. We compete with a number of procurement
software vendors, large software application providers and group
purchasing organizations. Our current principal competitors are
Ariba (across all of our vertical markets other than
healthcare), GHX (healthcare only), large enterprise application
providers that we believe have limited procurement
functionality, such as Oracle and SAP, smaller market-specific
vendors, and internally developed and maintained solutions.
We believe the principal competitive factors in our industry
include the following:
|
|
|
breadth, depth and configurability of the solution;
|
|
brand name recognition;
|
|
ability to meet a customers functional requirements and
provide content specific to a vertical market;
|
|
on-demand software delivery model;
|
|
managed network and supplier services;
|
|
price;
|
|
ease and speed of implementation and use;
|
|
measurability of results, demonstrable
return-on-investment
and perceived value;
|
|
satisfaction of customer base; and
|
|
performance and reliability of the software.
|
We believe we compete favorably with our competitors on the
basis of these factors. In addition, many of our customers are
current users of Oracle and SAP, and integrate our solution into
their ERP system. However, some of our existing and potential
competitors have greater financial resources, longer operating
histories and more name recognition. We may face future
competition in our markets from other large, established
companies, as well as emerging companies.
Technology
For several years, we have applied Lean-Agile product
development and project management principles to the operational
areas of our company. The four key principles of respecting the
individual, focusing on delivering customer value, eliminating
waste, and continuously improving each and every process are the
bases for designing, developing, implementing and supporting our
solution.
We use commercially available operating, application, and
database management systems and have a significant commitment to
using open source systems throughout our technology development
and delivery stack. We support key industry standards and have
an overall technology architecture that is highly redundant and
designed to be highly available, while supporting rapid
development and deployment of new releases several times per
year. We have implemented standard practices in the areas of
development, deployment, production control, administration and
monitoring.
Our product suite is designed for, and primarily delivered over,
the Internet on-demand. We also have two specialty
inventory management modules that are deployed behind the
customers firewall.
Our on-demand solution is web-based and modular, automating each
step of an organizations procurement lifecycle. These
on-demand modules require only a standard Web browser and access
to the Internet, requiring no
behind-the-firewall
components.
73
The multi-tenant, on-demand application environment is developed
using enterprise-class components:
Java-based
application code, IBMs DB2 database management system, and
an open source operating environment. The single code-base
supports thousands of users and delivers robust, scalable,
secure solutions for customers. Our solution has multiple layers
of security, with all production operating systems protected
against unauthorized access, sensitive data encrypted, all
network/firewall devices actively monitored and updated, and
user authentication required for system access.
Our integration layer is based on technology provided by a
technology partner, providing flexible, scalable, and deep
integrations to customers existing IT systems
infrastructure (e.g., into customers authentication,
financial or ERP systems). This technical architecture
facilitates true Internet-native standards support, scalability,
reliability, recoverability, security and ease of maintenance.
We own and administer all of our hosted production servers and
web site hardware, which physically reside in
tier-1 data
center hosting facilities. Our primary data center facility
offers physical security, redundant power systems, and multiple
OC3 internet network connections and is located in Durham, North
Carolina. We also have a fully redundant, disaster recovery
platform in a data center in Scottsdale, Arizona which is
automatically synchronized, real-time, with the system in North
Carolina. We have contracted with SunGard Availability Services,
LP to provide hosting and network services related to these data
center facilities. This contract expires in March 2013 but
automatically renews for additional one-year terms unless either
party provides written notice of termination at least three
months prior to the expiration of the current term. Pursuant to
this contract, for the North Carolina data facility, we will pay
a monthly fee of $7,900 through January 2011, with such monthly
fee increasing to $9,466 from February 2011 through March 2013,
and for the Arizona data facility, we will pay a monthly fee of
$3,629 through March 2013.
On a nightly basis, a backup of the production environments and
databases are performed and stored offsite in a vaulted
location, which enables full business recovery. We test the
reliability of our fail over systems and have numerous
contingency plans in place for business continuity. We utilize
external monitoring and load testing tools to track the
performance of our production environment.
Our deployed inventory management modules have a three-tier
architecture, with an interface component, an application server
layer, and database layer. These modules are deployed within a
customers network where we provide level 2 and
level 3 support. We provide regular updates to customers
with new releases available every
18-24 months
and maintenance releases available periodically (typically every
three to six months).
Product
Development
Our product development organization is responsible for the
design, development and testing of our software. Our current
product development efforts are focused on maintenance and new
releases of existing products as well as development of new
products and modules.
Following our Lean-Agile product development methodology, we
work closely with our customers in developing all our products.
Our customer community provides extensive input that we
incorporate into our products through regular reviews and
demonstration-based focus groups. Typically, our product
development organization will conduct four to six focus groups
and 30 to 40 customer interviews during a release cycle and
works closely with our implementation and customer support
organization, which also provides for customer feedback into the
development process.
As of June 30, 2010, our product development organization
consisted of 54 employees.
Our research and development expenses were $6.9 million,
$8.3 million, $8.1 million and $3.9 million in
2007, 2008, 2009 and the six months ended June 30, 2010,
respectively.
Intellectual
Property
Our success and ability to compete is dependent in part on our
ability to develop and maintain the proprietary aspects of our
technology and operate without infringing upon the proprietary
rights of others. We rely primarily
74
on a combination of patent, copyright, trade secret,
confidentiality procedures, contractual provisions and other
similar measures to protect our proprietary information.
We have registered trademarks and service marks in the United
States and abroad, and have applied for the registration of
additional trademarks and service marks. Our principal trademark
is SciQuest.
We have one issued U.S. patent, which expires in 2023, and
13 pending U.S. patent applications. We are not currently
pursuing patent protection in any foreign countries. We do not
know whether any of our pending patent applications will result
in the issuance of patents or whether the examination process
will require us to narrow our claims.
We also use contractual provisions to protect our intellectual
property rights. We license our software products directly to
customers. These license agreements, which address our
technology, documentation and other proprietary information,
include restrictions intended to protect and defend our
intellectual property. We also require all of our employees,
contractors and many of those with whom we have business
relationships to sign non-disclosure and confidentiality
agreements.
The legal protections described above afford only limited
protection for our technology. Due to rapid technological
change, we believe that factors such as the technological and
creative skills of our personnel, new product and service
developments and enhancements to existing products and services
are more important than the various legal protections of our
technology to establishing and maintaining a technology
leadership position.
Our products also include third-party software that we obtain
the rights to use through license agreements. These third-party
software applications are commercially available on reasonable
terms. We believe that we could obtain substitute software, or
in certain cases develop substitute software, to replace these
third-party software applications if they were no longer
available on reasonable terms.
In May 2009, a company filed a patent infringement action in the
United States District Court for the Eastern District of
Virginia against us and other unrelated companies. In August
2009, we entered into a settlement agreement under which we made
a one-time settlement payment.
In February 2010, we received a letter from a company offering
us a license to certain of its patent rights. We have reviewed
the offer and do not believe that a license is required or that
our products infringe that companys patent rights. We
cannot guarantee that this company will not assert a patent
infringement claim against us in the future or that we would
prevail should a patent infringement claim be asserted.
Properties
Our corporate headquarters are located in Cary, North Carolina,
where we currently lease approximately 32,000 square feet
of office space. This lease expires in January 2014. We also
maintain an office in Newtown Square, Pennsylvania, where we
currently lease approximately 5,500 square feet of space.
This lease expires in February 2016.
We believe that our current facilities are suitable and adequate
to meet our current needs, and that suitable additional or
substitute space will be available as needed to accommodate
future growth.
Employees
As of June 30, 2010, we had 183 full-time employees.
None of our employees are represented by labor unions or covered
by collective bargaining agreements. We consider our
relationship with our employees to be good.
Legal
Proceedings
In 2001, we were named as a defendant in several securities
class action complaints filed in the United States District
Court for the Southern District of New York originating from our
December 1999 initial public offering. The complaints alleged,
among other things, that the prospectus used in our initial
public offering contained material misstatements or omissions
regarding the underwriters allocation practices and
compensation and that the
75
underwriters manipulated the aftermarket for our stock. These
complaints were consolidated along with similar complaints filed
against over 300 other issuers in connection with their initial
public offerings. After several years of litigation and appeals
related to the sufficiency of the pleadings and class
certification, the parties agreed to a settlement of the entire
litigation, which was approved by the Court on October 5,
2009. Notices of appeal to the Courts order have been
filed by various appellants. We have not incurred significant
costs to date in connection with our defense of these claims
since this litigation is covered by our insurance policy. We
believe we have sufficient coverage under our insurance policy
to cover our obligations under the settlement agreement.
Accordingly, we believe the ultimate resolution of these matters
will not have an impact on our financial position and,
therefore, we have not accrued a contingent liability as of
December 31, 2008 and 2009 and June 30, 2010.
We are not party to any other material legal proceedings at this
time. From time to time, we may be subject to legal proceedings
and claims in the ordinary course of business.
76
MANAGEMENT
Executive
Officers and Directors
The following table sets forth the names, ages and positions of
our executive officers and directors as of August 5, 2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Stephen J. Wiehe
|
|
|
46
|
|
|
President, Chief Executive Officer and Director
|
Rudy C. Howard
|
|
|
53
|
|
|
Chief Financial Officer
|
James B. Duke
|
|
|
46
|
|
|
Chief Operating Officer
|
Jeffrey A. Martini
|
|
|
52
|
|
|
Senior Vice President of Worldwide Sales
|
Jennifer G. Kaelin
|
|
|
39
|
|
|
Vice President of Finance
|
C. Gamble Heffernan
|
|
|
49
|
|
|
Vice President of Marketing and Strategy
|
Noel J. Fenton(1)(3)
|
|
|
72
|
|
|
Chairman of the Board of Directors
|
Daniel F. Gillis(2)(3)
|
|
|
63
|
|
|
Director
|
Jeffrey T. Barber(1)
|
|
|
57
|
|
|
Director
|
Timothy J. Buckley(1)(2)
|
|
|
59
|
|
|
Director
|
|
|
|
(1) |
|
Member of the audit committee. |
|
(2) |
|
Member of the compensation committee. |
|
(3) |
|
Member of the nominating and corporate governance committee. |
Stephen J. Wiehe has served as our President, Chief
Executive Officer and a member of our board of directors since
joining SciQuest in February 2001. From 2000 until he joined
SciQuest, Mr. Wiehe served as Senior Director, Strategic
Investments & Mergers and Acquisitions at SAS
Institute. Mr. Wiehe joined SAS as part of its acquisition
of DataFlux Corporation, a provider of data quality and data
warehousing solutions, where Mr. Wiehe had served as
President and Chief Executive Officer since 1999. From 1998
until joining DataFlux, Mr. Wiehe served as Managing
Director/Europe and Senior Executive Vice President for SunGard
Treasury Systems, a division of SunGard Data Systems, Inc., a
software and IT services company. He also served as President
and Chief Executive Officer of Multinational Computer Models,
Inc., a provider of Treasury management solutions used by large
multinational corporations to manage their foreign exchange,
debt, and investment-related financial hedging instruments, from
1991 until Multinational Computer Models was sold to SunGard
Data Systems in 1998. Mr. Wiehe started his career with
General Electric Company, serving in various financial positions
from 1987 to 1991 and graduating from its Financial Management
Program in 1989. Mr. Wiehe is a graduate of the University
of Kentucky. Mr. Wiehes past experience as chief
executive officer of two software companies, his participation
in relevant industry organizations and his long service with us
has resulted in significant operational experience and a deep
knowledge of the software industry generally and our business in
particular. These qualities and this experience provide a
critical contribution to our board of directors.
Rudy C. Howard has served as our Chief Financial Officer
since joining SciQuest in January 2010. From November 2008 until
joining SciQuest, Mr. Howard served as Senior Vice
President and Chief Financial Officer of MDS Pharma Services, a
pharmaceutical services company, where he was responsible for
all financial management functions. From 2003 until joining MDS
Pharma Services, Mr. Howard operated his own financial
consulting company, Rudy C. Howard, CPA Consulting, in
Wilmington, North Carolina, where his services included advising
on merger and acquisition transactions, equity and debt
issuances and other general management matters. From 2001
through 2003, Mr. Howard served as Chief Financial Officer
for Peopleclick, Inc., an international human capital management
software company. From 2000 until joining Peopleclick,
Mr. Howard served as Chief Financial Officer for Marketing
Services Group, Inc., a marketing and internet technology
company. From 1995 until 2000, Mr. Howard served as Chief
Financial Officer for PPD, Inc., a clinical research
organization. Prior to joining PPD, Mr. Howard was a
partner with PricewaterhouseCoopers. Mr. Howard holds a
B.A. in Accounting from North Carolina State University, and he
is a Certified Public Accountant.
77
James B. Duke has served as our Chief Operating Officer
since joining SciQuest in March 2001. From 2000 until he joined
SciQuest, Mr. Duke served as Chief Information Officer of
BuildNet, a solutions provider for the construction and
materials industry. Mr. Duke served as Vice President of
Sales and Marketing for GE Capital Mortgage from 1999 until
joining BuildNet. Mr. Duke also served as Group Vice
President for Technology and Alternative Channels for First
Citizens Bank from 1995 until 1999 and as a management
consultant with McKinsey & Co., a leading management
consultancy, from 1992 until 1995. Mr. Duke graduated from
Duke University and also has a masters degree from
MITs Sloan School of Management.
Jeffrey A. Martini has served as our Senior Vice
President of Worldwide Sales since joining SciQuest in January
2005. From 2004 until he joined SciQuest, Mr. Martini
served as Vice President of Worldwide Sales for VitualEdge
Corporation, a leading provider of real-time recruiting software
for the extended enterprise. Prior to joining VirtualEdge,
Mr. Martini had served as Vice President of Worldwide Sales
at Primavera Systems, a portfolio management vendor, since 2002.
From 1987 until joining Primavera Systems, Mr. Martini held
a variety of sales and sales management roles at SCT
Corporation, a leading provider of enterprise software
applications, including serving as Corporate Vice President of
Sales. Mr. Martinis early sales career included
positions at Highline Data Systems, a provider of human resource
information systems for the mid-market, in 1986, and Personnel
Data Systems, a provider of human resources information systems,
in 1985. Mr. Martini is a graduate of Gettysburg College.
Jennifer G. Kaelin has served as our Vice President of
Finance since January 2010 and from joining SciQuest in July
2005 until January 2008. From January 2008 until December 2009,
Ms. Kaelin served as our Chief Financial Officer. From 2003
until she joined SciQuest, Ms. Kaelin served as Corporate
Controller at Art.com, an
e-tailer of
posters, prints and custom framing. Prior to joining Art.com,
Ms. Kaelin had served as Controller for several
manufacturing sites at Moduslink, a global supply chain
management company for technology-based manufacturers, since
1998. Ms. Kaelin also was a financial analyst for IBM from
1997 until 1998, and was an auditor for PricewaterhouseCoopers
from 1994 until 1997. She holds a masters degree in
accounting and a bachelors degree in business
administration from the University of North Carolina at Chapel
Hill, and she is a certified public accountant.
C. Gamble Heffernan has served as our Vice President of
Marketing and Strategy since joining SciQuest in October 2008.
From September 2007 until joining SciQuest, Ms. Heffernan
served as Senior Vice President of Community Solutions for
Misys, an application software and services provider to the
financial services and healthcare industries, where she was
responsible for the development and management of its community
services business team. Ms. Heffernan previously served as
Senior Vice President, Product Management for Healthcare for
Misys from October 2005 until September 2007, where she was
responsible for portfolio and market strategy. Prior to joining
Misys, Ms. Heffernan had served as Vice President and
General Manager of Professional Services and Consulting for
Cardinal Health and the Director of the ALARIS Center for
Medication Safety and Clinical Improvement since 2002.
Ms. Heffernan also served as Vice President of Services
Marketing at Ortho-Clinical Diagnostics, a provider of in-vitro
diagnostic systems, from 2001 until 2002. From 1996 until
joining
Ortho-Clinical
Diagnostics, she worked for GE Medical Systems, where she held
various management positions including General Manager for
eBusiness, General Manager for Clinical Information Systems and
Senior Business Unit Manager for Neonatal.
Noel J. Fenton serves as our lead independent director.
He has been a member of our board of directors since August 2004
and has served as Chairman since March 2010. Mr. Fenton
also served as a member of our board of directors from November
1998 until February 2004. In 1986, Mr. Fenton co-founded
Trinity Ventures, a venture capital firm that made an initial
investment in our company in 1998, and has served as one of its
directors since 1998. He also serves as a director of several
private companies. Prior to co-founding Trinity Ventures, he was
a co-founder
of three successful technology
start-ups
and Chief Executive Officer of two of them. Mr. Fenton is
actively involved in the Worlds Presidents
Organization and is a past Chairman of the Northern California
Chapter of the Young Presidents Organization and a past
chairman of the American Electronic Association. Mr. Fenton
holds a B.S. from Cornell University and an M.B.A. from the
Stanford University Graduate School of Business. We believe
Mr. Fentons qualifications to sit on our board of
directors include his previous operating experience as a chief
executive officer and founder of technology companies, his more
than 25 years of experience as a venture capital investor,
his service on the board of directors of approximately
30 companies in
78
which his venture capital firm invested, his service as a
director of public companies and, as one of our early stage
investors, his extensive knowledge of our company and the
electronic commerce marketplace.
Daniel F. Gillis has been a member of our board of
directors since October 2005. From 1997 until 2001,
Mr. Gillis served as Chief Executive Officer of SAGA
Systems, a NYSE-traded enterprise software company. Prior to
joining SAGA Systems, Mr. Gillis had served as Executive
Vice President of Falcon Systems, an interactive equipment
company serving the federal government market. Mr. Gillis
also served as a member of the NYSE Listed Companies Advisory
Board from 1999 until 2001. Mr. Gillis is a graduate of the
University of Rhode Island. Mr. Gillis executive,
managerial and sales experience, including service as chief
executive officer and director of a publicly-held software
company, as well as his experience with the NYSE, brings
valuable contributions and experience to our board of directors.
Jeffrey T. Barber has been a member of our board of
directors since March 2010. Mr. Barber has served as a
Managing Director of Fennebresque & Co., an investment
banking firm, since October 2009. From 1988 until June 2008,
Mr. Barber was an audit partner of PricewaterhouseCoopers
LLP, where he also served as the managing partner of its
Raleigh, North Carolina office for a period of 14 years.
Mr. Barber has served as a member of the board of directors
of Ply Gem Holdings, Inc., building products provider, since
January 2010. Mr. Barber also serves as chairman of Ply Gem
Holdings audit committee. Mr. Barber has a B.S. in
accounting from the University of Kentucky. Mr. Barber is a
financial expert as contemplated by the rules of the SEC
implementing Section 407 of the Sarbanes-Oxley Act of 2002.
As an audit partner with PricewaterhouseCoopers, Mr. Barber
worked with numerous software and other technology companies.
Mr. Barbers accounting and financial expertise,
qualifying him as a financial expert, and general business
acumen results in unique and valuable contributions to our board
of directors with respect to financial matters.
Timothy J. Buckley has been a member of our board of
directors since March 2010. From April 1999 until November 2003,
Mr. Buckley served as the chief operating officer for Red
Hat (NYSE: RHT), a premier open source and Linux provider. As
chief operating officer, Mr. Buckley used his insight to
accelerate the momentum of open source and expand Red Hats
worldwide business operations. From December 1993 until joining
Red Hat, Mr. Buckley was senior vice president of worldwide
sales at Visio Corporation (NASDAQ: VSIO), a software
application company that was acquired by Microsoft Corporation
in 2000 in a transaction valued at $1.5 billion. He
currently serves on the board of directors of several
privately-held companies. Mr. Buckley graduated from
Pennsylvania State University with a degree in liberal arts.
Mr. Buckleys experience as a sales executive and
chief operating officer for publicly-held companies in the
software industry as well as a director of several
privately-held companies provides us with valuable experience
and qualifies him to serve as a director.
Board
Composition
Our board of directors currently consists of five directors. In
accordance with our amended and restated certificate of
incorporation, immediately after this offering, our board of
directors will be divided into three classes with staggered
three-year terms. At each annual meeting of stockholders, the
successors to directors whose terms then expire will be elected
to serve from the time of election and qualification until the
third annual meeting following election. Our directors will be
divided among the three classes as follows:
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The Class I directors will be Messrs. Buckley and
Gillis and their terms will expire at the annual meeting of
stockholders to be held in 2011;
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The Class II directors will be Messrs. Barber and
Wiehe and their terms will expire at the annual meeting of
stockholders to be held in 2012; and
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The Class III director will be Mr. Fenton and his term
will expire at the annual meeting of stockholders to be held in
2013.
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Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors.
The division of our board of directors into three classes with
staggered three-year terms may delay or prevent a change of our
management or a change in control.
79
There is no family relationship between any director, executive
officer or person nominated to become a director or executive
officer.
Director
Independence
Our board of directors has determined that four of our five
directors are independent directors within the meaning of the
independent director guidelines of the NASDAQ Listing Rules. The
independent directors are Messrs. Barber, Buckley, Fenton
and Gillis.
Board
Committees
Audit
Committee
The audit committee oversees our corporate accounting and
financial reporting processes. The audit committee will also:
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evaluate the qualifications, performance and independence of our
independent auditor and review and approve both audit and
non-audit services to be provided by the independent auditor;
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discuss with management and our independent auditors any major
issues as to the adequacy of our internal controls, any actions
to be taken in light of significant or material control
deficiencies and the adequacy of disclosures about changes in
internal control over financial reporting;
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establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or
auditing matters, including the confidential, anonymous
submission by employees of concerns regarding accounting or
auditing matters;
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review our financial statements and review our critical
accounting policies and estimates; and
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prepare the audit committee report that SEC rules require to be
included in our annual proxy statement and annual report on
Form 10-K.
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The current members of the audit committee are
Messrs. Barber, Buckley and Fenton. Mr. Barber has
been appointed to serve as the chairman of the audit committee
and is a financial expert as contemplated by the rules of the
SEC implementing Section 407 of the Sarbanes-Oxley Act of
2002. The composition of the audit committee meets the
requirements for independence under current NASDAQ Listing Rules
and SEC rules and regulations. Our board of directors has
adopted an audit committee charter. We believe that the audit
committees charter and functioning comply with the
applicable requirements of the NASDAQ Listing Rules and SEC
rules and regulations. We intend to comply with future
requirements to the extent they become applicable to us.
Following the completion of this offering, copies of the charter
for our audit committee will be available without charge, upon
request in writing to SciQuest, Inc., 6501 Weston Parkway,
Suite 200, Cary, North Carolina 27513, Attn: Secretary, or
on the investor relations portion of our website,
www.sciquest.com.
Compensation
Committee
The compensation committee oversees our corporate compensation
and benefit programs and has the responsibilities described in
the Executive Compensation Compensation
Discussion and Analysis section of this prospectus.
The members of the compensation committee are
Messrs. Buckley and Gillis, each of whom our board of
directors has determined is independent within the meaning of
the independent director guidelines of the NASDAQ Listing Rules.
Mr. Gillis has been appointed to serve as the chairman of
the compensation committee. The composition of the compensation
committee meets the requirements for independence under current
NASDAQ Listing Rules and SEC rules and regulations. Our board of
directors has adopted a compensation committee charter. We
believe that the compensation committee charter and the
functioning of the compensation committee comply with the
applicable requirements of the NASDAQ Listing Rules and SEC
rules and regulations. We intend to comply with future
requirements to the extent they become applicable to us.
80
Following the completion of this offering, copies of the charter
for our compensation committee will be available without charge,
upon request in writing to SciQuest, Inc., 6501 Weston
Parkway, Suite 200, Cary, North Carolina 27513, Attn:
Secretary, or on the investor relations portion of our website,
www.sciquest.com.
Nominating
and Corporate Governance Committee
The nominating and corporate governance committee oversees and
assists our board of directors in reviewing and recommending
nominees for election as directors. The nominating and corporate
governance committee will also:
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assess the performance of the members of our board of directors;
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oversee guidelines for the composition of our board of
directors; and
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review and administer our corporate governance principles.
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The current members of the nominating and corporate governance
committee are Messrs. Fenton and Gillis, each of whom our
board of directors has determined is independent within the
meaning of the independent director guidelines of the NASDAQ
Listing Rules. Mr. Fenton has been appointed to serve as
the chairman of the nominating and corporate governance
committee. The compensation of the nominating and corporate
governance committee meets the requirements for independence
under current NASDAQ Listing Rules and SEC rules and
regulations. Our board of directors has adopted a nominating and
corporate governance committee charter to be effective prior to
the closing of this offering. We believe that the nominating and
corporate governance committee charter and the functioning of
the nominating and corporate governance committee will comply
with the applicable requirements of the NASDAQ Listing Rules and
SEC rules and regulations. We intend to comply with future
requirements to the extent they become applicable to us.
Following the completion of this offering, copies of the charter
for our nominating and corporate governance committee will be
available without charge, upon request in writing to SciQuest,
Inc., 6501 Weston Parkway, Suite 200, Cary, North
Carolina 27513, Attn: Secretary, or on the investor relations
portion of our website, www.sciquest.com.
Our board of directors may from time to time establish other
committees.
Director
Compensation
In 2010, our board of directors approved the following
compensation package for our non-employee directors based on the
recommendation of our Chief Executive Officer and the
compensation committee of our board of directors:
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Annual retainer
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$
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20,000
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In-person board of directors and committee meeting fees
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$
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2,000
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Telephonic board of directors and committee meeting fees
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$
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500
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Audit committee chair retainer
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$
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10,000
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Compensation committee chair retainer
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$
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5,000
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Nominating and corporate governance committee chair retainer
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$
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5,000
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Initial grant of stock options
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45,000
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Annual grant of stock options
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27,500
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Historically, we have not paid compensation to any director for
his service as a director, other than the grant of common stock
awards to non-employee directors who are not affiliated with any
of our major stockholders. Mr. Gillis is the only director
who has qualified to receive such stock awards. We have
historically reimbursed our non-employee directors for
reasonable travel and other expenses incurred in connection with
attending board of directors and committee meetings.
81
The following table sets forth information regarding
compensation earned by our qualifying non-employee director
during 2009.
Director
Compensation Table for Year Ended December 31,
2009
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Fees Earned or Paid
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Name
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in Cash
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Stock Awards
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Option Awards
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Total
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Daniel F. Gillis
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$
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0
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25,025
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0
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$
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25,525
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(1)
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(1) |
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This total is based on a fair value of our common stock as of
December 31, 2008 of $1.02, as determined by our board of
directors. |
Compensation
Committee Interlocks and Insider Participation
The members of our compensation committee are
Messrs. Buckley and Gillis. Neither of these members is or
has at any time during the last completed fiscal year been an
officer or employee of ours or is a former officer of ours. None
of our executive officers has served as a member of the board of
directors, or as a member of the compensation or similar
committee, of any entity that has one or more executive officers
who served on our board of directors or compensation committee
during the last completed fiscal year.
Executive
Officers
Our executive officers are elected by, and serve at the
discretion of, our board of directors. There are no familial
relationships among our directors and officers.
Code of
Business Ethics and Conduct
Our board of directors has adopted a code of business ethics and
conduct for all employees, officers and directors. The code of
business ethics and conduct will be available on our website at
www.sciquest.com. We expect that any amendments to the code of
business ethics and conduct, or any waiver of its requirements,
will be disclosed on our website. The inclusion of our website
address in this prospectus does not include or incorporate by
reference the information on our website into this prospectus.
82
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The following is a discussion and analysis of the compensation
arrangements for our named executive officers for 2009. Our
named executive officers for 2009 were Stephen Wiehe, our
President and Chief Executive Officer, James Duke, our Chief
Operating Officer, Jennifer Kaelin, who served as our Chief
Financial Officer in 2009 and currently serves as our Vice
President of Finance, Jeffrey Martini, our Senior Vice President
of Worldwide Sales, and Gamble Heffernan, our Vice President of
Marketing and Strategy. Effective January 4, 2010, Rudy
Howard became our Chief Financial Officer. Mr. Howard is
expected to be a named executive officer in 2010 in place of
Ms. Kaelin.
Compensation
Objectives and Process
Our compensation committees primary objectives with
respect to executive compensation are to:
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attract, motivate, reward, and retain high quality executives
necessary to formulate and execute our business strategy;
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ensure that compensation provided to executive officers is
closely aligned with our short and long-term business
objectives, risk profile, financial performance and strategic
goals;
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build a strong link between an individuals performance and
his or her compensation; and
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further align the interests of management with our stockholders
by providing equity incentive compensation.
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Our executive compensation practices are intended to provide
each executive a total annual compensation that is commensurate
with the executives responsibilities, experience and
demonstrated performance. We intend our compensation to be
competitive with companies in our industry and region.
Variations to this targeted compensation may occur depending on
the experience level of the individual and market factors, such
as the demand for executives with similar skills and experience.
The compensation committee of our board of directors oversees
our executive compensation program. In this role, the
compensation committee reviews and approves annually all
compensation decisions relating to our named executive officers
other than with respect to equity awards. Our compensation
committee proposes grants of equity awards for our named
executive officers and recommends such proposals to our board of
directors for approval. Our compensation committee believes that
our compensation program is aligned with our business and risk
management objectives and does not believe that our compensation
program is likely to have a material adverse effect on us.
Our historical executive compensation programs have been
developed and implemented by our compensation committee
consistent with practices of other venture-backed,
privately-held companies. To date, our compensation committee
has never engaged a compensation consultant. Our board of
directors and compensation committee has generally established
our executive compensation on an informal basis by considering
the employment and compensation history of each executive and
comparing our executives compensation to our estimates of
executive compensation paid by companies in our industry and
region. These estimates are based on the experience of our board
of directors and committee members, informal research of pay
practices at other comparable public companies and reviews of
external compensation reports for venture-backed companies. The
board of directors and the compensation committee intend to
continue to formalize their approach to the development and
implementation of our executive compensation programs. Following
the completion of this offering, we anticipate that our
compensation committee will determine executive compensation, at
least in part, by reference to the compensation information for
the executives of a peer group of comparable public companies,
although no peer group has yet been determined.
In January of each year, our compensation committee typically
determines our named executive officers base salaries,
awards annual cash incentive bonuses based on the achievement of
bonus criteria in the prior year and sets bonus criteria for the
upcoming year. The compensation committee also proposes grants
of equity awards to our named executive officers, which are
considered and approved by our board of directors in January as
well.
83
Each year, our chief executive officer provides a report to the
compensation committee with respect to each named executive
officer summarizing such officers performance in the prior
year, including his or her achievement of bonus criteria. This
report also contains the chief executive officers
recommendations for base salaries, bonuses and equity awards for
each named executive officer. The compensation committee then
deliberates and makes compensation determinations for the named
executive officers. During this deliberation, the committee
evaluates the recommendations based on their own compensation
experience, which generally includes service on the boards of
directors of other private and public companies, and their
reviews of other pay practices of comparable public companies.
The review of other pay practices consists of reviewing the
compensation of publicly-held SaaS companies with market
capitalizations of less than $500 million and, to a lesser
extent, external compensation reports for venture-backed
companies. Based on this evaluation, the committee will either
accept the recommendations, in whole or in part, or approve
modifications. Our chief executive officer participates in the
compensation committees deliberations with respect to the
other named executive officers, but he is not present when the
compensation committee deliberates and determines his own
compensation.
Compensation
Components
The primary elements of our executive compensation program are:
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base salary;
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annual cash incentive bonuses;
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equity incentive awards; and
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insurance and other employee benefits and compensation.
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We do not have any formal or informal policy or target for
allocating compensation between long-term and short-term
compensation, between cash and non-cash compensation or among
the different forms of non-cash compensation. Instead, our
compensation committee relies on the experience of its members,
its past practices and management input in establishing the
different forms of compensation.
Base
Salary
Base salaries are used to recognize the experience, skills,
knowledge and responsibilities required of our named executive
officers. None of our named executive officers is currently
party to an employment agreement that provides for automatic or
scheduled increases in base salary. Salaries for the named
executive officers generally are based upon their personal
performance in light of individual levels of responsibility, our
overall performance and profitability during the preceding year,
economic trends that may affect us, and the competitiveness of
the executives salary with the salaries of executives in
comparable positions at companies of comparable size or with
similar operational characteristics. While our compensation
committee considers each of these factors, it does not assign a
specific value to each factor.
Base salaries are reviewed at least annually by our compensation
committee, and are adjusted from time to time to realign
salaries with market trends and levels after taking into account
the factors discussed above. In addition to these periodic
reviews, the compensation committee may at any time review the
salary of an executive who has received a significant promotion
or whose responsibilities have been increased significantly.
For 2009, our named executive officers received salary increases
ranging from approximately 4% to 6% as compared to 2008. In
January 2010, our named executive officers received salary
increases from approximately 0% to 5% as compared to 2009.
Annual
Bonuses
We provide our named executive officers an opportunity to
receive annual discretionary cash incentive bonuses. The annual
bonuses are intended to compensate for the achievement of our
strategic, operational and financial goals
and/or
individual performance objectives of a particular named
executive officer.
84
Each executives bonus is based on a target bonus amount
and the achievement of bonus criteria, which are specific
financial or other business goals to promote the growth and
success of our business. In January of each year, our
compensation committee typically determines the bonus amount for
each named executive officer based on the prior years
target bonus amount and achievement of bonus criteria and
establishes the target bonus amount and the bonus criteria for
the upcoming year. The compensation committee establishes the
target bonus amount based on an amount it believes is necessary
to provide a competitive overall compensation package in light
of each named executive officers base salary and to
motivate our executives to achieve their goals. The bonus
criteria vary among the named executive officers, depending on
their operational responsibilities, as described below.
In general, when a component of the bonus criteria is
quantitative, the full targeted bonus amount attributable to
that component will be paid if the performance falls between 90%
and 110% of the targeted goal. If performance exceeds 110% of
the goal, 150% of the target bonus amount attributable to that
component will be paid. If performance is less than 75% of the
goal, no bonus amount attributable to that component will be
paid. If performance is between 75% and 90% of the goal, then
the bonus amount attributable to that component will be
determined by the compensation committee in its discretion. When
determining whether and to what extent bonus criteria have been
satisfied, our compensation committee uses their reasonable
discretion and will consider extenuating circumstances when
appropriate.
Mr. Wiehes target bonus amount for 2009 was $150,000,
and his bonus criteria were as follows: 25% based on attainment
of our budgeted revenues, 25% based on attainment of targeted
Adjusted EBITDA, 25% based on attainment of targeted Adjusted
Free Cash Flow and 25% as determined in the discretion of our
board of directors. For 2009, Mr. Wiehe received a bonus
equal to $145,688, based on achieving 96% of budgeted revenues,
106% of targeted Adjusted EBITDA, 89% of targeted Adjusted Free
Cash Flow, after taking into account certain adjustments for
certain discretionary prepayments of expenses made by our
company prior to year-end, and 100% of the discretionary
component. In awarding the discretionary component of the bonus,
the compensation committee considered Mr. Wiehes
achievements with respect to qualitative matters, such as
leadership, strategic direction and company culture, rather than
quantitative measures.
Mr. Dukes target bonus amount for 2009 was $125,000,
and his bonus criteria were as follows: $40,000 based on
attainment of company goals, $45,000 based on attainment of his
departmental goals, $20,000 based on meeting our production
up-time goals and $20,000 based on meeting goals for new
services and supplier revenues. The company goals were the same
revenue, Adjusted EBITDA and Adjusted Free Cash Flow targets
referenced above for Mr. Wiehe, each of which were weighted
evenly. The departmental goals consisted of meeting customer
satisfaction goals, weighted at 35%, meeting a supplier network
services backlog reduction target, weighted at 20%, meeting
system availability goals, weighted at 30%, and meeting
professional services utilization goals, weighted at 15%. The
production up-time goal was measured by system availability and
was the same as the system availability component of the
departmental goals. The new services and supplier revenue goals
consisted of meeting certain development and other milestones in
connection with the expansion of our services revenue. For 2009,
Mr. Duke received a bonus equal to $119,091, based on
achieving 96% of company goals, achieving 100% of departmental
goals and production up-time goals and achieving 84% of new
services and supplier revenues goals.
Mr. Martinis target bonus amount for 2009 was
$285,000, and his bonus criteria were based solely on sales
commissions. For 2009, Mr. Martinis bonus would have
been $183,118 based on sales commissions. The compensation
committee, however, awarded Mr. Martini an additional bonus
of $30,000 in recognition of his leadership of the sales
organization in a difficult economic environment. Thus,
Mr. Martinis aggregate bonus for 2009 was $213,118.
Ms. Kaelins target bonus amount for 2009 was $65,000,
and her bonus criteria were as follows: one-third based on
attainment of our budgeted revenues, one-third based on
attainment of targeted Adjusted EBITDA and one-third based on
attainment of targeted Adjusted Free Cash Flow. For 2009,
Ms. Kaelin received a bonus equal to $62,507, based on
achieving 96% of budgeted revenues, achieving 106% of targeted
Adjusted EBITDA and
85
achieving 89% of targeted Adjusted Free Cash Flow, after taking
into account certain adjustments for certain discretionary
prepayments of expenses made by our company prior to year-end.
Ms. Heffernans target bonus amount for 2009 was
$64,750, and her bonus criteria were as follows: 50% based on
attainment of growth and market expansion goals, 25% based on
attainment of lead generation goals and 25% based on attainment
of company goals. The company goals were the same revenue,
Adjusted EBITDA and Adjusted Free Cash Flow targets referenced
above for Mr. Wiehe, each of which are weighted evenly. The
growth and market expansion goals consisted of specific
deliveries, including market analyses and sales collateral,
related to our expansion into the healthcare market. The lead
generation goals consisted of meeting a targeted number of
qualified sales leads. For 2009, Ms. Heffernan received a
bonus equal to $62,511, based on achieving 95% of growth and
market expansion goals, achieving 100% of lead generation goals
and achieving 96% of company goals.
For further discussion of Adjusted EBITDA and a reconciliation
of Adjusted EBITDA to net income (loss), see footnote 3 to
the table in Selected Financial Data included
elsewhere in this prospectus. For further discussion of Adjusted
Free Cash Flow and a reconciliation of Adjusted Free Cash Flow
to cash flows from operations, see footnote 4 to the table
in Selected Financial Data included elsewhere in
this prospectus.
All bonus criteria for the named executive officers are
typically set at levels that require significantly improved
performance as compared to prior years.
In January 2010, our compensation committee decided to maintain
the target bonus amounts at the same levels for 2010 as for
2009. In addition, Mr. Howards bonus target was set
at $84,000 for 2010. The compensation committee did not set the
bonus criteria for 2010 at its January meeting, other than for
Mr. Martini, and the formulation of those bonus criteria is
ongoing. Mr. Martinis bonus will continue to be
determined based solely on sales commissions. In general, our
compensation committee determined to expand the metrics against
which each named executive officer is measured and to not assign
a specific weighting of the bonus criteria to each metric. It is
currently contemplated that the committee would examine each
named executive officers performance against the multiple
metrics comprising that officers bonus criteria and then
determine the bonus amount based on the entirety of their
performance.
Equity
Awards
Our equity award program is the primary vehicle for offering
long-term incentives to our executives. Our employees, including
our named executive officers, are eligible to participate in our
2004 stock incentive plan. Under the 2004 stock incentive plan,
our employees, including our named executive officers, are
eligible to receive grants of stock options, restricted stock
awards, restricted stock units and stock appreciation rights at
the discretion of our compensation committee. Historically, we
have granted restricted stock awards to executive officers and
stock options to all other employees. Beginning in 2008, we
began to grant stock options to new executive officers and limit
restricted stock grants only to executive officers who had
previously received equity awards in the form of restricted
stock grants.
We typically grant equity awards to employees, including our
named executive officers, in connection with their hiring. When
determining the size of the award, the compensation committee
considers the individuals position and responsibilities,
the equity position of our other similarly situated employees
and the anticipated future contribution of such individual. Our
compensation committee has established general guidelines for
the grant of equity awards for all new hires, including any
named executive officers, based on the individuals
position and responsibilities.
We believe equity awards are an important element of
compensation because they provide the recipient with a potential
ownership interest in our company, which helps align our
executives and other employees interests with those
of other stockholders. We believe equity awards further align
the interest of our employees and stockholders because they
profit from equity awards only if our stock price increases
relative to the awards exercise or purchase price. We
believe that equity awards incentivize recipients, including our
named executive officers, to incur appropriate risks that are
consistent with our business strategy but do not encourage undue
or inappropriate
risk-taking.
86
Equity awards are also an important element of our employee
retention strategy because the awards vest over several years
and vesting depends on the individuals continued
employment with us. The typical vesting provisions for equity
awards provide that one-quarter of the award vests on the first
anniversary of the grant date, with the remaining shares vesting
in 36 successive equal monthly installments thereafter upon
completion of each additional month of service.
Our compensation committee recommends the grant of all equity
awards for approval by the full board of directors. Equity
awards are typically made twice a year, in January and July.
Following the completion of this offering, our board of
directors may consider implementing a different grant date
policy.
Our policy is to grant stock options with an exercise price
equal to the fair value of our common stock on the date of
grant. As a private company, the fair value of our common stock
has been determined by our board of directors, based in large
part on third-party valuations.
Our board of directors has adopted an equity award re-grant
program to reestablish or provide additional incentives to
retain employees, including employees who had been with us for a
significant period of time. We believe that granting additional
equity awards to employees who are significantly vested in their
existing awards is an important retention tool. All awards under
the re-grant program are made in January of each year. In order
to be eligible for the re-grant program, the individual must
have been employed by the company for at least two years, have
not received any other significant compensation adjustments, be
at least 50% vested in their existing equity awards and perform
in accordance with expectations. Each equity award under the
re-grant program will equal 25% of that individuals
initial equity award at their time of employment. Vesting is in
48 successive equal monthly installments.
As a result of the decline in the stock market in 2008, the
board of directors determined that stock options and restricted
stock awards granted in 2008 had exercise prices or purchase
prices, as applicable, in excess of the then fair value of our
common stock. In March 2009, our board of directors approved a
common stock option
re-pricing
program whereby all 175,625 of our outstanding stock option
awards and restricted stock awards granted during 2008 were
repriced. Under this program, qualifying stock options and
restricted stock awards with original exercise or purchase
prices ranging from $1.30 to $1.58 per share were cancelled and
reissued with an exercise price equal to the then-current fair
value of our common stock, $1.02 per share, as determined by our
board of directors based in large part on a third-party
valuation. Because the revised exercise and purchase price of
$1.02 per share remained higher than the purchase prices paid by
our outside investors, our board of directors determined that
this repricing program was necessary and appropriate to restore
the incentive qualities of these equity awards and re-align the
interests of the equity incentive award recipients with our
stockholders.
Exit Event Bonus Plan
In 2005, we established an Exit Event Bonus Plan in order to
incentivize our executives to grow our company and achieve a
favorable investment outcome for our stockholders following our
going private transaction in 2004. We have provided more
detailed information about this plan in the Executive
Compensation Equity Plans section of this
prospectus. Under this plan, our executives may be granted units
to participate in a bonus pool in the event of an initial public
offering or sale of our company. In the case of a sale of our
company, the bonus pool would consist of proceeds from the sale
in an amount ranging from 0% to 3%, depending upon our valuation
in such sale. In the case of an initial public offering, the
bonus pool would consist of newly issued shares of our common
stock in an amount ranging from 0% to 3% of our issued and
outstanding shares of common stock immediately prior to such
offering depending on our valuation in such offering. No units
have been granted under the plan.
In June 2010, we terminated the Exit Event Bonus Plan and
determined to pay cash bonuses to our executives upon our
initial public offering in lieu of issuing shares of common
stock under the plan. In connection with this offering, our
board of directors evaluated the potential dilution to
stockholders that would have resulted from the issuance of
common stock under the plan as well as our expected cash
reserves both prior to and following the initial public
offering. After considering these matters, our board of
directors believed that it would be more beneficial to our
company and its stockholders to pay the amounts owed under the
Exit Event Bonus Plan in cash
87
rather than experience the dilution from issuing shares under
the plan. Our board of directors also deemed it desirable to
establish a fixed amount for the bonuses in advance of the
offering in order to provide greater certainty for our company,
the recipients and potential investors.
We have established an aggregate bonus pool of up to
$ by calculating the aggregate
initial value of the shares that would have been issued under
the Exit Event Bonus Plan assuming an initial public offering
price for our common stock of $ ,
subject to downward adjustment as determined in our board of
directors discretion. Under the Exit Event Bonus Plan,
this initial public offering price would have resulted in the
issuance
of shares
of our common stock, which at such price would have an aggregate
value equal to the established maximum bonus pool of
$ . We believe that this assumed
price is appropriate to reflect both the expected value of our
common stock and that bonus recipients would be foregoing the
potential appreciation of the common stock that otherwise would
have been issued under the plan. Individual bonus amounts have
been determined by our board of directors based on its
subjective assessment of the relative contributions of each
executive to our companys growth since the going private
transaction in 2004, which is the same basis as units under the
Exit Event Bonus Plan were to be granted. We have provided more
detailed information about the calculation of payments under the
Exit Event Bonus Plan in the Executive
Compensation Equity Plans Exit Event
Bonus Plan section of this prospectus.
The maximum individual bonus amounts for our named executive
officers will be as follows:
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Stephen J. Wiehe
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|
$
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James B. Duke
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$
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Jeffrey A. Martini
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$
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Jennifer G. Kaelin
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$
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C. Gamble Heffernan
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$
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Rudy C. Howard
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$
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|
Change of Control Benefits
Pursuant to change of control agreements and our stock incentive
plans, certain of our named executive officers are entitled to
specified benefits in the event of the termination of their
employment under specified circumstances, including termination
following a change of control of our company. We have provided
more detailed information about these benefits, along with
estimates of their value under various circumstances, in the
Executive Compensation Potential Payments upon
Termination or Change of Control section of this
prospectus.
Under our 2004 stock incentive plan, the vesting and
exercisability of all unvested awards automatically accelerate
by one year in the event of a change of control. In addition, we
have entered into change of control agreements with
Messrs. Wiehe, Duke and Howard. Under each change of
control agreement, the executive is entitled to receive a
lump-sum payment equal to one years base salary if, in
connection with a
change-of-control,
the executives employment is terminated by us, other than
for cause, or terminated by the executive with
good reason, as such terms are defined in the
agreements. Accordingly, these extra benefits are paid only if
the employment of the executive is terminated during a specified
period after the change of control. We believe that having this
benefit structured in this manner improves stockholder value
because it prevents an unintended windfall to executives in the
event of a friendly change of control, while still providing
them appropriate incentives to cooperate in negotiating any
change of control in which they believe they may lose their jobs.
We believe providing these benefits helps us compete for
executive talent. We believe that our change of control benefits
are generally in line with severance packages offered to
executives in our industry and region.
Other
Compensation
Historically, our executive officers who are recipients of
restricted stock awards paid the purchase price for such shares
by executing promissory notes for such amount, which notes are
payable in four annual payments due January 1 of each calendar
year and bear interest at 6%. In March 2010, we canceled all
such outstanding
88
notes and forgave the indebtedness owed by these executive
officers. The indebtedness amounts that were forgiven are as
follows: Stephen Wiehe ($376,612), James Duke ($268,965),
Jeffrey Martini ($149,345) and Jennifer Kaelin ($220,884). Our
board of directors made this decision in part to comply with the
requirements of Section 402 of the Sarbanes-Oxley Act of
2002, which prohibits public companies from extending loans to
its executive officers, and in part due to the fact that the
restricted stock awards that gave rise to the forgiven
indebtedness were issued in connection with the reduction of the
potential number of shares issuable under our Exit Event Bonus
Plan from 5% of outstanding shares of common stock to 3%. Had
those shares remained subject to the Exit Event Bonus Plan
rather than being issued as restricted stock awards, the
recipients would not have been required to pay any purchase
price for such shares. Consequently, our board of directors
determined that forgiving the indebtedness put the recipients in
the same position as they would have been had the shares
remained in the Exit Event Bonus Plan. The note cancellation did
not impact the compensation committees determination of
2010 compensation since the board of directors did not begin
consideration of this loan forgiveness until March 2010, which
was subsequent to the 2010 compensation determinations. No
determination has been made as to whether the note cancellation
will impact future compensation for these executives.
Other than a car allowance for Mr. Wiehe, perquisites are not a
material aspect of our executive compensation plan. All of our
full-time employees, including our named executive officers, are
eligible to participate in our 401(k) plan. Pursuant to our
401(k) plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit
and to have the amount of this reduction contributed to our
401(k) plan. Our 401(k) plan provides that we will match
eligible employees 401(k) contributions equal to 50% of
the employees elective deferrals, up to an amount not to
exceed $2,500 for each employee. We also offer health and dental
insurance, life and disability insurance, an employee assistance
program, maternity and paternity leave plans and standard
company holidays to our employees, including our named executive
officers.
2009
Summary Compensation Table
The following table provides information regarding the
compensation earned in 2009 by our named executive officers.
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Stock
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Option
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All Other
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Name and Principal Position
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Year
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Salary
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|
Bonus(1)
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Awards(2)
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Awards(3)
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Compensation(4)
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Total(1)
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Stephen J. Wiehe
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2009
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$
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338,000
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|
|
$
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145,688
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|
|
$
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95,916
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|
|
|
|
|
|
$
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40,939
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|
|
$
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620,543
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|
President, Chief
Executive Officer and Director
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|
|
|
|
|
|
|
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Jennifer G. Kaelin
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2009
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$
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182,000
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|
$
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62,507
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|
$
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47,957
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|
|
|
|
|
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$
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2,500
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|
$
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294,964
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|
Vice President of Finance
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|
|
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James B. Duke
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2009
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$
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234,000
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|
$
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119,091
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|
$
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95,916
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|
|
|
|
|
|
$
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2,500
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|
|
$
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451,507
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|
Chief Operating Officer
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|
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Jeffrey A. Martini
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2009
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$
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185,000
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$
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213,118
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$
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55,951
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$
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2,500
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|
$
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456,569
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Senior Vice President of Worldwide Sales
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C. Gamble Heffernan
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2009
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$
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191,667
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$
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62,511
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$
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127,500
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$
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2,500
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$
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384,178
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Vice President of Marketing and Strategy
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89
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(1) |
|
Consists of cash bonuses paid under the annual cash incentive
bonus element of our executive compensation program. See the
Executive Compensation Compensation Discussion
and Analysis Annual Bonuses section of this
prospectus for a description of this program. $8,996 of
Mr. Dukes 2009 bonus was paid in 2009 and $133,505 of
Mr. Martinis bonus was paid in 2009. All other
bonuses earned in 2009 were paid in January 2010. |
|
(2) |
|
In January 2009, Mr. Wiehe, Ms. Kaelin, Mr. Duke
and Mr. Martini were issued 94,035, 47,017, 94,035 and
54,854 shares of restricted stock, respectively, at a
purchase price of $1.02 per share. The restricted stock vests
monthly over a four-year period, beginning on the grant date.
The price per share of the restricted stock is equal to the fair
value of our common stock on the date of grant. This reflects
the fair value of the restricted stock awards. |
|
(3) |
|
In January 2009, Ms. Heffernan was issued 125,000 stock
options at an exercise price of $1.02 per share. The stock
options vest 25% on November 4, 2009 and monthly thereafter
over a remaining three-year period. The price per share of the
stock option award is equal to the fair value of our common
stock on the date of grant, as determined by an outside
valuation expert and approved by our board of directors. This
reflects the fair value of the stock option award. |
|
(4) |
|
This represents a 401(k) match of $2,500 for each individual and
includes a car allowance for Mr. Wiehe of $38,439. |
Grants of
Plan-Based Awards in 2009
The following table provides information regarding grants of
plan-based awards to our named executive officers in 2009.
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All Other
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Option
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Estimated
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All other
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Awards:
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Future
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Stock
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Number of
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Exercise or
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Grant Date
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|
|
Payouts under
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Awards:
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Securities
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Base Price
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Fair Value
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|
|
|
Non-Equity
|
|
Number of
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|
Underlying
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|
of Option
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|
of Stock and
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|
|
|
|
Incentive Plan
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Shares of
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|
Options
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|
Awards
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|
Option
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Name
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Grant Date
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|
Target ($)(1)
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|
Stock (#)
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|
(#)
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|
($/Share)
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|
Awards ($)
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Stephen J. Wiehe
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|
January 22, 2009
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|
$
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150,000
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|
|
|
94,035
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|
|
|
|
|
|
|
|
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|
$
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95,916
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Jennifer G. Kaelin
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January 22, 2009
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$
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65,000
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47,017
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|
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|
|
|
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|
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|
$
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47,957
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|
James B. Duke
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|
January 22, 2009
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|
|
$
|
125,000
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|
|
|
94,035
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|
|
|
|
|
|
|
|
|
|
$
|
95,916
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|
Jeffrey A. Martini
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|
|
January 22, 2009
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|
|
$
|
285,000
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|
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|
54,854
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|
|
|
|
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$
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55,951
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|
C. Gamble Heffernan
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|
January 22, 2009
|
|
|
$
|
64,750
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|
|
|
|
|
|
|
125,000
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|
|
$
|
1.02
|
|
|
$
|
127,500
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|
|
|
|
(1) |
|
Cash bonuses paid under the cash incentive bonus program for
2009 are also disclosed in the 2009 Summary Compensation
Table above. |
90
Outstanding
Equity Awards at December 31, 2009
The following table provides information concerning outstanding
equity awards held by our named executive officers at
December 31, 2009.
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|
Option Awards
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|
Stock Awards
|
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|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Number of
|
|
Value
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Shares or
|
|
of Shares
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|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Units of
|
|
or Units
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Stock That
|
|
of Stock
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
|
Have Not
|
|
That Have
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
Vested
|
|
Not Vested
|
|
Stephen J. Wiehe
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,498
|
|
|
$
|
89,833
|
|
Jennifer G. Kaelin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,325
|
|
|
$
|
123,537
|
|
James B. Duke
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,714
|
|
|
$
|
82,167
|
|
Jeffrey A. Martini
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,141
|
|
|
$
|
54,399
|
|
C. Gamble Heffernan
|
|
|
33,855
|
|
|
|
91,145
|
|
|
$
|
1.02
|
|
|
|
January 22, 2019(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This option vested 31,250 shares on November 4, 2009,
with the remaining shares vesting in equal monthly installments
of 2,604 shares thereafter beginning December 4, 2009
until November 4, 2012. |
Option
Exercises and Stock Vested During 2009
The following table provides information regarding the exercise
of stock options and the vesting of stock awards held by our
named executive officers during 2009.
|
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|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Number of
|
|
Value
|
|
|
Shares Acquired
|
|
Realized on
|
Name
|
|
on Vesting
|
|
Vesting(1)
|
|
Stephen J. Wiehe
|
|
|
142,876
|
|
|
$
|
58,583
|
|
Jennifer G. Kaelin
|
|
|
66,025
|
|
|
$
|
24,836
|
|
James B. Duke
|
|
|
81,634
|
|
|
$
|
19,842
|
|
Jeffrey A. Martini
|
|
|
70,675
|
|
|
$
|
35,726
|
|
|
|
|
(1) |
|
The value realized on vesting represents (1) the difference
between (a) the value of our common stock (as determined by
our board of directors as of January 21, 2010) and
(b) the per share price (2) multiplied by the number
of shares acquired on exercise. |
|
|
|
(2) |
|
None of our named executive officers exercised any stock options
during 2009. |
In March 2009, our board of directors approved a common stock
option re-pricing program whereby 175,625 of our outstanding
stock option awards and restricted stock awards granted during
2008 were repriced. Under this program, qualifying stock options
and restricted stock awards with original exercise or purchase
prices ranging from $1.30 to $1.58 per share were cancelled and
reissued with an exercise price equal to the then-current fair
value of our common stock, $1.02 per share.
Pension
Benefits
We do not offer pension benefits to our employees.
Non-qualified
Deferred Compensation
We do not offer non-qualified deferred compensation to our
employees.
91
Accounting
and Tax Considerations
Section 162(m) of the Internal Revenue Code limits to
$1.0 million the amount of compensation paid to our Chief
Executive Officer and to each of our three most highly
compensated executive officers that may be deducted by us for
federal income tax purposes in any fiscal year.
Performance-based compensation that has been
approved by our stockholders is not subject to the
$1.0 million deduction limit. Although the compensation
committee cannot predict how the deductibility limit may impact
our compensation program in future years, the compensation
committee intends to maintain an approach to executive
compensation that strongly links pay to performance. In
addition, although the compensation committee has not adopted a
formal policy regarding tax deductibility of compensation paid
to our named executive officers, the compensation committee
intends to consider tax deductibility under Section 162(m)
as a factor in compensation decisions.
Employment
Agreements
Our principal employees, including executive officers, are
required to sign an agreement prohibiting their disclosure of
any confidential or proprietary information and restricting
their ability to compete with us during their employment and for
a period of one year thereafter, restricting solicitation of
customers and employees for a period of one year following their
employment with us and providing for ownership and assignment of
intellectual property rights to us.
Stephen J. Wiehe, our chief executive officer, has an employment
agreement that provides for a one-year term that renews
automatically for successive one-year terms unless either party
gives at least 90 days prior notice to the other party of
non-renewal. If our company terminates Mr. Wiehe for any
reason other than for cause during the term of this agreement or
if Mr. Wiehe terminates this agreement for good reason,
Mr. Wiehe will receive an amount equal to his annual base
salary then in effect and 18 months of medical coverage.
The terms cause and good reason are each
defined in the employment agreement.
Potential
Payments upon Termination or Change of Control
We entered into Change of Control Agreements with Stephen J.
Wiehe, our chief executive officer, and James B. Duke, our chief
operating officer, each effective as of January 1, 2004,
and with Rudy C. Howard, our chief financial officer,
effective as of January 1, 2010. Each of these agreements
provide that such officer will be entitled to receive payment if
his employment is terminated either by us without
cause or by the officer with good reason
within three months prior to a change of control or
within 24 months following a change of control provided
that such change of control results in proceeds such that our
implied enterprise value is at least equal to our market
capitalization calculated based on the last 30 trading days in
our fiscal quarter immediately preceding the initial
announcement of such change of control. The terms
cause, good reason and change of
control are each defined in the Change of Control
Agreements. Upon such a termination, the officer will be
entitled to receive a payment equal to the highest annual base
salary received during the two-year period immediately prior to
such termination.
Under our 2004 stock incentive plan, the vesting and
exercisability of all unvested awards automatically accelerate
by one year in the event of a change of control.
The tables below set forth the benefits potentially payable to
Messrs. Wiehe, Duke and Howard in the event of a change of
control of our company where the named executive officers
employment is terminated under the circumstances described in
the tables below. These amounts are calculated on the assumption
that the employment termination and change of control event both
took place on December 31, 2009. Amounts in the tables for
the vesting of unvested stock options or shares of restricted
stock are calculated based on the number of accelerated stock
options multiplied by the difference between $1.13, the fair
value of our common stock as of December 31, 2009, as
determined by our board of directors, and the exercise price.
92
Stephen
J. Wiehe
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Vesting of Unvested
|
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|
Salary, Bonus &
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Health
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|
Shares of
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Triggering Event
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Unused Vacation
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Benefits
|
|
Restricted Stock
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|
Termination by us without cause
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$
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700,000
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$
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4,408
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$
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12,275
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Termination by executive for good reason
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|
$
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525,000
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|
|
$
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2,204
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|
|
$
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12,275
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Death or disability
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|
$
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350,000
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|
|
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|
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$
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12,275
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James B.
Duke
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|
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Vesting of Unvested
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|
Shares of
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Triggering Event
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Salary
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Restricted Stock
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Termination by us without cause
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$
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245,000
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$
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4,948
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Termination by executive for good reason
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$
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245,000
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|
|
$
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4,948
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Death or disability
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|
$
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245,000
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|
$
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4,948
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Rudy C.
Howard
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|
|
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Vesting of Unvested
|
Triggering Event
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Salary
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Stock Options
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Termination by us without cause
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$
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240,000
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|
|
$
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0
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|
Termination by executive for good reason
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$
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240,000
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|
|
$
|
0
|
|
Death or disability
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|
$
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240,000
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|
|
$
|
0
|
|
The table below sets forth the benefits potentially payable to
Mr. Martini, Ms. Kaelin and Ms. Heffernan in the
event of a change of control of our company. These amounts are
calculated on the assumption that the change of control event
both took place on December 31, 2009. Amounts in the tables
for the vesting of unvested stock options or shares of
restricted stock are calculated based on the number of
accelerated stock options multiplied by the difference between
$1.13, the fair value of our common stock as of
December 31, 2009, as determined by our board of directors,
and the exercise price.
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Vesting of
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Vesting of
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Unvested Shares
|
|
Unvested
|
|
|
of Restricted Stock
|
|
Stock Options
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Jeffrey A. Martini
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$
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9,068
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Jennifer G. Kaelin
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$
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6,968
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C. Gamble Heffernan
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$
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3,437
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Equity
Plans
2004
Stock Incentive Plan
We have adopted our 2004 Stock Incentive Plan, or our stock
incentive plan, which provides for the issuance of equity-based
awards, including incentive stock options, non-qualified stock
options, restricted stock awards, restricted stock units and
stock appreciation rights. No restricted stock units or stock
appreciation rights have been granted under the stock incentive
plan.
The material features of our stock incentive plan are summarized
below. The complete text of our stock incentive plan is filed as
an exhibit to the registration statement of which this
prospectus forms a part.
General. The total number of shares initially
reserved for issuance is 6,615,472. Any shares that may be
issued under our stock incentive plan to any person pursuant to
an award are counted against this limit as one share for every
one share granted.
Purposes. The purpose of our stock incentive
plan is to enable us to attract and retain highly qualified
directors, officers, employees and other parties by providing an
incentive to work to increase the value of our stock and a stake
in our future that corresponds to the stake of each of our
stockholders.
93
Administration. Our stock incentive plan is
administered by the compensation committee of our board of
directors. The compensation committee is comprised of
individuals intended to be, to the extent provided by
Rule 16b-3
of the Securities and Exchange Act of 1934, non-employee
directors and will, at such times as we are subject to
Section 162(m) of the Internal Revenue Code, qualify as
outside directors for purposes of
Section 162(m) of the Internal Revenue Code. Subject to the
terms of our stock incentive plan, the compensation committee
may determine the types of awards and the terms and conditions
of such awards, interpret provisions of our stock incentive plan
and select participants to receive awards, such grants being
subject to the approval of our board of directors.
Source of shares. The shares of common stock
issued or to be issued under our stock incentive plan consist of
authorized but unissued shares and shares that have been
reaquired. If any shares covered by an award are not purchased
or are forfeited, if an award is settled in cash or if an award
otherwise terminates without delivery of any shares, then the
number of shares of common stock counted against the aggregate
number of shares available under our stock incentive plan with
respect to the award will, to the extent of any such forfeiture
or termination, again be available for making awards under our
stock incentive plan.
Eligibility. All of our employees and
non-employee directors are eligible to be granted awards under
the stock incentive plan. Certain individual consultants,
advisors and independent contractors who render services to us
are also eligible to participate in the stock incentive plan.
Participants in our stock incentive plan will be selected by our
compensation committee, subject to the approval of our board of
directors.
Amendment or termination of our stock incentive
plan. While the compensation committee may
terminate or amend our stock incentive plan at any time, no
amendment may adversely impair the rights of grantees with
respect to outstanding awards without the affected
participants consent in writing to such amendment. In
addition, an amendment will be contingent on approval of our
stockholders to the extent required by law. Unless terminated
earlier, our stock incentive plan will terminate in 2014, but
will continue to govern unexpired awards.
Options. Our stock incentive plan permits the
granting of options to purchase shares of common stock intended
to qualify as incentive stock options under the
Internal Revenue Code, and options that do not qualify as
incentive stock options are referred to as non-qualified stock
options. We may grant non-qualified stock options to our
employees, directors, officers, consultants or advisors in the
discretion of our board of directors. Incentive stock options
will only be granted to our employees.
The exercise price of each incentive stock option may not be
less than 100% of the fair value of shares of our common stock
on the date of grant. If we grant incentive stock options to any
10% stockholder, the exercise price may not be less than 110% of
the fair value of shares of our common stock on the date of
grant. The exercise price of any non-qualified stock option will
be determined by our board of directors and may be less than the
fair value of shares of our common stock.
The term of each option may not exceed 10 years from the date of
grant. The compensation committee will determine at what time or
times each option may be exercised and the period of time, if
any, after retirement, death, disability or termination of
employment during which options may be exercised. Options may be
made exercisable in installments. The vesting and exercisability
of options may be accelerated by the compensation committee of
our board of directors. The exercise price of an option may not
be amended or modified after the grant of the option.
In general, an optionee may pay the exercise price of an option
by cash, by tendering shares of our common stock or such other
methods of payment approved in the sole discretion of the
compensation committee.
Options granted under our stock incentive plan may not be sold,
transferred, pledged or assigned other than by will or under
applicable laws of descent and distribution. However, we may
permit limited transfers of
non-qualified
options for the benefit of immediate family members of a grantee
if a grantee is incapacitated and unable to exercise his or her
option.
Restricted stock awards. Restricted stock
awards consist of shares of common stock that are subject to
vesting restrictions. Shares subject to restricted stock awards
may be issued for a purchase price or at no cost, subject to
94
vesting restrictions. If the employment of a recipient of a
restricted stock award is terminated for any reason other than a
termination by our company for cause, then our company has the
right to repurchase (1) all unvested shares subject to the
restricted stock award at the original purchase price for such
shares and (2) all vested shares subject to the restricted
stock award at the then fair value of such shares. If the
employment of a recipient of a restricted stock award is
terminated by our company for cause, then our company has the
right to repurchase all vested and unvested shares subject to
the restricted stock award at the original purchase price for
such shares.
Restricted stock awards may have restrictions that lapse based
upon length of service of the recipient or based upon the
attainment of performance goals. Unless otherwise specified in
the agreement governing the restricted stock award, all shares
subject to the restricted stock award shall be entitled to vote
and shall receive dividends during the periods of restriction.
Adjustments for share dividends and similar
events. We will make appropriate adjustments in
outstanding awards and the number of shares available for
issuance under our stock incentive plan, including the
individual limitations on awards, to reflect share dividends,
share splits, spin-offs and other similar events.
Extraordinary vesting events. If we experience
a change of control, as defined in the stock
incentive plan, the compensation committee will have full
authority to determine the effect, if any, on the vesting,
exercisability, settlement, payment or lapse of restrictions
applicable to an award. The effect of a change of control may be
specified in a participants award agreement or determined
at a subsequent time, including, without limitation, the
substitution of new awards, the termination or the adjustment of
outstanding awards, the acceleration of awards or the removal of
restrictions on outstanding awards. In addition, the vesting and
exercisability of all unvested awards automatically accelerate
by one year in the event of a change of control. A change
of control under our stock incentive plan means
(1) our merger, consolidation or reorganization with one or
more other entities after which our stockholders prior to the
consummation of the transaction do not own 50% or more of the
combined voting power of all classes of our common stock and
preferred stock; (2) a sale of all or substantially all of
our assets to another person or entity; or (3) any
transaction (including without limitation a merger or
reorganization in which we are the surviving entity) which
results in any person or entity (other than us, any fiduciary of
one of our employee benefit plans or any corporation directly or
indirectly owned by our stockholders) owning 50% or more of the
combined voting power of all classes of our common and preferred
stock.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the stock
incentive plan following completion of this offering.
Exit
Event Bonus Plan
In 2005, we established an Exit Event Bonus Plan in order to
incentivize our executives to grow our company and achieve a
favorable investment outcome for our stockholders following our
going private transaction in 2004. We amended the plan in
September 2007, April 2009 and March 2010. Participants in this
plan are eligible to receive payments out of a bonus pool in the
event of our initial public offering or sale of our company.
In June 2010, we terminated the Exit Event Bonus Plan and
determined to pay cash bonuses to our executives upon our
initial public offering in lieu of issuing shares of common
stock under the plan. We have established an aggregate bonus
pool of up to $ by calculating the
aggregate initial value of the shares that would have been
issued under the Exit Event Bonus Plan assuming an initial
public offering price for our common stock of
$ , subject to downward adjustment
as determined in our board of directors discretion. Under
the Exit Event Bonus Plan, this initial public offering price
would have resulted in the issuance
of shares
of our common stock, which at such price would have an aggregate
value equal to the established maximum bonus pool of
$ . Individual maximum bonus
amounts have been determined by our board of directors based on
its subjective assessment of the relative contributions of each
executive to our companys growth since the going private
transaction in 2004, which is the same basis as units under the
Exit Event Bonus Plan were to be granted. The payment of these
bonuses is subject to consummation of our initial public
offering. We have provided more detailed information about these
bonuses in the Executive Compensation
Compensation Discussion and Analysis Exit Event
Bonus Plan section of this prospectus.
95
Although the Exit Event Bonus Plan has been terminated, the
material features of the plan that impacted the determination of
the cash bonus payments are summarized below. The complete text
of our Exit Event Bonus Plan is filed as an exhibit to the
registration statement of which this prospectus forms a part.
Eligibility. Only executives or other
employees who would qualify as a highly compensated employee
within the meaning of the Employee Retirement Income Security
Act of 1974 are eligible to participate in the Exit Event Bonus
Plan.
Units. Participants are awarded units under
the Exit Event Bonus Plan, which units permit the holder to
participate in a bonus pool in the event of an initial public
offering or sale of our company.
Bonus Pool. In the event of an initial public
offering, the bonus pool will consist of shares of our common
stock, the number of which is determined by multiplying
(i) the applicable percentage by (ii) the
number of shares of common stock outstanding on a fully diluted
basis immediately prior to the initial public offering.
In the event of a sale of our company, the bonus pool will
consist of a portion of the aggregate consideration received by
us and/or
our stockholders in such sale, or the aggregate sale
consideration, the amount of which is determined by multiplying
(i) the applicable percentage by (ii) the
aggregate sale consideration less the amount of such aggregate
sale consideration payable in respect of our preferred stock
outstanding at the time of such sale.
The applicable percentage ranges from 0% to 3%, depending upon
our valuation in an initial public offering or the aggregate
sale consideration in a sale of our company, as applicable. If
the initial public offering valuation or aggregate sale
consideration is $210 million or less, the applicable
percentage will be 0%. If the initial public offering valuation
or aggregate sale consideration is $250 million or greater,
the applicable percentage will be 3%. For an initial public
offering valuation or an aggregate sale consideration between
$210 million and $250 million, the applicable
percentage will be between 0% and 3% as determined on a
proportional basis by multiplying 3% by a fraction where the
numerator is the difference between the applicable valuation or
aggregate sale consideration and $210 million and the
denominator is $40 million.
For the purposes of the Exit Event Bonus Plan, our valuation in
an initial public offering will be equal to the sum of:
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the number of shares of our common stock outstanding, on a fully
diluted basis, immediately prior to the initial public offering
multiplied by the price at which our shares of common stock are
offered to the public in the initial public offering; and
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the amount of proceeds of the initial public offering that are
used to redeem our outstanding preferred stock.
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Payments under the plan. Participants are
entitled to participate in the bonus pool on a pro rata basis
based on the respective number of units held by the
participants. In the event of a sale of our company,
participants are entitled to receive their payments under the
Exit Event Bonus Plan at the same time and upon the same terms
as our stockholders receive the aggregate sale consideration. In
the event of an initial public offering, participants will be
issued their shares of common stock within 30 days
following the consummation of the initial public offering.
401(k)
Plan
We maintain a deferred savings and retirement plan for our
employees. Such plan is intended to qualify as a
tax-qualified
plan under Section 401 of the Internal Revenue Code. The
deferred savings and retirement plan provides that each
participant may contribute his or her pre-tax compensation up to
the statutory limit ($16,500 in 2010). For employees
50 years of age or older, an additional
catch-up
contribution of $5,500 is allowable. In 2010, the statutory
limit for those who qualify for
catch-up
contributions is $22,000. We match 50% of each employees
contributions up to a maximum of $2,500 per employee. All
contributions are held in trust and are invested in accordance
with the terms of the deferred savings and retirement plan.
Under such plan, each employee is fully vested in his or her
deferred salary contributions.
96
Limitation
of Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, limits the liability of our directors for monetary
damages to the fullest extent permitted by Delaware law.
Consequently, no director will be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary
duties as a director, except liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
|
|
any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission. If Delaware law is amended to authorize the further
elimination or limitation of the liability of a director, then
the liability of our directors will be eliminated or limited to
the fullest extent permitted by Delaware law as so amended.
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, also provides that:
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we will indemnify our directors and officers to the fullest
extent permitted by law;
|
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we may indemnify our other employees and agents to the same
extent that we indemnify our directors and officers, unless
otherwise determined by our board of directors; and
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we will advance expenses to our directors and officers in
connection with defending an action, suit or proceeding in
advance of its final disposition to the fullest extent permitted
by law.
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The indemnification provisions contained in our amended and
restated certificate of incorporation are not exclusive.
Section 145(g) of the Delaware General Corporation Law and
our amended and restated certificate of incorporation permit us
to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her
actions in connection with their services to us, regardless of
whether Delaware General Corporation Law permits
indemnification. We maintain a directors and
officers liability insurance policy.
We have entered into indemnification agreements with each of our
directors and executive officers. These indemnification
agreements generally provide that we will indemnify them to the
fullest extent permitted by Delaware law in connection with
their service to us or on our behalf.
At present, there is no pending litigation or proceeding
involving any of our directors or officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling our company pursuant to the foregoing
provisions, or otherwise, the opinion of the SEC is that such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
97
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2007, we have entered into no transactions
in which the amount involved exceeded or will exceed $120,000
and in which any of our directors, executive officers, holders
of more than five percent of our voting securities, and
affiliates of our directors, executive officers and five percent
stockholders, had or will have a direct or indirect material
interest, other than compensation arrangements with directors
and executive officers, which are described under the
Executive Compensation section of this prospectus,
and the transactions described below.
Loan
Forgiveness
In March 2010, we canceled aggregate indebtedness from
Messrs. Wiehe, Duke and Martini and Ms. Kaelin in the
following amounts: Stephen Wiehe ($376,612), James Duke
($268,965), Jeffrey Martini ($149,345) and Jennifer Kaelin
($220,884). This indebtedness was represented by promissory
notes used to pay the purchase price for restricted stock awards
to these individuals. Our board of directors made this decision
in part to comply with the requirements of Section 402 of
the Sarbanes-Oxley Act of 2002, which prohibits public companies
from extending loans to its executive officers, and in part due
to the fact that the restricted stock awards that gave rise to
the forgiven indebtedness were issued in connection with the
reduction of the potential number of shares issuable under our
Exit Event Bonus Plan from 5% of outstanding shares of common
stock to 3%. Had those shares remained subject to the Exit Event
Bonus Plan rather than being issued as restricted stock awards,
the recipients would not have been required to pay any purchase
price for such shares. Consequently, our board of directors
determined that forgiving the indebtedness put the recipients in
the same position as they would have been had the shares
remained in the Exit Event Bonus Plan. See the section titled
Executive Compensation Compensation Discussion
and Analysis for additional information.
Stockholders
Agreement
We have entered into a stockholders agreement with our preferred
stockholders and Messrs. Wiehe, Duke and Gillis. This
agreement provides for certain governance rights, rights of
first refusal and co-sale and other rights relating to the
shares of our common stock, which will terminate upon
consummation of this offering. This agreement also provides for
registration rights, which are described in the
Description of Capital Stock Registration
Rights section of this prospectus.
Indemnification
Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. These agreements, among other
things, require us to indemnify each director and executive
officer to the fullest extent permitted by Delaware law,
including indemnification of expenses such as attorneys
fees, judgments, fines and settlement amounts incurred by the
director or executive officer in any action or proceeding,
including any action or proceeding by or in right of us, arising
out of the persons services as a director or executive
officer.
Employment
Agreement
We have entered into an employment agreement with
Mr. Wiehe. See the section titled Executive
Compensation Employment Agreements for
additional information.
Change of
Control Agreements
We have entered into change of control agreements with
Messrs. Wiehe, Duke and Howard. See the section titled
Executive Compensation Potential Payments upon
Termination or Change of Control for additional
information.
98
Policy
for Approval of Related Party Transactions
Although historically we have not had a formal written policy
regarding transactions with related persons, our executive
officers, directors and stockholders holding 5% or more of the
outstanding capital stock of our company have been required to
disclose to our executive officers and directors any potential
conflicts of interest with respect to a proposed transaction and
then recuse themselves from any consideration or vote with
respect to such transaction. In June 2010, our board of
directors adopted a written statement of policy regarding
transactions with related persons, which we refer to as our
related person policy. Our related person policy requires that a
related person (as defined in Item 404(a) of
Regulation S-K)
must promptly disclose to our Chief Financial Officer or Chief
Executive Officer any related person transaction
(defined as any transaction that is reportable by us under
Item 404(a) of
Regulation S-K)
and all material facts with respect thereto. The Chief Financial
Officer or Chief Executive Officer will then promptly
communicate that information to our nominating and corporate
governance committee. In reviewing a transaction, our nominating
and corporate governance committee will consider all relevant
facts and circumstances, including (1) the commercial
reasonableness of the terms, (2) the benefit and perceived
benefits, or lack thereof, to us, (3) opportunity costs of
alternate transactions, (4) the materiality and character
of the related persons interest, and (5) the actual or
apparent conflicts of interest of the related person. Our
nominating and corporate governance committee will not approve
or ratify a related person transaction unless it determines
that, upon consideration of all relevant information, the
transaction is in, or is not inconsistent with, the best
interests of our company and stockholders. No related person
transaction will be consummated without the approval or
ratification of our nominating and corporate governance
committee. It is our policy that directors interested in a
related person transaction will recuse themselves from any vote
relating to a related person transaction in which they have an
interest.
99
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our common stock as
of ,
2010, and as adjusted to reflect the shares of common stock to
be issued and sold in this offering by (i) each of our
named executive officers; (ii) each of our directors;
(iii) all of our executive officers and directors as a
group; and (iv) each person or group of affiliated persons
known by us to be the beneficial owner of more than 5% of our
common stock.
Beneficial ownership in this table is determined in accordance
with the rules of the SEC and does not necessarily indicate
beneficial ownership for any other purpose. Under these rules,
the number of shares of common stock deemed outstanding includes
shares issuable upon exercise of options held by the respective
person or group that may be exercised within 60 days
after ,
2010. For purposes of calculating each persons or
groups percentage ownership, stock options exercisable
within 60 days
after ,
2010 are included for that person or group.
Percentage of beneficial ownership is based
on shares
of common stock outstanding as
of ,
2010
and shares
of common stock outstanding after completion of this offering.
Unless otherwise indicated and subject to applicable community
property laws, to our knowledge, each stockholder named in the
following table possesses sole voting and investment power over
the shares listed, except for those jointly owned with that
persons spouse. Unless otherwise noted below, the address
of each person listed on the table is
c/o SciQuest,
Inc., 6501 Weston Parkway, Suite 200, Cary, North
Carolina 27513. Beneficial ownership representing less than 1%
is denoted with an asterisk (*).
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Shares Beneficially
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Number of
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Owned if
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Shares Beneficially
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Number
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Shares Beneficially
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Shares to be Sold
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Underwriters
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Owned Prior to the
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of
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Owned
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if Underwriters
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Option is Exercised in
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Offering
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Shares
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After the Offering
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Option is
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Full
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Name
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Shares
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Percentage
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Offered
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Shares
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Percentage
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Exercised in Full
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Shares
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Percentage
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Named Executive Officers and Directors:
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Stephen J. Wiehe(1)
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James B. Duke
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Jeffrey A. Martini
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Jennifer G. Kaelin
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C. Gamble Hefferman(2)
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Noel J. Fenton(3)
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Daniel F. Gillis
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Jeffrey T. Barber
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Timothy J. Buckley
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All executive officers and directors as a group (10 people)
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5% Stockholders:
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Funds associated with Trinity Ventures(4)
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Funds associated with Intersouth Partners(5)
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River Cities SBIC III, L.P.
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Other Selling Stockholders:
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(1) |
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Includes shares
held by Mr. Wiehe as custodian for Andrew John Wiehe and
Stephanie Elizabeth Wiehe, over which Mr. Wiehe has voting
and investment power. |
100
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(2) |
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Includes shares
subject to options that are exercisable within 60 days of
the date of the table. |
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(3) |
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Includes shares
held by Trinity Ventures VII, L.P., Trinity VII
Side-By-Side
Fund, L.P., Trinity Ventures VIII, L.P., Trinity VIII
Side-By-Side
Fund, L.P. and Trinity VIII Entrepreneurs Fund, L.P.
Mr. Fenton may be deemed to have shared voting and
investment power over the shares held by these limited
partnerships, but disclaims beneficial ownership of such shares. |
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(4) |
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Consists of shares held by Trinity Ventures VII, L.P., Trinity
VII
Side-By-Side
Fund, L.P., Trinity Ventures VIII, L.P., Trinity VIII
Side-By-Side
Fund, L.P. and Trinity VIII Entrepreneurs Fund, L.P. |
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(5) |
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Consists of shares held by Intersouth Partners V, L.P.,
Intersouth Affiliates V, L.P., and Intersouth Partners VI,
L.P. |
101
DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock and certain
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws are summaries and
are qualified by reference to the amended and restated
certificate of incorporation and amended and restated bylaws
that will become effective upon completion of this offering.
Copies of these documents have been filed with the SEC as
exhibits to the registration statement of which this prospectus
forms a part. The descriptions of common stock and preferred
stock reflect changes to our capital structure that will occur
upon completion of this offering.
Authorized
Capital Stock
Upon completion of this offering, our authorized capital stock
will consist
of shares
of common stock, $0.001 par value per share,
and shares
of preferred stock, $0.001 par value per share. Concurrent
with the consummation of this offering, all of our shares of
preferred stock that are currently outstanding will be redeemed.
Accordingly, no shares of our preferred stock will be
outstanding immediately following completion of this offering.
As of June 30, 2010, there were 28,612,008 shares of
common stock outstanding held by 56 stockholders of record.
As of June 30, 2010, there were 222,073 shares of
preferred stock outstanding held by 10 stockholders of
record.
Common
Stock
Voting. Except as otherwise required by
Delaware law, holders of our common stock are entitled to one
vote for each share held of record on all matters submitted to a
vote of the stockholders. There is no cumulative voting in the
election of directors.
Dividend Rights. Subject to dividend
preferences that may be applicable to any outstanding preferred
stock, holders of our common stock are entitled to receive
equally, on a per share basis, such dividends or other
distributions in cash, securities or other property of our
company as may be declared from time to time by our board of
directors out of assets and funds legally available for dividend
payments. It is our present intention not to pay dividends on
our common stock for the foreseeable future. Our board of
directors may, at its discretion, modify or repeal our dividend
policy. See Dividend Policy.
Liquidation and Preemptive Rights. In the
event of our liquidation, dissolution or
winding-up,
holders of our common stock are entitled to share equally on a
per share basis in all assets remaining after payment or
provision of payment of our debts and amounts payable upon
shares of preferred stock entitled to a preference, if any, over
holders of common stock upon a liquidation, dissolution or
winding up. Holders of our common stock have no conversion,
exchange, preemption or other subscription rights. There are no
redemption or sinking fund provisions applicable to our common
stock.
Listing. We intend to apply to have our common
stock listed on the NASDAQ Global Market under the symbol
SQI.
Transfer Agent and Registrar. The transfer
agent and registrar for our common stock is Computershare Trust
Company, N.A. Its address is P.O. Box 43070, Providence,
Rhode Island
02940-3070,
and its telephone number is
(781) 575-3120.
Preferred
Stock
Our board of directors is authorized, without further vote or
action by the stockholders, to issue from time to time up to an
aggregate
of shares
of preferred stock in one or more series and to fix the
designations, rights, preferences and privileges and any
qualifications, limitations or restrictions of the shares of
each such series of preferred stock, including the dividend
rights and rates, conversion rights, voting rights, the terms of
redemption including price and sinking fund provisions,
liquidation preferences and the number of shares constituting
any series or designations of that series.
102
We believe that the ability of our board of directors to issue
one or more series of preferred stock will provide us with
flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that may
arise. The authorized shares of preferred stock, as well as
authorized and unissued shares of common stock, will be
available for issuance without action by our stockholders,
unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our
securities may be listed or traded.
Our board of directors may authorize, without stockholder
approval, the issuance of preferred stock with voting and
conversion rights that could adversely affect the voting power
and other rights of holders of common stock. Although our board
of directors has no current intention of doing so, it could
issue a series of preferred stock that could have the effect of
discouraging, delaying or preventing a change in control of us
or an unsolicited acquisition proposal that some, or a majority,
of our stockholders might believe to be in their best interests
or in which stockholders might receive a premium for their stock
over the then-current market price. Any issuance of preferred
stock could therefore have the effect of decreasing the market
price of our common stock.
Our board of directors will make any determination to issue
shares of preferred stock based on its judgment as to the best
interests of our company and our stockholders. We have no
current plans to issue any shares of preferred stock after this
offering.
Registration
Rights
Holders, or their transferees, of
approximately shares
of our common stock are entitled to certain registration rights
with respect to these securities as set forth in a stockholders
agreement, dated July 28, 2004, between us and the holders
of these securities. The following description of the terms of
the stockholders agreement is intended as a summary only and is
qualified in its entirety by reference to the stockholders
agreement filed as an exhibit to the registration statement, of
which this prospectus forms a part.
Demand Registration Rights. At any time after
the earlier to occur of 180 days after the consummation of
this offering and expiration of the applicable
lock-up
agreements, the holders of more than 30% of the registrable
shares may request that we register all or a portion of their
registrable shares for sale under the Securities Act. We are
required to effect the registration as requested unless, in the
good faith judgment of our board of directors, such registration
should be delayed. We may be required to effect two of these
registrations. In addition, when we are eligible for the use of
Form S-3,
or any successor form, holders of registrable shares may make up
to two requests in any
12-month
period that we register all or a portion of their registrable
shares for sale under the Securities Act on
Form S-3,
or any successor form, so long as the aggregate price to the
public in connection with any such offering is at least
$1 million.
Piggyback Registration Rights. After the
completion of this offering, in the event that we propose to
register any of our securities under the Securities Act (except
for the registration of securities to be offered pursuant to an
employee benefit plan on
Form S-8
or pursuant to a registration made on
Form S-4
or any successor forms then in effect), we will include in these
registrations all securities with respect to which we have
received written requests for inclusion under our registration
rights agreement, subject to certain limitations.
Expenses of Registration. We will pay all
registration expenses, other than underwriting discounts and
commissions and any transfer taxes related to any demand or
piggyback registration. With respect to demand registrations,
these expenses include all reasonable expenses that any
stockholder incurs in connection with the registration of its
securities, subject to certain limitations.
Indemnification. The stockholders agreement
contains indemnification provisions pursuant to which we are
obligated to indemnify the selling stockholders and any person
who might be deemed to control any selling stockholder in the
event of material misstatements or omissions in the registration
statement or related violations of law attributable to us. The
stockholders agreement requires that, as a condition to
including their securities in any registration statement filed
pursuant to demand or piggyback registration rights, the selling
stockholders indemnify us for material misstatements or
omissions attributable to them.
103
Anti-Takeover
Effects of Our Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws
Certain provisions (including, among others, those summarized
below) of our amended and restated certificate of incorporation
and our amended and restated bylaws, each of which will become
effective upon the closing of this offering, may delay or
discourage transactions involving an actual or potential change
of control of our company or a change in our management,
including transactions in which stockholders might otherwise
receive a premium for their shares or transactions that our
stockholders might otherwise consider to be in their best
interests or in our best interests. Therefore, these provisions
could adversely affect the price of our common stock.
Authorized but Unissued Shares. The authorized
but unissued shares of our common stock and preferred stock are
available for future issuance without stockholder approval,
subject to any limitations imposed by applicable law or the
rules of any stock exchange or automated quotation system on
which our securities may be listed or traded. As discussed
above, our board of directors may designate the rights,
preferences and privileges of such authorized but unissued
preferred stock. These additional shares may be used for a
variety of corporate purposes, including acquisitions and
employee benefit plans, but they could also be issued in order
to deter or prevent an attempt to acquire us.
Board Matters. Our amended and restated
certificate of incorporation and amended and restated bylaws
provide that upon completion of this offering, our board of
directors will be divided into three classes with staggered
three-year terms. The board of directors, or its remaining
members, even if less than a quorum, is empowered to fill
vacancies on the board of directors occurring for any reason for
the remainder of the term of the class of directors in which the
vacancy occurred. The authorized number of directors may be
changed by resolution of the board of directors. Members of the
board of directors may only be removed for cause and only by the
affirmative vote of 75% of our outstanding voting stock. These
provisions are likely to increase the time required for
stockholders to change the composition of the board of directors
and could make it more difficult for a third party to acquire,
or discourage a third party from seeking to acquire, control of
our company.
No Cumulative Voting. Our amended and restated
certificate of incorporation and amended and restated bylaws do
not permit cumulative voting in the election of directors.
Cumulative voting allows a stockholder to vote a portion or all
of its shares for one or more candidates for seats on the board
of directors. The absence of cumulative voting may make it more
difficult for a minority stockholder to gain a seat on our board
of directors to influence decisions regarding takeovers or other
matters.
Stockholder Action; Special Meeting of Stockholders; Advance
Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated certificate
of incorporation and our amended and restated bylaws provide
that any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting may only be
taken if it is properly brought before such meeting and may not
be taken by written consent in lieu of a meeting. Our amended
and restated bylaws provide that, except as otherwise required
by law, special meetings of stockholders can only be called by
our chairman of the board of directors, our president or chief
executive officer or our board of directors. Our amended and
restated bylaws also provide that stockholders seeking to
present proposals before a meeting of stockholders or to
nominate candidates for election as directors at a meeting of
stockholders must provide notice in writing in a timely manner
and also specify requirements as to the form and content of a
stockholders notice. These provisions could have the
effect of delaying until the next stockholder meeting
stockholder actions that are favored by a majority of our
standing voting securities. These provisions also may have the
effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed.
Super Majority Stockholder Vote Required for Certain
Actions. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a
corporations certificate of incorporation or bylaws,
unless the corporations certificate of incorporation or
bylaws, as the case may be, requires a greater percentage. Our
amended and restated bylaws may be amended or repealed by a
majority vote of our board of directors or the affirmative vote
of the holders of at least 75% of the voting power of all shares
entitled to vote generally in the election of directors. In
addition, the affirmative vote of
104
the holders of at least 75% of the voting power of all shares
entitled to vote generally in the election of directors is
required to amend or repeal or adopt any provision inconsistent
with the provisions of our amended and restated certificate of
incorporation described above.
Delaware
Anti-Takeover Statute
We are subject to Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly-held
Delaware corporation 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:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an
interested stockholder;
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upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding (1) shares owned by persons who are directors
and also officers and (2) shares owned by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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at or subsequent to the date of the transaction, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the
interested stockholder.
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Section 203 defines a business combination to include:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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Subject to various exceptions, an interested
stockholder is a person who, together with his or her
affiliates and associates, owns, or within the past three years,
did own, 15% or more of the outstanding voting stock of the
corporation. Section 203 could discourage mergers or other
takeover or change of control attempts, including attempts that
might result in the payment of a premium over the market price
for shares of our common stock.
105
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there was no public market for our
common stock, and a liquid trading market for the common stock
may not develop or be sustained after this offering. We cannot
predict the effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock
for sale will have on the market price of our common stock
prevailing from time to time. Sales of substantial amounts of
our common stock in the public market, including shares issued
upon exercise of outstanding options or in the public market
after this offering, or the anticipation of these sales, could
adversely affect the market prices of our common stock and could
impair our future ability to raise capital through the sale of
our equity securities.
Upon completion of this offering, based on our outstanding
shares as
of ,
2010, and assuming no exercise of outstanding options, we will
have outstanding an aggregate
of shares
of our common stock
( shares
if the underwriters over-allotment option is exercised in
full). Of these shares, all of the shares sold in this offering
(plus any shares sold as a result of the underwriters
exercise of the over-allotment option) will be freely tradable
without restriction or further registration under the Securities
Act, unless those shares are purchased by our affiliates as that
term is defined in Rule 144 under the Securities Act.
The
remaining shares
of common stock to be outstanding after this offering and the
443,361 shares issuable upon exercise of outstanding
warrants will be restricted securities under
Rule 144. Of these restricted
securities, shares
will be subject to transfer restrictions for 180 days from
the date of this prospectus pursuant to
lock-up
agreements. Restricted securities may be sold in the public
market only if they have been registered or if they qualify for
an exemption from registration under Rules 144 or 701 under
the Securities Act.
Lock-Up
Agreements
All of our officers and directors, and holders
of shares
of our common stock and holders
of shares
of our common stock issuable upon exercise of outstanding
options, have entered into
lock-up
agreements pursuant to which they have agreed, subject to
limited exceptions, not to offer, sell or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock
or securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 180 days from
the date of this prospectus without our prior written consent
or, in some cases, the prior written consent of Stifel, Nicolaus
& Company, Incorporated. We have agreed, subject to limited
exceptions, that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent
of Stifel, Nicolaus & Company, Incorporated, offer, sell or
otherwise transfer or dispose of any shares of common stock or
securities convertible into or exchangeable or exercisable for
shares of common stock, except for the shares of common stock
offered in this offering and the shares of common stock issuable
upon exercise or conversion of options, warrants or securities
outstanding on the date of this prospectus and the shares of our
common stock that are issued under our stock option or employee
stock purchase plans, provided that such recipients agree to be
bound by these restrictions during the
180-day
period. Stifel, Nicolaus & Company, Incorporated has
advised us that it has no current intent or arrangement to
release any of the shares subject to the
lock-up
agreements prior to the expiration of the
lock-up
period. There are no contractually specified conditions for the
waiver of
lock-up
restrictions and any waiver is at the sole discretion of Stifel,
Nicolaus & Company, Incorporated, which may be granted by
Stifel, Nicolaus & Company, Incorporated for any reason.
The 180-day
lock-up
period will be extended automatically if (i) during the
last 17 days of the
180-day
restricted period we issue an earnings release or announce
material news or a material event or (ii) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in this
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event. After the
lock-up
period, these shares may be sold, subject to applicable
securities laws. See Underwriting.
Rule 144
In general, under Rule 144 as currently in effect, once we
have been subject to public company reporting requirements for
at least 90 days, a person who is not deemed to have been
one of our affiliates for purposes of
106
the Securities Act at any time during the 90 days preceding
a sale and who has beneficially owned the shares proposed to be
sold for at least six months, including the holding period of
any prior owner other than our affiliates, is entitled to sell
those shares without complying with the manner of sale, volume
limitation or notice provisions of Rule 144, subject to
compliance with the public information requirements of
Rule 144. If such a person has beneficially owned the
shares proposed to be sold for at least one year, including the
holding period of any prior owner other than our affiliates,
then that person is entitled to sell those shares without
complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our
affiliates or persons selling shares on behalf of our affiliates
are entitled to sell upon expiration of the
lock-up
agreements described above, within any three-month period
beginning 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
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1% of the number of shares of our common stock then
outstanding; or
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the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to that sale.
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Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Upon expiration of the
lock-up
period described
above,
additional shares of our common stock will be eligible for sale
under Rule 144, including shares eligible for resale
immediately upon the closing of this offering as described
above. We cannot estimate the number of shares of our common
stock that our existing stockholders will elect to sell under
Rule 144.
Rule 701
Rule 701 generally allows a stockholder who purchased
shares of our common stock pursuant to a written compensatory
plan or contract and who is not deemed to have been an affiliate
of our company during the immediately preceding 90 days to
sell these shares in reliance upon Rule 144, but without
being required to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144.
Rule 701 also permits affiliates of our company to sell
their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144.
All holders of Rule 701 shares, however, are required
to wait until 90 days after the date of this prospectus
before selling those shares pursuant to Rule 701.
Stock
Options and Restricted Stock Awards
We intend to file a registration statement on
Form S-8
under the Securities Act covering all of the shares of our
common stock subject to options outstanding or reserved for
issuance under our stock incentive plan and all shares of common
stock issued pursuant to restricted stock awards under our stock
incentive plan. We expect to file this registration statement as
soon as practicable after this offering. In addition, we intend
to file a registration statement on
Form S-8
or such other form as may be required under the Securities Act
for the resale of shares of our common stock issued upon the
exercise of options that were not granted under Rule 701.
We expect to file this registration statement as soon as
permitted under the Securities Act. However, the shares
registered on
Form S-8
will be subject to volume limitations, manner of sale, notice
and public information requirements of Rule 144 and will
not be eligible for resale until expiration of the
lock-up
agreements to which they are subject.
Registration
Rights
After the completion of this offering, holders
of shares
of common stock will be entitled to specific rights to register
those shares for sale in the public market. See
Description of Capital Stock Registration
Rights. Registration of these shares under the Securities
Act would result in the shares becoming freely tradable without
restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of
the registration statement relating to such shares.
107
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS OF OUR COMMON STOCK
The following discussion summarizes certain material
U.S. federal income and estate tax considerations relating
to the acquisition, ownership and disposition of our common
stock purchased pursuant to this offering by a
non-U.S. holder
(as defined below). This discussion is based on the provisions
of the U.S. Internal Revenue Code of 1986, as amended,
final, temporary and proposed U.S. Treasury regulations
promulgated thereunder and current administrative rulings and
judicial decisions, all as in effect as of the date hereof. All
of these authorities may be subject to differing interpretations
or repealed, revoked or modified, possibly with retroactive
effect, which could materially alter the tax consequences to
non-U.S. holders
described in this prospectus.
There can be no assurance that the IRS will not take a contrary
position to the tax consequences described herein or that such
position will not be sustained by a court. No ruling from the
IRS or opinion of counsel has been obtained with respect to the
U.S. federal income or estate tax consequences to a
non-U.S. holder
of the purchase, ownership or disposition of our common stock.
This discussion is for general information only and is not
tax advice. All prospective
non-U.S. holders
of our common stock should consult their own tax advisors with
respect to the U.S. federal, state, local and
non-U.S. tax
consequences of the purchase, ownership and disposition of our
common stock.
As used in this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock that is not any of
the following for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United
States;
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a corporation or other entity taxable as a corporation for
U.S. federal income tax purposes that was created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source;
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a trust (a) if a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons have the authority to control all of
the trusts substantial decisions or (b) that has a
valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person; or
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an entity that is disregarded as separate from its owner if all
of its interests are owned by a single person described above.
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An individual may be treated, for U.S. federal income tax
purposes, as a resident of the United States in any calendar
year by being present in the United States on at least
31 days in that calendar year and for an aggregate of at
least 183 days during a three-year period ending in the
current calendar year. The
183-day test
is determined by counting all of the days the individual is
treated as being present in the current year, one-third of such
days in the immediately preceding year and one-sixth of such
days in the second preceding year. Residents are subject to
U.S. federal income tax as if they were U.S. citizens.
This discussion assumes that a prospective
non-U.S. holder
will hold shares of our common stock as a capital asset
(generally, property held for investment). This discussion does
not address all aspects of U.S. federal income and estate
taxation that may be relevant to a particular
non-U.S. holder
in light of that
non-U.S. holders
individual circumstances. In addition, this discussion does not
address any aspect of U.S. state or local or
non-U.S. taxes,
or the special tax rules applicable to particular
non-U.S. holders,
such as:
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insurance companies and financial institutions;
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tax-exempt organizations;
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controlled foreign corporations and passive foreign investment
companies;
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partnerships or other pass-through entities;
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regulated investment companies or real estate investment trusts;
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pension plans;
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persons who received our common stock as compensation;
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brokers and dealers in securities;
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108
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owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
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former citizens or residents of the United States subject to tax
as expatriates.
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If a partnership or other entity treated as a partnership for
U.S. federal income tax purposes is a beneficial owner of
our common stock, the treatment of a partner in the partnership
generally will depend on the status of the partner and the
activities of the partnership. We urge any beneficial owner of
our common stock that is a partnership and partners in that
partnership to consult their tax advisors regarding the
U.S. federal income tax consequences of acquiring, owning
and disposing of our common stock.
Distributions
on Our Common Stock
Any distribution on our common stock paid to
non-U.S. holders
will generally constitute a dividend for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. Distributions in excess
of our current and accumulated earnings and profits will
generally constitute a return of capital to the extent of the
non-U.S. holders
adjusted tax basis in our common stock, and will be applied
against and reduce the
non-U.S. holders
adjusted tax basis. Any remaining excess will be treated as
capital gain, subject to the tax treatment described below in
Gain on Sale, Exchange or Other Disposition of
Our Common Stock.
Dividends paid to a
non-U.S. holder
that are not treated as effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States generally
will be subject to withholding of U.S. federal income tax
at a rate of 30% on the gross amount paid, unless the
non-U.S. holder
is entitled to an exemption from or reduced rate of withholding
under an applicable income tax treaty. In order to claim the
benefit of a tax treaty or to claim an exemption from
withholding, a
non-U.S. holder
must provide an
IRS-approved
certificate of eligibility prior to payment of the dividends.
For most individuals and corporations, such certificate will be
a properly completed and executed IRS
Form W-8BEN
(or successor form). For most partnerships or other pass-through
entities, a certificate of eligibility may consist of a
completed, signed IRS
Form W-8IMY.
A
non-U.S. holder
eligible for a reduced rate of withholding pursuant to an income
tax treaty may be eligible to obtain a refund of any excess
amounts withheld by timely filing an appropriate claim for a
refund with the IRS.
Dividends paid to a
non-U.S. holder
that are treated as effectively connected with a trade or
business conducted by the
non-U.S. holder
within the United States (and, if an applicable income tax
treaty so provides, are also attributable to a permanent
establishment or a fixed base maintained within the United
States by the
non-U.S. holder)
are generally exempt from the 30% withholding tax if the
non-U.S. holder
satisfies applicable certification and disclosure requirements.
To obtain the exemption, a
non-U.S. holder
must provide us with a properly executed IRS
Form W-8ECI
(or successor form) prior to the payment of the dividend.
Dividends received by a
non-U.S. holder
that are treated as effectively connected with a U.S. trade
or business generally are subject to U.S. federal income
tax at rates applicable to U.S. persons. A
non-U.S. holder
that is a corporation may, under certain circumstances, be
subject to an additional branch profits tax imposed
at a rate of 30%, or such lower rate as specified by an
applicable income tax treaty between the United States and such
holders country of residence.
A
non-U.S. holder
who provides us with an IRS
Form W-8BEN,
Form W-8IMY
or
Form W-8ECI
must update the form or submit a new form, as applicable, if
there is a change in circumstances that makes any information on
such form incorrect.
Gain on
Sale, Exchange or Other Disposition of Our Common
Stock
In general, a
non-U.S. holder
will not be subject to any U.S. federal income tax or
withholding on any gain realized from the
non-U.S. holders
sale, exchange or other disposition of shares of our common
stock unless:
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the gain is effectively connected with a U.S. trade or
business (and, if an applicable income tax treaty so provides,
is also attributable to a permanent establishment or a fixed
base maintained within the United States by the
non-U.S. holder),
in which case the gain will be taxed on a net income basis
generally in the same
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109
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manner as if the
non-U.S. holder
were a U.S. person, and, if the
non-U.S. holder
is a corporation, the additional branch profits tax described
above in Distributions on Our Common
Stock may also apply;
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of the disposition and
certain other conditions are met, in which case the
non-U.S. holder
will be subject to a 30% tax on the net gain derived from the
disposition, which may be offset by
U.S.-source
capital losses of the
non-U.S. holder,
if any;
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the non-U.S. holder is an entity that fails to meet certain
disclosure requirements imposed under the Hiring Incentives to
Restore Employment Act of 2010 described below in
Obama Administration Legislation; or
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we are, or have been at any time during the five-year period
preceding such disposition (or the
non-U.S. holders
holding period, if shorter), a United States real property
holding corporation.
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Generally, we will be a United States real property
holding corporation if the fair value of our
U.S. real property interests equals or exceeds 50% of the
sum of the fair values of our worldwide real property interests
and other assets used or held for use in a trade or business,
all as determined under applicable U.S. Treasury
regulations. We believe that we have not been and are not
currently, and do not anticipate becoming in the future, a
United States real property holding corporation for
U.S. federal income tax purposes.
Backup
Withholding and Information Reporting
We must report annually to the IRS and to each
non-U.S. holder
the amount of distributions paid to such holder and the amount
of tax withheld, if any. Copies of the information returns filed
with the IRS to report the distributions and withholding also
may be made available to the tax authorities in a country in
which the
non-U.S. holder
is a resident under the provisions of an applicable income tax
treaty or agreement.
The United States imposes a backup withholding tax on the gross
amount of dividends and certain other types of payments
(currently at a rate of 28%). Dividends paid to a
non-U.S. holder
will not be subject to backup withholding if proper
certification of foreign status (usually on IRS
Form W-8BEN)
is provided, and we do not have actual knowledge or reason to
know that the
non-U.S. holder
is a U.S. person. In addition, no backup withholding or
information reporting will be required regarding the proceeds of
a disposition of our common stock made by a
non-U.S. holder
within the United States or conducted through certain
U.S. financial intermediaries if we receive the
certification of foreign status described in the preceding
sentence and we do not have actual knowledge or reason to know
that such
non-U.S. holder
is a U.S. person or the
non-U.S. holder
otherwise establishes an exemption.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that
certain required information is furnished to the IRS in a timely
manner.
U.S.
Federal Estate Tax
An individual
non-U.S. holder
who is treated as the owner, or who has made certain lifetime
transfers, of an interest in our common stock may be required to
include the value of the common stock in his or her gross estate
for U.S. federal estate tax purposes, and may be subject to
U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise. Under current U.S. federal law,
all federal taxes on the value of an individuals estate at
death have been temporarily repealed through December 31,
2010. Beginning January 1, 2011, absent further act by the
United States Congress, the estate tax automatically will be
reinstated at 2001 levels. This federal estate tax would apply
to any individual
non-U.S. holder
if such person owned our common stock at the time of his or her
death on or after January 1, 2011.
Currently, numerous proposals are under review by the United
States Congress to determine how best to reform the
U.S. federal estate tax. None of the current proposals
support repeal of the estate tax, and all of the proposals
preserve and continue some form of federal tax on the value of
an individuals estate (at tax rates ranging from
approximately 35% to 45%). Several of the legislative proposals
provide for a credit or other exemption that would be applied
before imposing any federal estate tax (for example, one
proposal provides
110
that no estate tax would be imposed until the value of the total
estate exceeds approximately $3,500,000 U.S. dollars). It
is unclear whether such a credit or exemption would apply to
non-U.S. holders
of our common stock. As a result of the widely differing
proposals for federal estate tax reform, it is difficult to
predict how the tax laws will apply, and all prospective
non-U.S. holders
are urged to consult their tax advisor to determine possible
application of the U.S. federal estate tax, if any.
Obama
Administration Legislation
On March 18, 2010, the Hiring Incentives to Restore
Employment Act of 2010, or the HIRE Act, was signed into law.
Under the HIRE Act, for dividends and certain other payments
made after December 31, 2012 to
non-U.S. entities
(including without limitation foreign financial institutions and
foreign corporations), a 30% withholding tax will apply if the
non-U.S. entity
does not meet certain disclosure requirements. If the
non-U.S. entity
is a foreign financial institution, the 30% withholding tax
would apply to dividends and to gains on the sale, exchange or
other disposition of our common stock unless the foreign
financial institution enters a written agreement with the IRS to
provide certain information and disclosure regarding all
U.S. persons holding an account with such financial
institution including written annual reports regarding such
accounts and the U.S. account holders. If the
non-U.S. entity
is not a financial institution, the 30% withholding tax would
apply to dividends and to gains on the sale, exchange or other
disposition of our common stock unless such
non-U.S. entity
certifies to us (on an IRS-approved form) that such entity does
not have a substantial U.S. owner or otherwise provides the
name, current address and U.S. taxpayer identification
number of each substantial U.S. owner. We will require
compliance with the HIRE Act on or before December 31, 2012
from all
non-U.S. entities
holding our common stock or will impose the mandatory 30%
withholding tax (regardless of receipt of a properly completed
IRS
Form W-8BEN
noted above).
All non-U.S. holders are encouraged to consult with their tax
advisors regarding possible implications of the HIRE Act or any
future Obama Administration legislative proposals.
111
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, each of the underwriters named below has severally
agreed to purchase from us and the selling stockholders the
aggregate number of shares of common stock set forth opposite
their respective names:
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Underwriters
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Number of Shares
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Stifel, Nicolaus & Company, Incorporated
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William Blair & Company, L.L.C.
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JMP Securities LLC
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Pacific Crest Securities LLC
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Total
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Stifel, Nicolaus & Company, Incorporated is the
book-running manager and William Blair & Company,
L.L.C., JMP Securities LLC and Pacific Crest Securities LLC are
co-managers.
Of
the shares
to be purchased by the
underwriters, shares
will be purchased from us
and
will be purchased from the selling stockholders.
The underwriting agreement provides that the obligations of the
several underwriters are subject to various conditions,
including approval of legal matters by counsel. The nature of
the underwriters obligations commits them to purchase and
pay for all of the shares of common stock listed above if any
are purchased.
The underwriting agreement provides that we and the selling
stockholders will indemnify the underwriters against liabilities
specified in the underwriting agreement under the Securities
Act, or will contribute to payments that the underwriters may be
required to make relating to these liabilities.
Stifel, Nicolaus & Company, Incorporated expects to deliver
the shares of common stock to purchasers on or
about ,
2010.
Over-Allotment
Option
We have granted a
30-day
over-allotment option to the underwriters to purchase up to a
total
of
additional shares of our common stock from us at the initial
public offering price, less the underwriting discount payable by
us, as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each
of the underwriters will be separately committed, subject to the
conditions described in the underwriting agreement, to purchase
the additional shares of our common stock in proportion to their
respective commitments set forth in the table above. If any
additional shares of common stock are purchased, the
underwriters will offer the additional shares on the same terms
as those on which the shares are being offered.
Determination
of Offering Price
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations between us and the underwriters.
In addition to prevailing market conditions, the factors to be
considered in determining the initial public offering price will
include:
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the valuation multiples of publicly-traded companies that the
representatives of the underwriters believe are comparable to us;
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our financial information;
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our history and prospects and the outlook for our industry;
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an assessment of our management, our past and present
operations, and the prospects for, and timing of, our future
revenues; and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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We cannot assure you that an active or orderly trading market
will develop for our common stock or that our common stock will
trade in the public markets subsequent to this offering at or
above the initial offering price.
112
Commissions
and Discounts
The underwriters propose to offer the shares of common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus, and at this price less a
concession not in excess of $ per
share of common stock to other dealers specified in a master
agreement among underwriters who are members of the Financial
Industry Regulatory Authority, Inc. The underwriters may allow,
and the other dealers specified may reallow, concessions not in
excess of $ per share of common
stock to these other dealers. After this offering, the offering
price, concessions and other selling terms may be changed by the
underwriters. Our common stock is offered subject to receipt and
acceptance by the underwriters and to other conditions,
including the right to reject orders in whole or in part.
The following table summarizes the compensation to be paid to
the underwriters by us and the proceeds, before expenses,
payable to us and the selling stockholders:
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Total
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Without Over-
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Per Share
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Allotment
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With Over-Allotment
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Public offering price
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$
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$
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$
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Underwriting discount
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Proceeds, before expenses, to us
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Proceeds, before expenses, to selling stockholders
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Indemnification
of Underwriters
We and the selling stockholders will indemnify the underwriters
against some civil liabilities, including liabilities under the
Securities Act and liabilities arising from breaches of our
representations and warranties contained in the underwriting
agreement. If we or the selling stockholders are unable to
provide this indemnification, we and the selling stockholders
will contribute to payments the underwriters may be required to
make in respect of those liabilities.
No Sales
of Similar Securities
The underwriters will require all of our directors and officers,
the selling stockholders and certain other of our stockholders
to agree not to offer, sell, agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock
or any securities convertible into or exchangeable for shares of
common stock except for the shares of common stock offered in
this offering without the prior written consent of Stifel,
Nicolaus & Company, Incorporated for a period of
180 days after the date of this prospectus.
We have agreed that for a period of 180 days after the date
of this prospectus, we will not, without the prior written
consent of Stifel, Nicolaus & Company, Incorporated, offer,
sell or otherwise dispose of any shares of common stock, except
for the shares of common stock offered in this offering and the
shares of common stock issuable upon exercise of outstanding
options on the date of this prospectus.
The 180-day
restricted period described in the preceding two paragraphs will
be automatically extended if: (1) during the last
17 days of the l80-day restricted period we issue an
earnings release or announce material news or a material event
or (2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event.
NASDAQ
Global Market
We have applied to have our common stock listed on the NASDAQ
Global Market under the symbol SQI.
113
Short
Sales, Stabilizing Transactions and Penalty Bids
In order to facilitate this offering, persons participating in
this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of our common stock
during and after this offering. Specifically, the underwriters
may engage in the following activities in accordance with the
rules of the SEC.
Short Sales. Short sales involve the sales by
the underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short sales are
short sales made in an amount not greater than the
underwriters overallotment option to purchase additional
shares from us in this offering. The underwriters may close out
any covered short position by either exercising their
over-allotment option to purchase shares or purchasing shares in
the open market. In determining the source of shares to close
out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short
sales are any short sales in excess of such over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market after pricing that could adversely
affect investors who purchase in this offering.
Stabilizing Transactions. The underwriters may
make bids for or purchases of the shares for the purpose of
pegging, fixing or maintaining the price of the shares, so long
as stabilizing bids do not exceed a specified maximum.
Penalty Bids. If the underwriters purchase
shares in the open market in a stabilizing transaction or
syndicate covering transaction, they may reclaim a selling
concession from the underwriters and selling group members who
sold those shares as part of this offering. Stabilization and
syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these
transactions. The imposition of a penalty bid might also have an
effect on the price of the shares if it discourages presales of
the shares.
The transactions above may occur on the NASDAQ Global Market or
otherwise. Neither we nor the underwriters make any
representation or prediction as to the effect that the
transactions described above may have on the price of the
shares. If these transactions are commenced, they may be
discontinued without notice at any time.
114
LEGAL
MATTERS
The validity of the shares of common stock offered hereby and
certain other legal matters will be passed upon for us by
Morris, Manning & Martin, LLP, Atlanta, Georgia. The
underwriters have been represented in connection with this
offering by Choate, Hall & Stewart LLP.
EXPERTS
The financial statements of SciQuest, Inc. at December 31,
2008 and 2009, and for each of the three years in the period
ended December 31, 2009, appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1,
including exhibits, schedules and amendments filed with the
registration statement, of which this prospectus is a part. This
prospectus does not contain all of the information set forth in
the registration statement and exhibits and schedules to the
registration statement. The rules and regulations of the SEC
allow us to omit from this prospectus certain information
included in the registration statement. For further information
with respect to our company and the shares of our common stock
to be sold in this offering, we refer you to the registration
statement, including the exhibits and schedules thereto.
Statements contained in this prospectus as to the contents of
any contract or other document referred to in this prospectus
are not necessarily complete and, where that contract or other
document has been filed as an exhibit to the registration
statement, each statement in this prospectus is qualified in all
respects by the exhibit to which the reference relates. Copies
of the registration statement, including the exhibits and
schedules to the registration statement, may be examined without
charge at the public reference room of the SEC,
100 F Street, N.E., Washington, DC 20549. You may
obtain information about the operation of the public reference
room by calling the SEC at
1-800-SEC-0330.
Copies of all or a portion of the registration statement can be
obtained from the public reference room of the SEC upon payment
of prescribed fees. Our SEC filings, including our registration
statement, are also available to you, free of charge, on the
SECs website at
http://www.sec.gov.
As a result of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act and will file annual, periodic and current reports, proxy
statements and other information with the SEC. These reports,
proxy statements and other information will be available for
inspection and copying at the SECs public reference
facilities and the website of the SEC referred to above.
REPORTS
TO STOCKHOLDERS
Following this offering, we will file annual, periodic and
special reports with the SEC as required by the SECs rules
and regulations. In addition, our annual proxy statement will be
mailed to our stockholders accompanied or preceded by an annual
report which meets the requirements of the SECs rules and
regulations no later than 120 days following the end of our
fiscal year. Our periodic quarterly reports will be filed with
the SEC within 45 days following the end of the quarter,
unless a shorter period is required by the rules and regulations
of the SEC. Our annual reports will contain financial statements
audited by our independent registered public accounting firm.
115
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Stockholders of SciQuest, Inc.
We have audited the accompanying balance sheets of SciQuest,
Inc. as of December 31, 2009 and 2008, and the related
statements of operations, stockholders deficit, and cash
flows for each of the three years in the period ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of SciQuest, Inc. at December 31, 2009 and 2008, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
Raleigh, North Carolina
May 10, 2010
F-2
SCIQUEST,
INC.
(in
thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,502
|
|
|
$
|
17,132
|
|
|
$
|
20,195
|
|
Restricted cash
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
Accounts receivable
|
|
|
3,506
|
|
|
|
4,846
|
|
|
|
6,763
|
|
Prepaid expenses and other current assets
|
|
|
874
|
|
|
|
834
|
|
|
|
745
|
|
Deferred tax asset
|
|
|
|
|
|
|
177
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,232
|
|
|
|
23,339
|
|
|
|
27,910
|
|
Property and equipment, net
|
|
|
1,353
|
|
|
|
1,307
|
|
|
|
1,741
|
|
Goodwill
|
|
|
6,765
|
|
|
|
6,765
|
|
|
|
6,765
|
|
Intangible assets, net
|
|
|
1,743
|
|
|
|
1,340
|
|
|
|
1,189
|
|
Deferred project costs
|
|
|
4,786
|
|
|
|
5,148
|
|
|
|
4,974
|
|
Deferred tax asset
|
|
|
|
|
|
|
17,269
|
|
|
|
15,642
|
|
Other
|
|
|
43
|
|
|
|
43
|
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
32,922
|
|
|
$
|
55,211
|
|
|
$
|
59,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
301
|
|
|
$
|
46
|
|
|
$
|
3
|
|
Accrued liabilities
|
|
|
3,308
|
|
|
|
2,980
|
|
|
|
2,818
|
|
Line of credit
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
Deferred revenues
|
|
|
23,947
|
|
|
|
27,066
|
|
|
|
26,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,906
|
|
|
|
30,442
|
|
|
|
28,828
|
|
Deferred revenues, less current portion
|
|
|
7,643
|
|
|
|
7,209
|
|
|
|
9,501
|
|
Restructuring liability, less current portion
|
|
|
287
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
646
|
|
|
|
813
|
|
Redeemable preferred stock at redemption value, $0.001 par
value; 500,000 shares authorized; 222,073 shares
issued and outstanding
|
|
|
31,477
|
|
|
|
34,072
|
|
|
|
35,436
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 32,000,000 shares
authorized; 28,352,041, 28,684,596 and 28,612,008 shares
issued and outstanding as of December 31, 2008,
December 31, 2009, and June 30, 2010
|
|
|
28
|
|
|
|
29
|
|
|
|
29
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from stockholders
|
|
|
(617
|
)
|
|
|
(769
|
)
|
|
|
(15
|
)
|
Accumulated deficit
|
|
|
(33,802
|
)
|
|
|
(16,418
|
)
|
|
|
(14,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(34,391
|
)
|
|
|
(17,158
|
)
|
|
|
(14,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable preferred stock, and
stockholders deficit
|
|
$
|
32,922
|
|
|
$
|
55,211
|
|
|
$
|
59,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-3
SCIQUEST,
INC.
(in
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Years Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,107
|
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
17,406
|
|
|
$
|
20,688
|
|
Cost of revenues
|
|
|
6,101
|
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
3,748
|
|
|
|
4,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,006
|
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
13,658
|
|
|
|
16,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,908
|
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
4,360
|
|
|
|
3,919
|
|
Sales and marketing
|
|
|
7,213
|
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
5,346
|
|
|
|
5,969
|
|
General and administrative
|
|
|
2,717
|
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
1,945
|
|
|
|
2,635
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
100
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
201
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,124
|
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
11,952
|
|
|
|
12,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,118
|
)
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,706
|
|
|
|
3,568
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
209
|
|
|
|
200
|
|
|
|
37
|
|
|
|
33
|
|
|
|
12
|
|
Interest expense
|
|
|
(90
|
)
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Other (expense) income, net
|
|
|
(1
|
)
|
|
|
(65
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
118
|
|
|
|
113
|
|
|
|
27
|
|
|
|
31
|
|
|
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,000
|
)
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
1,737
|
|
|
|
5,256
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
9
|
|
|
|
16,821
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,000
|
)
|
|
|
1,117
|
|
|
|
19,429
|
|
|
|
1,737
|
|
|
|
3,204
|
|
Dividends on redeemable preferred stock
|
|
|
2,207
|
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
1,261
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
476
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.60
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.58
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,122
|
|
|
|
28,016
|
|
|
|
28,157
|
|
Diluted
|
|
|
26,985
|
|
|
|
27,600
|
|
|
|
28,900
|
|
|
|
28,794
|
|
|
|
29,359
|
|
The accompanying notes are an integral part of the financial
statements.
F-4
SCIQUEST,
INC.
(in
thousands except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
from
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Balance as of December 31, 2006
|
|
|
27,495,120
|
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
(50
|
)
|
|
$
|
(26,381
|
)
|
|
$
|
(26,404
|
)
|
Issuance of restricted stock
|
|
|
445,055
|
|
|
|
1
|
|
|
|
30
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
23,296
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
(2,066
|
)
|
|
|
(2,207
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
27,963,471
|
|
|
|
28
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
(33,447
|
)
|
|
|
(33,461
|
)
|
Issuance of restricted stock
|
|
|
584,275
|
|
|
|
|
|
|
|
760
|
|
|
|
(724
|
)
|
|
|
|
|
|
|
36
|
|
Repurchase of restricted stock
|
|
|
(260,209
|
)
|
|
|
|
|
|
|
(229
|
)
|
|
|
130
|
|
|
|
|
|
|
|
(99
|
)
|
Exercise of common stock options
|
|
|
36,273
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Issuance of common stock
|
|
|
3,231
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Stock-based compensation
|
|
|
25,000
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
386
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(923
|
)
|
|
|
|
|
|
|
(1,472
|
)
|
|
|
(2,395
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,117
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
28,352,041
|
|
|
|
28
|
|
|
|
|
|
|
|
(617
|
)
|
|
|
(33,802
|
)
|
|
|
(34,391
|
)
|
Issuance of restricted stock
|
|
|
318,053
|
|
|
|
1
|
|
|
|
195
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
25
|
|
Repurchase of restricted stock
|
|
|
(15,604
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(15
|
)
|
Exercise of common stock options
|
|
|
30,106
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
365
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
(2,045
|
)
|
|
|
(2,595
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,429
|
|
|
|
19,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
28,684,596
|
|
|
|
29
|
|
|
|
|
|
|
|
(769
|
)
|
|
|
(16,418
|
)
|
|
|
(17,158
|
)
|
Issuance of restricted stock
|
|
|
191,724
|
|
|
|
|
|
|
|
216
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
39
|
|
Repurchase of restricted stock
|
|
|
(287,087
|
)
|
|
|
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
(273
|
)
|
Exercise of common stock options
|
|
|
22,775
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Forgiveness of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
927
|
|
|
|
(927
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(720
|
)
|
|
|
|
|
|
|
(644
|
)
|
|
|
(1,364
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,204
|
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 (unaudited)
|
|
|
28,612,008
|
|
|
$
|
29
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
(14,785
|
)
|
|
$
|
(14,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-5
SCIQUEST,
INC.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,909
|
|
|
|
1,285
|
|
|
|
1,214
|
|
|
|
612
|
|
|
|
518
|
|
(Gain) on sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
Stock-based compensation expense
|
|
|
110
|
|
|
|
386
|
|
|
|
365
|
|
|
|
185
|
|
|
|
756
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
(16,800
|
)
|
|
|
|
|
|
|
1,764
|
|
Loss (gain) from disposal of property and equipment
|
|
|
(1
|
)
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
694
|
|
|
|
(285
|
)
|
|
|
(1,340
|
)
|
|
|
(3,158
|
)
|
|
|
(1,917
|
)
|
Prepaid expense and other current assets
|
|
|
(871
|
)
|
|
|
(117
|
)
|
|
|
40
|
|
|
|
263
|
|
|
|
89
|
|
Deferred project costs and other assets
|
|
|
(550
|
)
|
|
|
(833
|
)
|
|
|
(362
|
)
|
|
|
243
|
|
|
|
(1,369
|
)
|
Accounts payable
|
|
|
95
|
|
|
|
(181
|
)
|
|
|
(255
|
)
|
|
|
(301
|
)
|
|
|
(43
|
)
|
Accrued liabilities and other
|
|
|
347
|
|
|
|
(257
|
)
|
|
|
(615
|
)
|
|
|
(837
|
)
|
|
|
(162
|
)
|
Deferred revenues
|
|
|
6,960
|
|
|
|
5,467
|
|
|
|
2,685
|
|
|
|
978
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,693
|
|
|
|
6,582
|
|
|
|
4,501
|
|
|
|
(278
|
)
|
|
|
2,373
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition of capitalized software development costs
|
|
|
(362
|
)
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
(422
|
)
|
Purchase of property and equipment
|
|
|
(695
|
)
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(462
|
)
|
|
|
(379
|
)
|
Proceeds from sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
Restricted cash
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,057
|
)
|
|
|
(929
|
)
|
|
|
(905
|
)
|
|
|
(462
|
)
|
|
|
1,249
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common and restricted stock
|
|
|
|
|
|
|
40
|
|
|
|
25
|
|
|
|
24
|
|
|
|
39
|
|
Repurchases of restricted stock
|
|
|
|
|
|
|
(99
|
)
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
(273
|
)
|
Collection of notes receivable from stockholders
|
|
|
39
|
|
|
|
19
|
|
|
|
18
|
|
|
|
7
|
|
|
|
4
|
|
Proceeds from exercise of common stock options
|
|
|
1
|
|
|
|
2
|
|
|
|
6
|
|
|
|
4
|
|
|
|
21
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,063
|
)
|
|
|
58
|
|
|
|
34
|
|
|
|
20
|
|
|
|
(559
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,573
|
|
|
|
5,711
|
|
|
|
3,630
|
|
|
|
(720
|
)
|
|
|
3,063
|
|
Cash and cash equivalents at beginning of year
|
|
|
5,218
|
|
|
|
7,791
|
|
|
|
13,502
|
|
|
|
13,852
|
|
|
|
17,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,791
|
|
|
$
|
13,502
|
|
|
$
|
17,132
|
|
|
$
|
13,132
|
|
|
$
|
20,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
88
|
|
|
$
|
22
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on redeemable preferred stock
|
|
$
|
2,207
|
|
|
$
|
2,395
|
|
|
$
|
2,595
|
|
|
$
|
1,261
|
|
|
$
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-6
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
|
|
1.
|
Description
of Business
|
SciQuest, Inc. (the Company) provides an on-demand strategic
procurement and supplier enablement solution that integrates
customers with their suppliers to improve procurement of
indirect goods and services, such as office supplies, laboratory
supplies, furniture, MRO (maintenance, repair and operations)
supplies and food and beverages. The Companys on-demand
software enables organizations to more efficiently source
indirect goods and services, manage their spend and obtain the
benefits of compliance with purchasing policies and negotiating
power with suppliers. The Companys on-demand strategic
procurement software suite coupled with its managed supplier
network forms the Companys integrated solution, which is
designed to achieve rapid and sustainable savings. The
Companys solution is designed to optimize tasks throughout
the cycle of finding, procuring, receiving and paying for
indirect goods and services, which can result in increased
efficiency, reduced costs and increased insight into an
organizations buying patterns. The Companys current
target markets are higher education, life sciences, healthcare
and state and local governments.
On April 10, 2004, the Company entered into a definitive
agreement to be acquired in connection with a going private
transaction led by Trinity Ventures. After approval by the
stockholders on July 15, 2004, the acquisition was
completed on July 28, 2004. As part of this transaction,
the Companys outstanding publicly-traded common stock was
repurchased, converting SciQuest into a privately-held company.
The Company recorded this acquisition using the purchase method
of accounting.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of
presentation
The financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the
United States.
Unaudited
Interim Financial Statements
The accompanying consolidated balance sheet as of June 30,
2010, statements of operations and cash flows for the six months
ended June 30, 2009 and 2010 and the statement of
stockholders deficit for the six months ended
June 30, 2010 are unaudited. The unaudited financial
statements include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of such financial statements.
The information disclosed in the notes to the financial
statements for these periods is unaudited. The results of
operations for the six months ended June 30, 2010 are not
necessarily indicative of the results to be expected for the
entire fiscal year or any future period.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and assumptions
that 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 reporting period. Actual
results could differ materially from those estimates.
Revenue
Recognition
The Company primarily derives its revenues from subscription
fees for its on-demand strategic procurement and supplier
enablement software solution and associated implementation
services. Revenue is generated from subscription agreements and
related services permitting customers to access and utilize the
Companys hosted software. Customers may on occasion also
purchase a perpetual license for certain software modules.
Revenue is
F-7
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
recognized when there is persuasive evidence of an arrangement,
the service has been provided or delivered to the customer, the
collection of the fee is probable and the amount of the fee to
be paid by the customer is fixed or determinable.
The Companys contractual agreements generally contain
multiple service elements and deliverables. These elements
include access to the hosted software, implementation services
and, on a limited basis, perpetual licenses for certain software
modules and related maintenance and support. Subscription
agreements do not provide customers the right to take possession
of the hosted software at any time, with the exception of a
triggering event in source code escrow arrangements. In applying
the multiple element revenue recognition guidance, the Company
determined that it does not have objective and reliable evidence
of the fair value of the subscription agreement and related
services. The Company therefore accounts for fees received under
multiple element agreements as a single unit of accounting and
recognizes the agreement consideration ratably over the term of
the subscription agreement, which is generally three to five
years. The term of the subscription agreement commences on the
start date specified in the subscription agreement, which is the
date access to the software is provided to the customer,
provided all other revenue recognition criteria have been met.
Fees for professional services that are contingent upon future
performance are recognized ratably over the remaining
subscription term once the performance milestones have been met.
The Company recognizes revenue from any professional services
that are sold separately as the services are performed.
Deferred revenue primarily consists of billings or payments
received in advance of revenue recognition from the
Companys software and services described above. For
multiple year subscription agreements, the Company generally
invoices its customers in annual installments. Accordingly, the
deferred revenue balance does not represent the total contract
value of these multi-year subscription agreements. The
Companys services, such as implementation, are generally
sold in conjunction with subscription agreements. These services
are recognized ratably over the remaining term of the
subscription agreement once any contingent performance
milestones have been satisfied. The portion of deferred revenue
that the Company anticipates will be recognized after the
succeeding
12-month
period is recorded as non-current deferred revenue and the
remaining portion is recorded as current deferred revenue.
Cost of
Revenues
Cost of revenues primarily consists of costs related to hosting
the Companys subscription software services, compensation
and related expenses for implementation services, supplier
enablement services, customer support staff and client partners,
amortization of capitalized software development costs and
allocated fixed asset depreciation and facilities costs. Cost of
revenues is expensed as incurred.
Deferred
Project Costs
The Company capitalizes sales commission costs that are directly
related to the execution of its subscription agreements. The
commissions are deferred and amortized over the contractual term
of the related subscription agreement. The deferred commission
amounts are recoverable from the future revenue streams under
the subscription agreements. The Company believes this is the
appropriate method of accounting, as the commission costs are so
closely related to the revenues from the subscription agreements
that they should be recorded as an asset and charged to expense
over the same period that the subscription revenues are
recognized. Amortization of deferred commissions is included in
sales and marketing expense in the accompanying statements of
operations. The deferred commissions are reflected within
deferred project costs in the accompanying balance sheets.
F-8
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
Concentrations
As of December 31, 2009, three customers comprised 17%, 12%
and 12%, respectively, of the accounts receivable balance. As of
December 31, 2008, two customers comprised 14% and 12%,
respectively, and three customers each comprised 10%, of the
accounts receivable balance. As of June 30, 2010
(unaudited), no individual customer comprised more than 10% of
the accounts receivable balance. During each of the years ended
December 31, 2007, 2008 and 2009, as well as the periods
ended June 30, 2009 and 2010 (unaudited), no individual
customer comprised more than 10% of the Companys revenues.
During each of the years ended December 31, 2007, 2008 and
2009, and for the period ended June 30, 2009, approximately
93% of the Companys revenues were from sales transactions
originating in the United States. During the period ended
June 30, 2010 (unaudited), approximately 94% of the
Companys revenues were from sales transactions originating
in the United States.
Cash and
Cash Equivalents
The Company considers all highly liquid debt investments with an
original maturity of three months or less at the date of
purchase to be cash equivalents. The Company maintains cash
balances at financial institutions that may at times exceed
federally insured limits. The Company maintains this cash at
high credit quality institutions and, as a result, believes
credit risk related to its cash is minimal. In accordance with
the Companys outstanding credit arrangement, the Company
maintains restricted cash in an amount equal to its outstanding
line of credit. As of December 31, 2008 and 2009,
restricted cash totaled $350. In March 2010, the Company fully
repaid the outstanding balance under its line of credit of $350,
plus accrued interest, and closed the credit agreement. There
was no restricted cash as of June 30, 2010 (unaudited).
Accounts
Receivable
The Company assesses the need for an allowance for doubtful
accounts based on estimates of probable credit losses. This
assessment is based on several factors including aging of
customer accounts, known customer specific risks, historical
experience and existing economic conditions. The Company
generally does not require collateral for receivable balances.
Accounts would be charged against the allowance after all means
of collection were exhausted and recovery was considered remote.
Any required provisions for doubtful accounts would be recorded
in general and administrative expense. Based on
managements analysis of its outstanding accounts
receivable, the Company concluded no allowance was necessary at
December 31, 2008 and 2009, or at June 30, 2010
(unaudited).
Property
and Equipment
Property and equipment are recorded at cost and depreciated
using the straight-line method over their estimated useful
lives, which are usually seven years for furniture and three to
five years for computer software and equipment. Historically,
property and equipment have included certain equipment under
capital leases. These items are depreciated over the shorter of
the lease period or the estimated useful life of the equipment.
Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the expected term of the
leases. Costs for repairs and maintenance are expensed as
incurred. Upon retirement or sale, the cost of the disposed
assets and the related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is credited or
charged to operations.
F-9
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
Software
Development Costs
The Company incurs certain costs associated with the development
of its on-demand solution, which are accounted for as
internal-use software. Certain qualifying costs incurred during
the application development phase are capitalized and amortized
to expense over the estimated useful life of the related
applications, which is generally three years.
Costs incurred in connection with the development of the
Companys licensed software products are accounted for as
costs of software to be sold, leased or otherwise marketed.
Capitalization of software development costs begins upon the
establishment of technological feasibility (based on a working
model approach), subject to net realizable value considerations.
To date, the period between achieving technological feasibility
and the general availability of such software has substantially
coincided; therefore, software development costs qualifying for
capitalization have been immaterial. Accordingly, the Company
has not capitalized any software development costs related to
its licensed software products and has charged all such costs to
research and development expense.
Goodwill
Goodwill represents the excess of the cost of an acquired entity
over the net fair value of the identifiable assets acquired and
liabilities assumed. The Company reviews the carrying value of
goodwill at least annually to assess impairment since it is not
amortized. Additionally, the Company would also review the
carrying value of goodwill whenever events or changes in
circumstances indicated that its carrying amount may not be
recoverable. The Company has concluded that it has one reporting
unit for purposes of its annual goodwill impairment testing. To
assess goodwill impairment, the first step is to identify if a
potential impairment exists by comparing the fair value of a
reporting unit with its carrying amount, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered to have a
potential impairment and the second step of the impairment test
is not necessary. The Company performed its annual assessment on
December 31, 2009. The estimated fair value of the
Companys reporting unit exceeded its carrying amount,
including goodwill, and as such, no potential goodwill
impairment was recorded.
Long-Lived
Assets
The Company evaluates the recoverability of its property and
equipment and other long-lived assets, including acquired
technology and customer relationships, when events change or
circumstances indicate the carrying amount may not be
recoverable. If such events or changes in circumstances are
present, the undiscounted cash flow method is used to determine
whether the asset is impaired. An impairment loss is recognized
when, and to the extent, the net book value of such assets
exceeds the estimated future undiscounted cash flows
attributable to the assets or the business to which the assets
relate. Cash flows would include the estimated terminal value of
the asset and exclude any interest charges. The discount rate
utilized would be based on the Companys best estimate of
the related risks and return at the time the impairment
assessment is made. As discussed in Note 3, the Company
recorded an impairment charge for leasehold improvements of $140
during 2009 in connection with a lease renegotiation. There were
no other impairments of its long-lived assets during the years
ended December 31, 2007, 2008 and 2009, or during the six
months ended June 30, 2009 and 2010 (unaudited).
Investment
As of December 31, 2008 and 2009, the Company had
outstanding warrants to purchase a 15% equity interest in an
unaffiliated private company for an aggregate consideration of
one cent at any time until December 31, 2024.
F-10
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
Due to the lack of quoted prices from an active market for these
or similar equity instruments of the investee, the Company
carried this investment at its cost basis of zero in the
accompanying balance sheets. As of June 30, 2010
(unaudited), the outstanding warrants were purchased back by the
unaffiliated company for a total cash consideration of $1,700
which is recorded within other income in the accompanying
statement of operations.
Sales and
Marketing Expenses
Sales and marketing expenses consist primarily of costs,
including salaries and sales commissions, of all personnel
involved in the sales process. Sales and marketing expenses also
include costs of advertising, trade shows, certain indirect
costs and allocated fixed asset depreciation and facilities
costs. Advertising costs are expensed as incurred. Advertising
expenses totaled approximately $486, $524 and $433 for the years
ended December 31, 2007, 2008 and 2009, respectively, and
$158 and $327 for the six months ended June 30, 2009 and
2010 (unaudited), respectively.
Stock-Based
Compensation
As of January 1, 2006, the Company adopted new accounting
guidance using the prospective application method, which
requires that all stock-based payments to employees, including
grants of employee stock options, are recognized in the income
statement based on their fair values. Stock-based compensation
cost is measured at the grant date based on the fair value of
the award and is recognized as expense on a straight-line basis
over the requisite service period, which is the vesting period.
Stock-based compensation costs are based on the fair value of
the underlying option calculated using the Black-Scholes
option-pricing model on the date of grant for stock options.
Determining the appropriate fair value model and related
assumptions requires judgment, including estimating stock price
volatility, forfeiture rates and expected term. The expected
volatility rates are estimated based on the actual volatility of
comparable public companies over the expected term. The expected
term for the years ended December 31, 2007, 2008 and 2009,
and the six months ended June 30, 2009 and 2010
(unaudited), represents the average time that options that vest
are expected to be outstanding based on the mid-point between
the vesting date and the end of the contractual term of the
award. The Company has not paid dividends and does not
anticipate paying a cash dividend in the foreseeable future and,
accordingly, uses an expected dividend yield of zero. The
risk-free interest rate is based on the rate of
U.S. Treasury securities with maturities consistent with
the estimated expected term of the awards.
Earnings
Per Share
Basic net income (loss) per share is computed by dividing net
income (loss) attributable to common stockholders by the
weighted-average number of shares of common stock outstanding
for the period. Outstanding unvested restricted stock purchased
by employees is subject to repurchase by the Company and
therefore is not included in the calculation of the
weighted-average shares outstanding until vested. Diluted net
income (loss) per share is computed giving effect to all
potentially dilutive common stock, including options and
restricted stock. The dilutive effect of outstanding awards is
reflected in diluted earnings per share by application of the
treasury stock method.
F-11
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
The following summarizes the calculation of basic and diluted
net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,737
|
|
|
$
|
3,204
|
|
Less: Dividends on redeemable preferred stock
|
|
|
2,207
|
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
1,261
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
476
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares, basic
|
|
|
26,984,942
|
|
|
|
27,599,536
|
|
|
|
28,122,014
|
|
|
|
28,016,131
|
|
|
|
28,157,477
|
|
Basic net income (loss) attributable to common stockholders per
share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.60
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
476
|
|
|
$
|
1,840
|
|
Weighted average common shares, basic
|
|
|
26,984,942
|
|
|
|
27,599,536
|
|
|
|
28,122,014
|
|
|
|
28,016,131
|
|
|
|
28,157,477
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
345,325
|
|
|
|
347,678
|
|
|
|
625,881
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
426,109
|
|
|
|
425,356
|
|
|
|
436,566
|
|
Nonvested shares of restricted stock
|
|
|
|
|
|
|
|
|
|
|
6,863
|
|
|
|
4,669
|
|
|
|
139,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares Diluted
|
|
|
26,984,942
|
|
|
|
27,599,536
|
|
|
|
28,900,311
|
|
|
|
28,793,834
|
|
|
|
29,359,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to common stockholders
per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.58
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
The treasury effect of the following equity instruments has been
excluded from diluted net income (loss) per common share as its
effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Nonvested restricted stock
|
|
|
680,718
|
|
|
|
456,174
|
|
|
|
78,383
|
|
|
|
799,828
|
|
|
|
|
|
Common stock options
|
|
|
466,829
|
|
|
|
593,765
|
|
|
|
10,250
|
|
|
|
522,474
|
|
|
|
159,000
|
|
Common stock warrants
|
|
|
443,361
|
|
|
|
443,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,590,908
|
|
|
|
1,493,300
|
|
|
|
88,633
|
|
|
|
1,322,302
|
|
|
|
159,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Data
The Company manages its operations on a consolidated basis for
purposes of assessing performance and making operating
decisions. Accordingly, the Company has determined that it has a
single reporting segment.
Fair
Value of Financial Instruments
Effective January 1, 2008, the Company adopted new
accounting guidance that clarifies the definition of fair value,
prescribes methods for measuring fair value, establishes a fair
value hierarchy based on the inputs used to measure fair value
and expands disclosures about fair value measurements. Inputs
used in the valuation techniques to derive fair values are
classified based on a three-level hierarchy, as follows:
|
|
|
|
|
|
Level 1:
|
|
Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
|
Level 2:
|
|
Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data.
|
|
|
|
Level 3:
|
|
Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to
Level 3 inputs.
|
Observable inputs are based on market data obtained from
independent sources. As of December 31, 2008 and 2009, and
June 30, 2010 (unaudited), the Company had cash equivalents
of $9,013, $16,776 and $18,938, respectively, which consist of
money market accounts. These cash equivalents are classified
within Level 1 of the fair value hierarchy since they are
valued using quoted market prices. As of December 31, 2008
and 2009, and June 30, 2010 (unaudited), the Company did
not have any financial assets or liabilities without observable
market values that would require a high level of judgment to
determine fair value (Level 3).
Income
Taxes
Deferred income taxes are provided using tax rates enacted for
periods of expected reversal on all temporary differences.
Temporary differences relate to differences between the book and
tax basis of assets and liabilities, principally intangible
assets, property and equipment, deferred subscription revenues,
pension assets, accruals and stock-based compensation. Valuation
allowances are established to reduce deferred tax assets to the
amount that will more likely than not be realized. To the extent
that a determination is made to establish or adjust a valuation
allowance, the expense or benefit is recorded in the period in
which the determination is made.
F-13
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
Judgment is required in determining the provision for income
taxes. Additionally, the income tax provision is based on
calculations and assumptions that are subject to examination by
many different tax authorities and to changes in tax law and
rates in many jurisdictions. The Company would adjust its income
tax provision in the period in which it becomes probable that
actual results differ from management estimates.
On January 1, 2007, the Company adopted new guidance which
prescribed a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
guidance also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Companys policy is
to recognize interest and penalties accrued on any unrecognized
tax positions as a component of income tax expense. The
Companys adoption of this new guidance did not have a
material effect on its financial position or results of
operations. The Company does not believe there will be any
material changes in its unrecognized tax positions over the next
twelve months. As of the date of adoption of this guidance, the
Company did not have any accrued interest or penalties
associated with any unrecognized tax positions, and there were
no such interest or penalties recognized during the year ended
December 31, 2009.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued The FASB Accounting Standards Codification
(Codification), which is the single source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants.
The Codification supersedes all non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification is
non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. The Codification did not change or
alter existing GAAP and therefore, did not have an impact on the
Companys balance sheets, statements of operations and cash
flows.
In October 2009, the FASBs Emerging Issues Task Force
revised its guidance on revenue recognition for
multiple-deliverable revenue arrangements. The amendments in
this update will, in certain circumstances, enable companies to
separately account for multiple revenue-generating activities
(deliverables) that they perform for their customers. Existing
U.S. GAAP requires a company to use vendor-specific
objective evidence (VSOE) or third-party evidence of selling
price to separate deliverables in a multiple-deliverable
arrangement. The update will allow the use of an estimated
selling price if neither VSOE, nor third-party evidence is
available. The update will require additional disclosures of
information about an entitys multiple-deliverable
arrangements. The requirements of the update may be applied
prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010, although early adoption is permitted. The
Company is currently evaluating the impact of the update on its
financial position and results of operations and does not plan
to early or retroactively adopt the new guidance.
F-14
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
3.
|
Property
and Equipment
|
Property and equipment consist of the following as of
December 31, 2008 and 2009, and as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Furniture and equipment
|
|
$
|
505
|
|
|
$
|
579
|
|
|
$
|
594
|
|
Computer software and equipment
|
|
|
3,016
|
|
|
|
3,483
|
|
|
|
4,270
|
|
Leasehold improvements
|
|
|
487
|
|
|
|
231
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
4,008
|
|
|
|
4,293
|
|
|
|
5,095
|
|
Less accumulated depreciation and amortization
|
|
|
(2,655
|
)
|
|
|
(2,986
|
)
|
|
|
(3,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,353
|
|
|
$
|
1,307
|
|
|
$
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment
(excluding capitalized internal-use software) for the years
ended December 31, 2007, 2008 and 2009 was $509, $594 and
$644, respectively, and was $325 and $270 for the six months
ended June 30, 2009 and 2010 (unaudited), respectively. The
Company disposed of fully-depreciated computer software and
equipment with a cost of $231 during the year ended
December 31, 2009.
During 2009, the Company renegotiated a lease, which reduced the
total leased office space at that property. Accordingly, the
Company wrote-off leasehold improvements with an original cost
of $389 and accumulated amortization of $249. The Company
recognized a loss in the accompanying statements of operations
of $140 during the year ended December 31, 2009 related to
the disposal of these leasehold improvements.
Computer software and equipment includes capitalized software
development costs incurred during development of the
Companys on-demand solution. The Company capitalized
software development costs of $362, $99 and $220 during the
years ended December 31, 2007, 2008 and 2009, respectively,
and capitalized $0 and $422 during the six months ended
June 30, 2009 and 2010 (unaudited), respectively. Net
capitalized software development costs totaled $280, $333 and
$658 as of December 31, 2008 and 2009, and June 30,
2010, respectively. Amortization expense for the years ended
December 31, 2007, 2008 and 2009 related to capitalized
software development costs was $114, $154 and $167,
respectively, and was $86 and $97 for the six months ended
June 30, 2009 and 2010 (unaudited), which is classified
within cost of revenues in the accompanying statements of
operations.
|
|
4.
|
Goodwill
and Other Intangible Assets
|
The Company acquired goodwill and certain identifiable
intangible assets as part of the going private transaction in
July 2004. A summary of intangible assets as of
December 31, 2008 and 2009, and June 30, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2009
|
|
|
June 30, 2010 (Unaudited)
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Goodwill
|
|
$
|
6,765
|
|
|
$
|
|
|
|
$
|
6,765
|
|
|
$
|
6,765
|
|
|
$
|
|
|
|
$
|
6,765
|
|
|
$
|
6,765
|
|
|
$
|
|
|
|
$
|
6,765
|
|
Acquired technology
|
|
|
8,100
|
|
|
|
(8,100
|
)
|
|
|
|
|
|
|
8,100
|
|
|
|
(8,100
|
)
|
|
|
|
|
|
|
8,100
|
|
|
|
(8,100
|
)
|
|
|
|
|
Customer relationships
|
|
|
5,200
|
|
|
|
(3,887
|
)
|
|
|
1,313
|
|
|
|
5,200
|
|
|
|
(4,290
|
)
|
|
|
910
|
|
|
|
5,200
|
|
|
|
(4,441
|
)
|
|
|
759
|
|
Trademarks
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,495
|
|
|
$
|
(11,987
|
)
|
|
$
|
8,508
|
|
|
$
|
20,495
|
|
|
$
|
(12,390
|
)
|
|
$
|
8,105
|
|
|
$
|
20,495
|
|
|
$
|
(12,541
|
)
|
|
$
|
7,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
4.
|
Goodwill
and Other Intangible Assets (continued)
|
Acquired technology was amortized to expense on a straight-line
basis over the estimated useful life of three years. Related
amortization expense for the year ended December 31, 2007
was $1,575 and was included in amortization of intangible assets
in the accompanying statement of operations for the year ended
December 31, 2007. This asset was fully amortized as of
December 31, 2007.
The customer relationships asset is being amortized over a
ten-year estimated life in a pattern consistent with which the
economic benefit is expected to be realized. Related
amortization expense was $711, $537 and $403 for the years ended
December 31, 2007, 2008 and 2009, respectively, and $201
and $151 for the six months ended June 30, 2009 and 2010
(unaudited), respectively.
The Company estimates the following amortization expense related
to its customer relationships for the years ended December 31:
|
|
|
|
|
2010
|
|
$
|
301
|
|
2011
|
|
|
225
|
|
2012
|
|
|
167
|
|
2013
|
|
|
125
|
|
2014
|
|
|
92
|
|
|
|
|
|
|
|
|
$
|
910
|
|
|
|
|
|
|
Current accrued liabilities are comprised of the following as of
December 31, 2008 and 2009, and as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accrued compensation
|
|
$
|
2,313
|
|
|
$
|
2,321
|
|
|
$
|
1,862
|
|
Accrued consulting and professional services
|
|
|
271
|
|
|
|
96
|
|
|
|
369
|
|
Accrued restructuring charges, current
|
|
|
262
|
|
|
|
|
|
|
|
|
|
Accrued rent
|
|
|
226
|
|
|
|
239
|
|
|
|
226
|
|
Other
|
|
|
236
|
|
|
|
324
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,308
|
|
|
$
|
2,980
|
|
|
$
|
2,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In years prior to 2007, the Company restructured certain
operations to eliminate excess leased office space and to reduce
the workforce. As of December 31, 2008, the remaining total
liability of $549 ($262 current and $287 non-current) reflected
lease commitments for unused office space. During the year ended
December 31, 2009, the Company renegotiated the operating
lease for which the reserve was originally established and
reduced the total leased office space. As a result, the
restructuring reserve for unused office space was no longer
necessary and was reduced to $0 at the time the renegotiation
was finalized.
F-16
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
5.
|
Accrued
Liabilities (continued)
|
The following summarizes the restructuring liability for the
years ended December 31, 2008 and 2009:
|
|
|
|
|
|
|
Restructuring Liability
|
|
|
Balance as of December 31, 2007
|
|
$
|
891
|
|
Payments
|
|
|
(333
|
)
|
Change in estimate
|
|
|
(83
|
)
|
Accretion
|
|
|
74
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
549
|
|
Payments
|
|
|
(296
|
)
|
Decrease in liability due to lease termination
|
|
|
(287
|
)
|
Accretion
|
|
|
34
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
|
|
|
|
|
|
|
On October 30, 2008, the Company entered into a credit
agreement with a bank which provides for borrowings of up to
$2,500, of which $350 was outstanding as of December 31,
2009. Interest accrued on the unpaid principal balance at the
LIBOR Market Index Rate plus 1.5%. As of December 31, 2009,
the interest rate was 1.7%. In accordance with the terms of the
agreement, the Company maintained a restricted cash balance in
the amount equal to the outstanding credit balance. As of
June 30, 2010 (unaudited), the Company fully repaid the
outstanding balance under its line of credit of $350, plus
accrued interest, and closed the credit agreement. In accordance
with the terms of the credit agreement, the restricted cash
balance became unrestricted upon the repayment and closing of
the credit agreement.
On July 29, 2004, the Company entered into a senior
revolving credit facility with an availability of $2,500 which
was renewable annually. During 2008, this line of credit was
fully repaid by the Company and closed. In conjunction with this
facility, a warrant was issued to purchase 52,160 shares of
the Companys common stock at a price of $0.04 per share,
which expires on July 29, 2011 (see Note 8).
|
|
7.
|
Redeemable
Preferred Stock
|
Authorized Shares The Company is authorized
to issue up to 500,000 shares of $0.001 par value
redeemable preferred stock.
Issuance of Stock As of December 31,
2008 and 2009, and June 30, 2010 (unaudited), the Company
had outstanding 222,073 shares of $0.001 par value
redeemable preferred stock. All of the shares were issued at a
price of $100 per share.
Rank The Board of Directors is empowered to
authorize classes of preferred stock and their related rights
and preferences. The preferred stock ranks senior to all common
stock with respect to dividend rights and rights on liquidation
or dissolution.
Dividends Holders of redeemable preferred
stock shall be entitled to receive, when, as and if declared by
the Board of Directors, dividends at the rate per share of 8% of
the accreted value per annum, calculated on a fiscal quarter
basis at a rate of 2%. The accreted value is defined as $100 per
share plus the cumulative calculated dividends, resulting in a
quarterly compounding effect on previously accrued dividends.
The accreted value of the redeemable preferred stock dividends
is recorded on a quarterly basis as an increase to the preferred
stock value and a decrease to additional paid-in capital. Due to
the absence of retained earnings, in circumstances
F-17
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
7.
|
Redeemable
Preferred Stock (continued)
|
where the additional paid-in capital balance is reduced to zero,
remaining accretion amounts are applied to accumulated deficit.
As of December 31, 2009, and as of June 30, 2010
(unaudited), cumulative accrued dividends on the Companys
redeemable preferred stock totaled $11,864 and $13,228,
respectively.
Liquidation Upon any liquidation (including a
merger event), the holders of redeemable preferred stock shall
be entitled to receive for each outstanding share an amount in
cash equal to the accreted value, including calculated and
unpaid cumulative dividends. Beyond the accreted value, the
holders of redeemable preferred stock are not entitled to any
distribution in liquidation or dissolution. If sufficient
legally available funds were not available for distribution, the
payments would be distributed ratably among the holders of the
redeemable preferred stock.
Redemption The redeemable preferred shares
are only redeemable at the option of the Company at a price
equal to the issuance price plus cumulative preferred dividends.
No portion of the redeemable preferred stock may be redeemed
unless the full cumulative dividends (whether or not declared)
on all outstanding shares of redeemable preferred stock shall
have been paid or contemporaneously are declared and paid or set
apart for payment for all dividend periods terminating on or
prior to the applicable redemption date, unless the redemption
of the shares are being calculated on a pro rata basis due to
the insufficiency of legally available funds.
Voting Holders of shares of redeemable
preferred stock are not entitled to any voting rights, except in
actions proposed by the Company that would adversely affect the
preferences, rights or powers of the redeemable preferred stock
including the creation of classes of stock with superior rights
to the preferred and the payment of a dividend or distribution
on or redemption of shares of equal or fewer rights or powers,
i.e., other preferred or common classes of stock.
The following summarizes preferred stock carrying amount and
activity for the years ended December 31, 2008 and 2009,
and the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Redeemable
|
|
|
|
Redeemable Preferred
|
|
|
Preferred Shares
|
|
|
|
Stock
|
|
|
Outstanding
|
|
|
Balance as of December 31, 2007
|
|
$
|
28,986
|
|
|
|
221,115
|
|
Issuance of preferred stock
|
|
|
96
|
|
|
|
958
|
|
Dividends accrued on redeemable preferred stock
|
|
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
31,477
|
|
|
|
222,073
|
|
Dividends accrued on redeemable preferred stock
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
34,072
|
|
|
|
222,073
|
|
Dividends accrued on redeemable preferred stock
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 (unaudited)
|
|
$
|
35,436
|
|
|
|
222,073
|
|
|
|
|
|
|
|
|
|
|
Stock
Incentive Plan
On August 27, 2004, the Company adopted a stock incentive
plan (the Plan) which allowed the Company to grant up to
4,307,815 common stock options, stock appreciation rights (SARs)
and restricted stock awards to employees, board members and
others who contribute materially to the success of the Company.
In February 2007, the Company increased the number of shares of
common stock reserved for issuance under the Plan by
F-18
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
8.
|
Stockholders
Deficit (continued)
|
500,000 to an aggregate of 4,807,815 shares. In February
2008, the Company increased the number of shares of common stock
reserved for issuance under the Plan by 1,807,657 to an
aggregate of 6,615,472 shares. The Companys Board of
Directors approves the terms of stock options granted.
Individual option grants generally become exercisable ratably
over a period of four years from the grant date. The contractual
term of the options is approximately ten years from the date of
grant.
The Company recognizes compensation expense associated with
restricted stock and common stock options based on the
grant-date fair value of the award on a straight-line basis over
the requisite service period of the individual grantees, which
generally equals the vesting period.
Restricted
Stock
As part of the Plan, the Company has issued restricted shares of
its common stock to certain employees. Upon employee
termination, the Company has the option to repurchase the
shares. The repurchase price is the original purchase price plus
interest for unvested restricted shares and the current fair
value (as determined by the Board of Directors) for vested
restricted shares. The shares generally vest ratably over two to
four years. As of December 31, 2009, there were
4,496,492 shares of vested and unvested restricted stock
outstanding. As of June 30, 2010 (unaudited), there were
4,401,129 shares of vested and unvested restricted stock
outstanding.
The following summarizes the activity of nonvested shares of
restricted stock for the year ended December 31, 2009 and
the period ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of Shares
|
|
|
Date Fair Value
|
|
|
Nonvested as of December 31, 2008
|
|
|
445,402
|
|
|
$
|
0.52
|
|
Issued
|
|
|
318,053
|
|
|
|
0.85
|
|
Vested
|
|
|
(408,666
|
)
|
|
|
0.53
|
|
Repurchased
|
|
|
(793
|
)
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2009
|
|
|
353,996
|
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
191,724
|
|
|
|
0.79
|
|
Vested
|
|
|
(108,989
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of June 30, 2010 (unaudited)
|
|
|
436,731
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to nonvested
shares of restricted stock is approximately $364 at
June 30, 2010 (unaudited). This amount is expected to be
recognized over a weighted-average period of 2.7 years.
In conjunction with the issuance of these restricted shares,
subscription note agreements were executed for certain
employees. The notes are payable in four annual payments due
January 1 of each calendar year and bear interest at 6%. As of
December 31, 2008 and 2009, the balance outstanding for
these subscription note agreements was $617 and $769,
respectively, and as of June 30, 2010 (unaudited), the
balance was $15. Although the outstanding balance was not
modified, the payment terms for all outstanding notes receivable
issued during the year ended December 31, 2008 were amended
during January 2009 such that the notes become due at the
earlier of a change in control, as defined by the Plan, or five
years from the modification date. The outstanding notes
receivable as of December 31, 2008 and 2009, and
June 30, 2010 (unaudited), are considered a separate
component of additional
paid-in-capital.
Due to the absence of sufficient additional
paid-in-capital,
such amounts are presented separately in the accompanying
balance sheets.
F-19
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
8.
|
Stockholders
Deficit (continued)
|
The Company accounts for restricted shares granted prior to the
adoption of the fair value method as variable awards, and
accordingly, remeasures the compensation expense for the
unvested shares each period as of the balance sheet date, based
on changes in the fair value of these awards. The Company
recognized stock-based compensation of $91, $83 and $11 during
the years ended December 31, 2007, 2008 and 2009,
respectively, related to such awards, as well as $11 and $0 for
the six months ended June 30, 2009 and 2010 (unaudited),
respectively.
Restricted stock awards granted after December 31, 2005 are
recognized in the income statement based on their fair values.
As a result of the notes receivable being deemed nonrecourse for
accounting purposes and other contractual provisions in the
agreements, the related restricted stock grants are considered
stock options for accounting purposes. Stock-based compensation
expense of $13, $147 and $214 was recorded during the years
ended December 31, 2007, 2008 and 2009, respectively, and
$109 and $75 was recorded for the six months ended June 30,
2009 and 2010 (unaudited), respectively, in connection with
these restricted stock awards.
On March 20, 2010 (unaudited), the Board of Directors
authorized the forgiveness of the outstanding balance of the
subscription note agreements issued by certain employees in
connection with their previous purchases of the Companys
restricted stock. A total of $1,016 was forgiven, which included
the outstanding principal note amount plus accrued but unpaid
interest. The Company accounted for the forgiveness of the
outstanding note balance as a modification of a stock option for
accounting purposes. Accordingly, the Company measured
incremental compensation expense of $746 in connection with this
modification. Incremental compensation expense of $518 related
to the vested shares of restricted stock was recognized
immediately at the date of modification. Incremental
compensation expense of $228 related to the unvested shares will
be recognized as additional compensation expense over the
remaining vesting period. During the six months ended
June 30, 2010, the Company recognized compensation expense
of $540 related to this modification.
During the six months ended June 30, 2010 (unaudited) and
the year ended December 31, 2009, the Company repurchased
287,087 and 15,604 shares of vested and unvested restricted
stock for $273 and $15, respectively, in connection with the
termination of one employee in each of the years. During the
year ended December 31, 2008, the Company repurchased
260,209 shares of vested and unvested restricted stock for
$99 in connection with the termination of two employees and
recognized additional stock-based compensation expense of $60
related to these repurchased shares.
F-20
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
8.
|
Stockholders
Deficit (continued)
|
Stock
Options
The Company also issues common stock options under the terms of
the Plan. The following summarizes stock option activity for the
year ended December 31, 2009 and the period ended
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
as of
|
|
|
|
Number of Options
|
|
|
Range of Exercise
|
|
|
Average
|
|
|
Contractual
|
|
|
June 30,
|
|
|
|
Outstanding
|
|
|
Prices
|
|
|
Exercise Price
|
|
|
Term (In Years)
|
|
|
2010 (Unaudited)
|
|
|
Balance as of December 31, 2008
|
|
|
593,765
|
|
|
$
|
0.04-$1.58
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
559,724
|
|
|
$
|
0.95-$1.02
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(30,106
|
)
|
|
$
|
0.04-$1.02
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(236,159
|
)
|
|
$
|
0.05-$1.58
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
887,224
|
|
|
$
|
0.04-$1.58
|
|
|
$
|
0.63
|
|
|
|
7.5
|
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009
|
|
|
807,535
|
|
|
$
|
0.04-$1.58
|
|
|
$
|
0.61
|
|
|
|
7.4
|
|
|
$
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
488,778
|
|
|
$
|
0.04-$1.58
|
|
|
$
|
0.40
|
|
|
|
6.5
|
|
|
$
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
606,198
|
|
|
$
|
1.13-$4.09
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(22,775
|
)
|
|
$
|
0.07-$1.13
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(47,285
|
)
|
|
$
|
0.04-$1.13
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 (unaudited)
|
|
|
1,423,362
|
|
|
$
|
0.04-$4.09
|
|
|
$
|
1.16
|
|
|
|
8.1
|
|
|
$
|
4,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2010 (unaudited)
|
|
|
1,248,902
|
|
|
$
|
0.04-$4.09
|
|
|
$
|
1.10
|
|
|
|
8.0
|
|
|
$
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2010 (unaudited)
|
|
|
551,063
|
|
|
$
|
0.04-$4.09
|
|
|
$
|
0.49
|
|
|
|
6.4
|
|
|
$
|
1,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2009, the Company approved a common stock option
re-pricing program whereby 175,625 of the Companys
outstanding stock option awards granted during the year ended
December 31, 2008 were repriced. Under this program,
qualifying options with an original exercise price, ranging from
$1.30 to $1.58 per share, were cancelled and reissued with an
exercise price equal to the then-current estimated fair value of
the Companys common stock, $1.02 per share. The
incremental fair value resulting from the modification of
unvested awards is being recognized as expense on a
straight-line basis over the remaining requisite service period,
which is the vesting period. The incremental fair value
resulting from the modification of the vested awards was
recognized as expense at the modification date. The incremental
compensation expense of approximately $4 recognized in
connection with this stock option modification was not material
to the Companys financial statements. The modified options
are included as cancellations and grants in the above table for
the year ended December 31, 2009.
The aggregate intrinsic value in the table above represents the
difference between the exercise price of the underlying awards
and the estimated fair value of the Companys common stock
at June 30, 2010 multiplied by the number of shares that
would have been received by the option holders had all option
holders exercised their options on June 30, 2010. The
aggregate intrinsic value of options exercised during the years
ended
F-21
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
8.
|
Stockholders
Deficit (continued)
|
December 31, 2007, 2008 and 2009 was $1, $47 and $24,
respectively, and $66 for the six months ended June 30,
2010 (unaudited).
The total unrecognized compensation cost related to outstanding
stock options is $1,138 at June 30, 2010 (unaudited). This
amount is expected to be recognized over a weighted-average
period of 3.33 years.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2009 and at
June 30, 2010 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at
|
|
|
|
Options Outstanding at December 31, 2009
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
|
|
|
Contractual Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise Price
|
|
Number
|
|
|
(Yrs.)
|
|
|
Exercise Price
|
|
|
Number
|
|
|
Exercise Price
|
|
|
$0.04 $0.07
|
|
|
355,360
|
|
|
|
5.7
|
|
|
$
|
0.05
|
|
|
|
314,547
|
|
|
$
|
0.05
|
|
$0.95 $1.02
|
|
|
521,614
|
|
|
|
8.7
|
|
|
|
1.02
|
|
|
|
169,196
|
|
|
|
1.02
|
|
$1.30 $1.58
|
|
|
10,250
|
|
|
|
8.2
|
|
|
|
1.38
|
|
|
|
5,035
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
887,224
|
|
|
|
7.5
|
|
|
$
|
0.63
|
|
|
|
488,778
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 30, 2010
|
|
|
Options Exercisable at June 30, 2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
|
|
|
Contractual Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise Price
|
|
Number
|
|
|
(Yrs.)
|
|
|
Exercise Price
|
|
|
Number
|
|
|
Exercise Price
|
|
|
$0.04 $0.07
|
|
|
344,798
|
|
|
|
5.2
|
|
|
$
|
0.05
|
|
|
|
323,052
|
|
|
$
|
0.05
|
|
$0.95 $1.02
|
|
|
467,116
|
|
|
|
8.3
|
|
|
|
1.02
|
|
|
|
206,112
|
|
|
|
1.02
|
|
$1.13 $1.58
|
|
|
452,448
|
|
|
|
9.5
|
|
|
|
1.14
|
|
|
|
16,275
|
|
|
|
1.22
|
|
$4.09 $4.09
|
|
|
159,000
|
|
|
|
9.8
|
|
|
|
4.09
|
|
|
|
5,624
|
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,423,362
|
|
|
|
8.1
|
|
|
$
|
1.16
|
|
|
|
551,063
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of common stock options for employees and
non-employees is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
2008
|
|
|
2009
|
|
|
(Unaudited)
|
|
|
Estimated dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected stock price volatility
|
|
|
100.00%
|
|
|
|
100.00%
|
|
|
|
100.00%
|
|
Weighted-average risk-free interest rate
|
|
|
2.6% 3.6%
|
|
|
|
1.9% 2.8%
|
|
|
|
2.6% 3.0%
|
|
Expected life of options (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Stock-based compensation expense of $6, $56 and $140 was
recorded during the years ended December 31, 2007, 2008 and
2009, respectively, while $65 and $141 was recorded during the
six months ended June 30, 2009 and 2010 (unaudited),
respectively, related to the Companys outstanding stock
options. The weighted average grant date fair value per share
for stock options granted in 2007, 2008 and 2009 was $0.26,
$1.12 and $0.91, respectively, and $1.54 for the six months
ended June 30, 2010 (unaudited).
F-22
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
8.
|
Stockholders
Deficit (continued)
|
During the year ended December 31, 2008, the Company issued
25,000 shares of unrestricted common stock as employee
compensation and recognized the estimated fair value of $40 as
stock-based compensation expense during the period.
Warrants
As of December 31, 2008 and 2009, and June 30, 2010
(unaudited), the Company had warrants outstanding representing
443,361 shares of common stock, with all of the warrants
being exercisable as of December 31, 2008 and 2009, and
June 30, 2010 (unaudited), to purchase the Companys
common stock at $0.04 per share. These warrants expire during
2011. The fair value of each warrant was estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate
of 3.47%; expected lives of five years; dividend yield of 0%;
and volatility factor of 80%. All warrants were issued in
conjunction with prior credit agreements that have since
terminated and the fair value of the warrants was recorded as a
financing cost and amortized to interest expense over the term
of the related debt.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
74,493
|
|
|
$
|
73,587
|
|
Research and development tax credits
|
|
|
1,386
|
|
|
|
1,344
|
|
Compensation accruals
|
|
|
182
|
|
|
|
177
|
|
Lease termination
|
|
|
212
|
|
|
|
|
|
Deferred revenues
|
|
|
2,952
|
|
|
|
2,785
|
|
Depreciation and amortization
|
|
|
52
|
|
|
|
25
|
|
Other credits
|
|
|
28
|
|
|
|
74
|
|
Other
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
79,308
|
|
|
|
77,996
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(78,527
|
)
|
|
|
(60,550
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
781
|
|
|
|
17,446
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Customer contracts
|
|
|
507
|
|
|
|
351
|
|
Trade names
|
|
|
166
|
|
|
|
166
|
|
Capitalized software costs
|
|
|
108
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
781
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
|
|
|
$
|
16,800
|
|
|
|
|
|
|
|
|
|
|
The Company routinely assesses the likelihood that it will be
able to realize its deferred tax assets. The Company considers
all available positive and negative evidence in assessing the
need for a valuation allowance. At December 31, 2008, the
Company recorded a full valuation allowance against its deferred
tax assets due to the
F-23
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
9.
|
Income
Taxes (continued)
|
uncertainty surrounding the realization of such assets. At
December 31, 2009, the Company determined that it was more
likely than not that it would be able to realize certain of its
deferred tax assets primarily as a result of expected future
taxable income. Accordingly, the Company reversed approximately
$16,800 of its valuation allowance.
During the years ended December 31, 2008 and 2009, the
Company recorded a benefit from income taxes of $9 and $21 under
the Housing and Economic Recovery Act of 2008 resulting from a
research and development credit refund for credits generated
prior to 2006. Due to the losses incurred in 2007 and the
recording of the valuation allowance, no tax provision or
benefit was recorded in the statement of operations for 2007.
At December 31, 2008 and 2009, unrecognized tax benefits of
$165, net of federal tax benefits, would have increased the
Companys deferred tax assets with a corresponding increase
to the valuation allowance if recognized. There would be no
effect on the effective tax rate, net of valuation allowance,
had these tax benefits been recognized as of December 31,
2008. Income tax expense for the year ended December 31,
2009 would have been lower by $366 had these benefits been
recognized. There were no gross increases or settlements of the
Companys unrecognized tax benefits during the years ended
December 31, 2007, 2008, or 2009. The Companys open
tax years that are subject to federal examination are inception
through 2009.
As of December 31, 2009, the Company has federal and state
net operating loss carryforwards of approximately
$199.4 million and $124.7 million, respectively, which
will begin to expire in 2014 for federal tax purposes and began
to expire in 2009 for state tax purposes. The Tax Reform Act of
1986 contains provisions that limit the ability of companies to
utilize net operating loss carryforwards and tax credit
carryovers in the case of certain events including significant
changes in ownership. These limitations may significantly impact
the amount of net operating loss and tax credit carryovers
available to offset future taxable income. The Company believes
that federal net operating loss carryforwards originating prior
to July 28, 2004 will be available for future utilization
to the extent of future income in the amount of
$19.2 million as of December 31, 2009. The amount
available will increase by $683 per year until 2024. Future
changes in ownership could further limit these tax attributes if
such transactions occur.
Income taxes computed at the statutory federal income tax rate
of 34% are reconciled to the provision (benefit) for income
taxes for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
US federal tax at statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
State taxes (net of federal benefit)
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
Change in valuation allowance
|
|
|
(41
|
)%
|
|
|
(39
|
)%
|
|
|
(695
|
)%
|
Other nondeductible (benefit) expenses
|
|
|
(2
|
)%
|
|
|
17
|
%
|
|
|
7
|
%
|
Increase in credit carryforwards
|
|
|
4
|
%
|
|
|
(17
|
)%
|
|
|
6
|
%
|
Other
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
(645
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases office space and certain equipment under
non-cancelable operating leases. The Company did not have any
capital lease obligations as of December 31, 2009, or as of
June 30, 2010 (unaudited). The Company is committed to a
lease agreement for office space for its headquarters through
F-24
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
10.
|
Commitments
and Contingencies (continued)
|
January 2014 and is also committed to another lease through
February 2016. Future minimum lease payments required under
leases in effect as of June 30, 2010 are as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
|
2010
|
|
$
|
376
|
|
2011
|
|
|
765
|
|
2012
|
|
|
784
|
|
2013
|
|
|
803
|
|
2014 and thereafter
|
|
|
361
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
3,089
|
|
|
|
|
|
|
Rent expense is calculated on a straight-line basis over the
term of the lease. Rent expense recognized under operating
leases totaled approximately $652, $717 and $886 for the years
ended December 31, 2007, 2008 and 2009, respectively, and
$435 and $369 for the six months ended June 30, 2009 and
2010 (unaudited), respectively.
Exit
Event Bonus Plan
In 2005, the Company established an Exit Event Bonus Plan. Under
the terms of the Exit Event Bonus Plan, upon the occurrence of
an Exit Event, as defined, a cash bonus pool will become due and
payable to the participants in the Exit Event Bonus Plan.
Participation in the Exit Event Bonus Plan will be limited to
those employees selected by the Board of Directors and awarded
units thereunder, which has not occurred as of December 31,
2009, or as of June 30, 2010 (unaudited). Accordingly, the
Company has not recognized any compensation expense related to
the Exit Event Bonus Plan, since a measurement date has not
occurred as of December 31, 2009 or June 30, 2010
(unaudited). In the case of an Exit Event that is an initial
public offering, the bonus pool will consist of shares of common
stock, the number of which is determined by multiplying
(i) the applicable percentage, as defined, by (ii) the
number of shares of common stock outstanding on a fully diluted
basis immediately prior to the initial public offering. In the
event of an Exit Event that is a sale of the Company, the bonus
pool will consist of a portion of the aggregate consideration
received by the Company
and/or its
stockholders in such sale, or the aggregate sale consideration,
the amount of which is determined by multiplying (i) the
applicable percentage, as defined, by (ii) the aggregate
sale consideration less the amount of such aggregate sale
consideration payable to the holders of preferred stock
outstanding at the time of such sale. The applicable percentage
ranges from 0% to 3%, depending upon the Companys
valuation in the initial public offering or sale of the Company,
as applicable. If the valuation is $210 million or less,
the applicable percentage will be 0%. If the valuation is
$250 million or greater, the applicable percentage will be
3%. For valuations between $210 million and
$250 million, the applicable percentage will be between 0%
and 3% as determined on a proportional basis by multiplying 3%
by a fraction where the numerator is the difference between the
applicable valuation and $210 million and the denominator
is $40 million. During the year ended December 31,
2009, the Exit Event Bonus Plan was amended to change the
maximum applicable percentage to 3%.
On June 23, 2010, the Companys Board of Directors
terminated the Exit Event Bonus Plan and approved the payment of
cash bonuses to the Companys management upon an initial
public offering, in lieu of issuing shares of the Companys
common stock under the plan. The payment of these bonuses is
subject to consummation of an initial public offering by the
Company. The total cash bonus will be determined by the
Companys Board of Directors by calculating the aggregate
initial value of the shares that would have been issued under
the Exit Event Bonus Plan, based on an assumed initial public
offering price of the Companys common stock. The Company
will record compensation expense in the amount of such bonuses
upon the consummation of the initial public offering.
F-25
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
10.
|
Commitments
and Contingencies (continued)
|
Legal
Contingencies
On May 22, 2009, a company filed a patent infringement
action in the United States District Court for the Eastern
District of Virginia against SciQuest, Inc. and other, unrelated
companies. On August 19, 2009, SciQuest, Inc. and the
company entered into a settlement agreement in exchange for a
one-time settlement payment. The settlement and related legal
costs totaling $3,189 were recorded in operating expenses in the
accompanying statement of operations for the year ended
December 31, 2009.
In 2001, the Company was named as a defendant in several
securities class action complaints filed in the United States
District Court for the Southern District of New York originating
from its December 1999 initial public offering. The complaints
alleged, among other things, that the prospectus used in the
Companys initial public offering contained material
misstatements or omissions regarding the underwriters
allocation practices and compensation and that the underwriters
manipulated the aftermarket for the Companys stock. These
complaints were consolidated along with similar complaints filed
against over 300 other issuers in connection with their initial
public offerings. After several years of litigation and appeals
related to the sufficiency of the pleadings and class
certification, the parties agreed to a settlement of the entire
litigation, which was approved by the Court on October 5,
2009. Notices of appeal to the Courts order have been
filed by various appellants. The Company has not incurred
significant costs to date in connection with its defense of
these claims since this litigation is covered by its insurance
policy. The Company believes it has sufficient coverage under
its insurance policy to cover its obligations under the
settlement agreement. Accordingly, the Company believes the
ultimate resolution of these matters will not have an impact on
its financial position and, therefore, it has not accrued a
contingent liability as of December 31, 2008 and 2009, or
as of June 30, 2010 (unaudited) related to this litigation.
From time to time, the Company is subject to legal proceedings
and claims that arise in the ordinary course of business. The
Company records an accrual for a contingency when it is both
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. The Company does not
currently believe the resolution of these actions will have a
material adverse effect upon the Companys financial
position, results of operations or cash flows.
Warranties
and Indemnification
The Companys hosting service is typically warranted to
perform in a manner consistent with general industry standards
that are reasonably applicable under normal use and
circumstances. The Companys arrangements also include
certain provisions for indemnifying customers against
liabilities if its products or services infringe a third
partys intellectual property rights. The Company to date
has not incurred costs to settle claims or pay awards under
these indemnification obligations. The Company accounts for
these indemnity obligations as contingencies and records a
liability for these obligations when a loss is probable and
reasonably estimable. To date, the Company has not incurred any
material costs as a result of these indemnifications and has not
accrued any liabilities related to the obligations in the
accompanying financial statements.
The Company enters into service level agreements with its
on-demand solution customers warranting certain levels of uptime
reliability. To date, the Company has not incurred any material
costs and has not accrued any liabilities related to such
obligations.
|
|
11.
|
Employee
Benefit Plan
|
The Company has established a defined contribution plan (the
Contribution Plan) which qualifies under Section 401(k) of
the Internal Revenue Code. All employees of the Company who have
attained 21 years of age are eligible for participation in
the Contribution Plan after one month of employment. Under the
Contribution
F-26
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
11.
|
Employee
Benefit Plan (continued)
|
Plan, participating employees may defer up to the Internal
Revenue Service annual contribution limit. The Company may elect
to make contributions to the Contribution Plan at its
discretion. During the years ended December 31, 2008 and
2009, the Company paid $252 and $277, respectively, and $204 and
$249 during the six months ended June 30, 2009 and 2010
(unaudited), respectively, in discretionary contributions to the
Contribution Plan. During the year ended December 31, 2007,
the Company did not make any discretionary contributions to the
Contribution Plan.
|
|
12.
|
Subsequent
Events (unaudited)
|
The Company evaluated subsequent events through August 4,
2010, which is the date the financial statements were available
to be issued.
F-27
Shares
Common
Stock
PROSPECTUS
,
2010
Stifel
Nicolaus Weisel
William Blair & Company
JMP Securities
Pacific Crest Securities
Neither we nor any
of the underwriters have authorized anyone to provide
information different from that contained in this prospectus.
When you make a decision about whether to invest in our common
stock, you should not rely upon any information other than the
information in this prospectus. Neither the delivery of this
prospectus nor the sale of our common stock means that
information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell
or solicitation of an offer to buy these shares of common stock
in any circumstances under which the offer or solicitation is
unlawful.
Through and
including ,
2010 (the 25th day after the date of this prospectus), all
dealers that effect transactions in shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
expenses of issuance and distribution.
|
The following table itemizes the expenses, other than the
underwriting discounts and commissions, incurred by us in
connection with the issuance and distribution of the securities
being registered hereunder. All amounts shown are estimates
except for the Securities and Exchange Commission, or SEC,
registration fee, the Financial Industry Regulatory Authority,
Inc., or FINRA, filing fee and the NASDAQ Global Market listing
fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
5,348
|
|
FINRA filing fee
|
|
|
8,000
|
|
NASDAQ Global Market listing fee
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Transfer agent and registrar fees and expenses
|
|
|
*
|
|
Director and officer liability insurance policy premium
|
|
|
*
|
|
Miscellaneous expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be completed by amendment. |
|
|
Item 14.
|
Indemnification
of directors and officers.
|
We are a corporation organized under the laws of the State of
Delaware. Section 145 of the Delaware General Corporation
Law provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to an action
by reason of the fact that he or she was a director, officer,
employee or agent of the corporation or is or was serving at the
request of the corporation against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful, except that,
in the case of an action by or in right of the corporation, no
indemnification may generally be made in respect of any claim as
to which such person is adjudged to be liable to the
corporation. Our amended and restated certificate of
incorporation, in the form that will become effective upon the
closing of this offering, provides that we will indemnify and
advance expenses to our directors and officers (and may choose
to indemnify and advance expenses to other employees and agents)
to the fullest extent permitted by the Delaware General
Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duties as a director,
except for liability for any:
|
|
|
breach of a directors duty of loyalty to the corporation
or its stockholders;
|
|
act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
|
unlawful payment of dividends or redemption of shares; or
|
|
transaction from which the director derives an improper personal
benefit.
|
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, provides that our directors are not personally liable
for breaches of fiduciary duties to the fullest extent permitted
by the Delaware General Corporation Law.
II-1
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Section 145(g) of the Delaware General Corporation Law and
our amended and restated certificate of incorporation permit us
to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her
actions in connection with their services to us, regardless of
whether Delaware General Corporation Law permits
indemnification. We maintain a directors and
officers liability insurance policy.
As permitted by the Delaware General Corporation Law, we have
entered into indemnity agreements with each of our directors
that require us to indemnify such persons against various
actions including, but not limited to, third-party actions where
such director, by reason of his or her corporate status, is a
party or is threatened to be made a party to an action, or by
reason of anything done or not done by such director in any such
capacity. We indemnify directors against all costs, judgments,
penalties, fines, liabilities, amounts paid in settlement by or
on behalf of such directors, and for any expenses actually and
reasonably incurred by such directors in connection with such
action, if such directors acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal
proceeding, had no reasonable cause to believe their conduct was
unlawful. We also advance to our directors expenses (including
attorneys fees) incurred by such directors in advance of
the final disposition of any action after the receipt by the
corporation of a statement or statements from directors
requesting such payment or payments from time to time, provided
that such statement or statements are accompanied by an
undertaking, by or on behalf of such directors, to repay such
amount if it shall ultimately be determined that they are not
entitled to be indemnified against such expenses by the
corporation.
The indemnification agreements set forth certain procedures that
will apply in the event of a claim for indemnification or
advancement of expenses, including, among others, provisions
about providing notice to the corporation of any action in
connection with which a director seeks indemnification or
advancement of expenses from the corporation, and provisions
concerning the determination of entitlement to indemnification
or advancement of expenses.
Prior to the closing of this offering, we plan to enter into an
underwriting agreement, which will provide that the underwriters
are obligated, under some circumstances, to indemnify our
directors, officers and controlling persons against specified
liabilities.
|
|
Item 15.
|
Recent
sales of unregistered securities.
|
In the three years preceding the filing of this registration
statement, we issued the securities indicated below that were
not registered under the Securities Act of 1933, as amended, or
the Securities Act.
On March 26, 2008, we issued 958 shares of our
preferred stock and 3,231 shares of our common stock to
Brad Stevens, our then Vice President of Marketing, for
aggregate cash consideration of $100,000.
On September 24, 2008, we issued an aggregate of
25,000 shares of our common stock for no cash consideration
to the family members of a recently deceased employee in
recognition and appreciation of his past services.
The above-described sales of securities were made in reliance
upon the exemption from registration requirements of the
Securities Act available under Section 4(2) of the
Securities Act. These sales did not involve any underwriters,
underwriting discounts or commissions or any public offering.
The recipients of the securities in these transactions
represented that they intended to acquire the securities for
investment only and not with a view to, or for sale in
connection with, any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments
issued in such sales. We believe that the purchasers either
received adequate information about us or had adequate access,
through their relationships with us, to such information.
II-2
The following table sets forth information on stock options
issued by us to our employees in the three years preceding the
filing of this registration statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Number of
|
|
Grant Date
|
|
Grant Date
|
|
Exercise
|
Date of Issuance
|
|
Options Granted
|
|
Exercise Price
|
|
Fair Value
|
|
Price
|
|
July 18, 2007
|
|
|
60,000
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
January 23, 2008(1)
|
|
|
147,125
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
$
|
1.02
|
|
July 23, 2008(1)
|
|
|
63,000
|
|
|
$
|
1.58
|
|
|
$
|
1.58
|
|
|
$
|
1.02
|
|
January 22, 2009
|
|
|
349,099
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
July 22, 2009
|
|
|
35,000
|
|
|
$
|
0.95
|
|
|
$
|
0.95
|
|
|
$
|
0.95
|
|
January 21, 2010
|
|
|
447,198
|
|
|
$
|
1.13
|
|
|
$
|
1.13
|
|
|
$
|
1.13
|
|
April 20, 2010
|
|
|
159,000
|
|
|
$
|
4.09
|
|
|
$
|
4.09
|
|
|
$
|
4.09
|
|
|
|
|
(1) |
|
Represents stock options that were amended to reduce the
exercise price for substantially all of the shares subject to
stock options granted on January 23, 2008 and July 23,
2008. The amendments reduced the exercise price of the
previously granted options to $1.02 per share, which was the
fair value of our common stock on the date of the amendments.
The amendments did not affect the vesting provisions or the
number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as being forfeited and the amendments as new option
grants. |
No consideration was paid to us by any recipient of any of the
foregoing options for the grant of such options. All of the
stock options described above were granted under our 2004 Stock
Incentive Plan to our officers, directors and employees in
reliance upon an available exemption from the registration
requirements of the Securities Act, including those contained in
Rule 701 promulgated under Section 3(b) of the
Securities Act. Among other things, we relied on the fact that,
under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d)
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, are exempt from registration under the Securities
Act with respect to certain offers and sales of securities
pursuant to compensatory benefit plans as defined
under that rule. We believe that our 2004 Stock Incentive Plan
qualifies as a compensatory benefit plan.
II-3
The following table sets forth information on shares of common
stock issued to our employees and former employees upon the
exercise of stock options in the three years preceding the
filing of this registration statement.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Per Share
|
Date of Issuance
|
|
Shares Issued
|
|
Exercise Price
|
|
March 28, 2007
|
|
|
1,250
|
|
|
$
|
0.04
|
|
July 11, 2007
|
|
|
1,125
|
|
|
$
|
0.05
|
|
August 27, 2007
|
|
|
16,421
|
|
|
$
|
0.04
|
|
August 28, 2007
|
|
|
1,125
|
|
|
$
|
0.07
|
|
September 25, 2007
|
|
|
1,375
|
|
|
$
|
0.05
|
|
November 30, 2007
|
|
|
1,250
|
|
|
$
|
0.05
|
|
December 14, 2007
|
|
|
750
|
|
|
$
|
0.07
|
|
January 16, 2008
|
|
|
5,260
|
|
|
$
|
0.04
|
|
March 8, 2008
|
|
|
21,199
|
|
|
$
|
0.04
|
|
March 19, 2008
|
|
|
1,063
|
|
|
$
|
0.07
|
|
April 1, 2008
|
|
|
1,438
|
|
|
$
|
0.07
|
|
April 23, 2008
|
|
|
750
|
|
|
$
|
0.07
|
|
July 17, 2008
|
|
|
875
|
|
|
$
|
0.07
|
|
October 1, 2008
|
|
|
875
|
|
|
$
|
0.05
|
|
December 1, 2008
|
|
|
4,250
|
|
|
$
|
0.19
|
|
December 10, 2008
|
|
|
563
|
|
|
$
|
0.07
|
|
February 18, 2009
|
|
|
2,125
|
|
|
$
|
0.05
|
|
March 11, 2009
|
|
|
1,875
|
|
|
$
|
0.07
|
|
April 3, 2009
|
|
|
5,599
|
|
|
$
|
0.04
|
|
May 8, 2009
|
|
|
6,105
|
|
|
$
|
0.12
|
|
August 6, 2009
|
|
|
1,125
|
|
|
$
|
0.95
|
|
November 16, 2009
|
|
|
826
|
|
|
$
|
0.23
|
|
December 29, 2009
|
|
|
12,451
|
|
|
$
|
0.25
|
|
March 14, 2010
|
|
|
1,953
|
|
|
$
|
0.08
|
|
March 31, 2010
|
|
|
1,718
|
|
|
$
|
1.02
|
|
May 3, 2010
|
|
|
4,000
|
|
|
$
|
1.02
|
|
May 10, 2010
|
|
|
15,104
|
|
|
$
|
1.02
|
|
All of the shares of common stock issued upon the exercise of
stock options described above were issued in reliance upon an
available exemption from the registration requirements of the
Securities Act, including those contained in Rule 701
promulgated under Section 3(b) of the Securities Act. Among
other things, we relied on the fact that, under Rule 701,
companies that are not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act are
exempt from registration under the Securities Act with respect
to certain offers and sales of securities pursuant to
compensatory benefit plans as defined under that
rule. We believe that our 2004 Stock Incentive Plan qualifies as
a compensatory benefit plan.
II-4
The following table sets forth information on restricted stock
awards issued by us to our employees and
non-employee
directors in the three years preceding the filing of this
registration statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Grant Date
|
|
Grant Date
|
Date of Issuance
|
|
Shares Issued
|
|
Purchase Price
|
|
Fair Value
|
|
July 18, 2007
|
|
|
125,000
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
January 23, 2008(1)
|
|
|
584,275
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
January 22, 2009
|
|
|
318,053
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
January 21, 2010
|
|
|
191,724
|
|
|
$
|
1.13
|
|
|
$
|
1.13
|
|
|
|
|
(1) |
|
Represents restricted stock awards that were amended to reduce
the purchase price for such shares issued on January 23,
2008. The amendments reduced the purchase price of the
previously issued restricted stock to $1.02 per share, which was
the fair value of our common stock on the date of the
amendments. The amendments did not affect the vesting provisions
or the number of shares subject to any of the restricted stock
awards. |
All of the restricted stock awards described above were granted
under our 2004 Stock Incentive Plan to our officers, directors
and employees in reliance upon an available exemption from the
registration requirements of the Securities Act, including those
contained in Rule 701 promulgated under Section 3(b)
of the Securities Act. Among other things, we relied on the fact
that, under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d)
of the Exchange Act are exempt from registration under the
Securities Act with respect to certain offers and sales of
securities pursuant to compensatory benefit plans as
defined under that rule. We believe that our 2004 Stock
Incentive Plan qualifies as a compensatory benefit plan.
|
|
Item 16.
|
Exhibits
and financial statement schedules.
|
(a) Exhibits. Reference is made to the
Exhibit Index attached hereto, which is made a part hereof
by reference thereto.
(b) Financial statement schedules. See
page F-1
for an index of the financial statements and schedules that are
being filed as part of this Registration Statement.
(a) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(ii) For the purposes determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Cary, State of North
Carolina, on August 5, 2010.
SciQuest, Inc.
Stephen J. Wiehe
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Stephen
J. Wiehe
Stephen
J. Wiehe
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President, Chief Executive Officer and Director
(Principal Executive Officer)
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August 5, 2010
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*
Rudy
C. Howard
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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August 5, 2010
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*
Noel
J. Fenton
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Chairman of the Board of Directors
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August 5, 2010
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*
Daniel
F. Gillis
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Director
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August 5, 2010
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*
Jeffrey
T. Barber
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Director
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August 5, 2010
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*
Timothy
J. Buckley
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Director
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August 5, 2010
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* /s/ Stephen
J. Wiehe
By: Stephen
J. Wiehe
Agent and attorney-in-fact
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II-6
EXHIBIT LIST
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Exhibit No.
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Description
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1
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.1
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Form of Underwriting Agreement
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3
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.1*
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Amended and Restated Certificate of Incorporation of SciQuest,
Inc. to be effective immediately prior to the closing of the
offering
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3
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.2
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Amended and Restated Bylaws of SciQuest, Inc. to be effective
immediately prior to the closing of the offering
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4
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.1*
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Specimen Certificate representing shares of common stock of
SciQuest, Inc.
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4
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.2
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Stockholders Agreement, by and among SciQuest, Inc. and certain
of its stockholders, dated July 28, 2004
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4
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.3*
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Amendment No. 1 to Stockholders Agreement, by and among
SciQuest, Inc. and certain of its stockholders,
dated ,
2010.
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5
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.1*
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Opinion of Morris, Manning & Martin, LLP
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10
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.1
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SciQuest, Inc. 2004 Stock Incentive Plan**
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10
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.2
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Amendment No. 2 to SciQuest, Inc. 2004 Stock Incentive
Plan**
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10
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.3
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Form of Stock Option Grant Certificate under the SciQuest, Inc.
2004 Stock Incentive Plan**
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10
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.4
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Form of Management Subscription Agreement under the SciQuest,
Inc. 2004 Stock Incentive Plan**
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10
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.5
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Second Amended and Restated Exit Event Bonus Plan**
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10
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.6
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Amendment No. 1 to Second Amended and Restated Exit Event
Bonus Plan**
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10
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.7
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Employment Agreement by and between SciQuest, Inc. and Stephen
J. Wiehe, dated February 5, 2002**
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10
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.8
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Change of Control Agreement by and between SciQuest, Inc. and
Stephen J. Wiehe, dated January 1, 2004**
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10
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.9
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Change of Control Agreement by and between SciQuest, Inc. and
James B. Duke, dated January 1, 2004**
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10
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.10
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Change of Control Agreement by and between SciQuest, Inc. and
Rudy C. Howard, dated January 1, 2010**
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10
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.11
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Amended and Restated Subscription Agreement by and between
SciQuest, Inc. and Daniel F. Gillis, dated January 21,
2010**
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10
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.12
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Subscription Agreement by and between SciQuest, Inc. and Daniel
F. Gillis, dated January 21, 2010**
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10
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.13
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Form of Indemnification Agreement
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10
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.14
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Office Lease by and between SciQuest, Inc. and Duke Realty
Limited Partnership, dated May 17, 2005
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10
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.15
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First Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 21, 2008
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10
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.16
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Second Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 27, 2008
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10
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.17
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Assignment of Lease by and between SciQuest, Inc. and Kroy
Building Products, Inc., dated February 11, 2008
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10
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.18
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Office Lease by and between Duke Realty Limited Partnership and
Kroy Building Products, Inc., dated September 29, 2006
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10
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.19
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Second Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 21, 2008
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10
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.20
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Master Agreement for U.S. Availability Services between SunGard
Availability Services LP and SciQuest, Inc.
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23
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.1
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Consent of Ernst & Young LLP
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23
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.2*
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Consent of Morris, Manning & Martin, LLP (included in
Exhibit 5.1)
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24
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.1
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Power of Attorney
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* |
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To be filed by amendment. |
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** |
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Indicates management contract or compensatory plan or
arrangement. |
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Previously filed. |