As filed
with the Securities and Exchange Commission on March 9,
2011
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SCIQUEST, INC.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
(State or other Jurisdiction
of
Incorporation or Organization)
|
|
7372
(Primary Standard
Industrial
Classification Code Number)
|
|
56-2127592
(I.R.S. Employer
Identification Number)
|
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:
|
|
|
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
|
|
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
|
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):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller reporting
company o
|
(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
|
Title of Each Class of
|
|
|
Amount to
|
|
|
Offering Price
|
|
|
Aggregate
|
|
|
Amount of
|
Securities to be Registered
|
|
|
be Registered(1)
|
|
|
per Share(2)
|
|
|
Offering Price(2)
|
|
|
Registration Fee
|
Common stock, par value $0.001 per share
|
|
|
|
4,525,702
|
|
|
|
$
|
14.67
|
|
|
|
$
|
66,392,049
|
|
|
|
$
|
7,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes 590,309 shares that
the underwriters have an option to purchase to cover
over-allotments, if any.
|
|
(2)
|
|
Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) of
the Securities Act of 1933, as amended, based on the average of
the high and low trading prices for the common stock as reported
by the NASDAQ Global Market on March 4, 2011.
|
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.
|
PRELIMINARY
PROSPECTUS
3,935,393 Shares
Common Stock
$
per share
SciQuest, Inc. is selling 1,000,000 shares of our common
stock and the selling stockholders identified in this prospectus
are selling an additional 2,935,393 shares. We will not
receive any of the proceeds from the sale of the shares of the
selling stockholders. We and the selling stockholders have
granted the underwriters a
30-day
option to purchase up to an additional 590,309 shares of
common stock to cover over-allotments, if any.
On March 4, 2011, the last reported sale price of our
common stock on the NASDAQ Global Market was $14.67 per share.
Our common stock is traded on the NASDAQ Global Market under the
symbol SQI.
Investing in our common stock
involves risks. See Risk Factors beginning on
page 11.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to the selling stockholders
|
|
$
|
|
|
|
$
|
|
|
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.
Stifel Nicolaus
Weisel
|
|
|
William
Blair & Company |
JMP Securities |
Pacific Crest Securities |
Canaccord Genuity
The date of this prospectus
is ,
2011.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
11
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
35
|
|
|
|
|
63
|
|
|
|
|
80
|
|
|
|
|
86
|
|
|
|
|
103
|
|
|
|
|
105
|
|
|
|
|
107
|
|
|
|
|
111
|
|
|
|
|
113
|
|
|
|
|
117
|
|
|
|
|
122
|
|
|
|
|
122
|
|
|
|
|
122
|
|
|
|
|
F-1
|
|
EX-1.1 |
EX-5.1 |
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.
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 $14.67 per share, which was
the last reported sale price of our common stock on
March 4, 2011 and (2) no exercise by the underwriters
of their overallotment option to purchase up to an additional
590,309 shares of common stock from us and the selling
stockholders.
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. As of December 31,
2010, we serve 195 customers operating in 14 countries and
offer our solution in five languages and 22 currencies. In
addition, as a result of our January 2011 acquisition of AECsoft
USA, Inc., or AECsoft, we have added more than 100 additional
customers operating in four countries. Our value proposition has
led to an average annual customer renewal rate, on a dollar
basis, of approximately 100% over the last three fiscal years.
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.
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.
1
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).
The procurement process for indirect goods and services is often
not well-managed or controlled. Characteristics of these
traditional processes include:
|
|
|
|
|
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.
|
|
|
Limited ability to analyze spend. Given the lack of
automation and centralized reporting, organizations have
difficulty analyzing what they are buying from suppliers.
|
|
|
Dissatisfied employees. Manual, non-integrated
processes often lead to excess costs, delays and errors,
resulting in a frustrating experience for the employee.
|
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 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:
|
|
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
Greater adoption by employees. Our intuitive
shopping interface provides employees with easy and automated
visibility and access to goods and services.
|
|
|
Greater adoption by suppliers. Suppliers typically are
motivated to join our network due to ease of enablement and lack
of supplier fees.
|
|
|
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.
|
2
|
|
|
|
|
Visibility into suppliers. Our solution provides
customers with greater insight into their supplier base by
identifying supplier data and qualities, such as supplier
capabilities and diversity qualifications, that may impact
purchasing decisions.
|
|
|
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.
|
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:
|
|
|
|
|
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.
|
|
|
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.
|
|
|
Extensive content and supplier network. Suppliers
are not charged any fees or transaction costs for purchases
consummated through the SciQuest Supplier Network, which has
facilitated the growth of our network to over 30,000 unique
suppliers servicing the higher education, life sciences,
healthcare and state and local government markets.
|
|
|
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 75% in 2010.
|
|
|
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.
|
Our
Growth Strategy
We seek to become the leading provider of strategic procurement
solutions for indirect goods and services. Our key strategic
initiatives include:
|
|
|
|
|
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.
|
|
|
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 vertical markets.
|
|
|
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.
|
|
|
Selectively expanding into new vertical markets. We
may pursue new vertical expansion through internal product
development, sales and marketing initiatives or strategic
acquisitions.
|
|
|
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.
|
3
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:
|
|
|
|
|
our failure to sustain our historical renewal rates, pricing and
terms of our customer contracts would adversely affect our
operating results;
|
|
|
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;
|
|
|
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;
|
|
|
we expect to continue to develop and acquire new product and
service offerings with no guarantee that we will be able to
market those acquired products and services successfully or to
integrate any acquired businesses in our operations effectively;
|
|
|
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;
|
|
|
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;
|
|
|
if we are unable to adapt our products and services to rapid
technological change, our revenues and profits 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;
|
|
|
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
|
|
|
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.
|
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
|
|
|
Common stock offered by us |
|
1,000,000 shares |
|
Common stock offered by selling stockholders |
|
2,935,393 shares |
|
Common stock to be outstanding after this offering |
|
21,899,052 shares |
|
Over-allotment option |
|
590,309 shares |
|
Use of Proceeds |
|
We estimate that the net proceeds from our sale of shares of
common stock in this offering will be approximately
$13.4 million. This estimate is based upon an assumed
public offering price of $14.67 per share, which was the last
reported sale price of our common stock on March 4, 2011,
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. |
|
|
|
We intend to use the net proceeds for working capital and
general corporate purposes. We may also use a portion of the
proceeds to expand our business through acquisitions of
complementary businesses, products or technologies. We have no
agreements or commitments with respect to any acquisitions at
this time. |
|
|
|
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. |
|
Symbol on the NASDAQ Global Market |
|
SQI |
The number of shares of our common stock outstanding after this
offering is based on 20,899,052 shares outstanding as of
February 28, 2011 and excludes:
|
|
|
|
|
an aggregate of 1,116,688 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $6.63 per share; and
|
|
|
an aggregate of 1,063,983 shares reserved for issuance
under our 2004 Stock Incentive Plan.
|
Except as otherwise indicated, information in this prospectus
assumes no exercise of the underwriters overallotment
option to purchase up to 590,309 additional shares of our common
stock from us and 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, 2008, 2009 and 2010, under the heading
Non-GAAP Operating Data relating to Adjusted
Net Income and Adjusted Free Cash Flow for each of the three
years ended December 31, 2008, 2009 and 2010 have been
derived from our audited annual financial statements, which are
included elsewhere in this prospectus.
The pro forma balance sheet data as of December 31, 2010 is
unaudited and gives effect to our receipt of estimated net
proceeds of $13.4 million from this offering, based on an
assumed public offering price of $14.67 per share, after
deducting underwriting discounts and estimated offering expenses
payable by us. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
42,477
|
|
Cost of revenues(1)(2)
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
9,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
33,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
8,395
|
|
Sales and marketing
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
11,592
|
|
General and administrative
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
5,810
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
31,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,130
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
200
|
|
|
|
37
|
|
|
|
40
|
|
Interest expense
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
(65
|
)
|
|
|
(4
|
)
|
|
|
1,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
113
|
|
|
|
27
|
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
2,857
|
|
Income tax (expense) benefit
|
|
|
9
|
|
|
|
16,821
|
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,117
|
|
|
|
19,429
|
|
|
|
1,743
|
|
Dividends on redeemable preferred stock
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
2,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Net (loss) income attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
1.16
|
|
|
$
|
(0.02
|
)
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,800
|
|
|
|
14,061
|
|
|
|
15,754
|
|
Diluted
|
|
|
13,800
|
|
|
|
14,450
|
|
|
|
15,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income(3)
|
|
$
|
1,285
|
|
|
$
|
4,149
|
|
|
$
|
5,536
|
|
Adjusted Free Cash Flow(4)
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
10,563
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,494
|
|
|
$
|
30,870
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
20,000
|
|
Working capital excluding deferred revenues
|
|
|
41,147
|
|
|
|
54,523
|
|
Total assets
|
|
|
76,687
|
|
|
|
90,063
|
|
Deferred revenues
|
|
|
38,201
|
|
|
|
38,201
|
|
Total stockholders equity
|
|
|
34,235
|
|
|
|
47,611
|
|
|
|
|
(1) |
|
Amounts include stock-based compensation expense, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
83
|
|
Research and development
|
|
|
53
|
|
|
|
86
|
|
|
|
236
|
|
Sales and marketing
|
|
|
150
|
|
|
|
83
|
|
|
|
167
|
|
General and administrative
|
|
|
158
|
|
|
|
163
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
386
|
|
|
$
|
365
|
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Cost of revenues includes amortization of capitalized software
development costs of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
(In thousands)
|
|
Amortization of capitalized software development costs
|
|
$
|
154
|
|
|
$
|
167
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
(3) |
|
Adjusted Net Income, a non-GAAP operating measure (as defined
below), consists of net income (loss) plus our non-cash,
stock-based compensation expense, amortization of intangible
assets, acquisition costs incurred in 2010, compensation expense
relating to management bonuses paid in connection with our
initial public offering in 2010, a stock contribution to fund a
charitable trust established by us in 2010 and settlement and
legal costs related to a patent infringement lawsuit settled in
2009, less the gain realized upon the sale of a warrant in 2010
and the tax benefit in 2009 from the release of the valuation
reserve on our deferred tax asset. Adjusted Net Income is
determined on a tax-effected basis. For 2010, we used our
quarterly effective tax rate to determine the tax effect for
Adjusted Net Income. For 2009 and 2008, we used our pro forma
effective tax rate assuming the reduction of the valuation
reserve had occurred the prior year to determine the tax effect
for Adjusted Net Income. We use Adjusted Net Income 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,
acquisition-related costs, the one-time costs associated with
non-recurring events and such non-cash items such as stock-based
compensation expense and amortization of intangible assets,
which can vary depending upon accounting methods. We believe
Adjusted Net Income 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 non-cash items such as stock-based compensation expense and
amortization of intangible assets, which can vary depending upon
accounting methods, 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 Net Income 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
U.S. generally accepted accounting principles, or GAAP.
Some of these limitations are: |
|
|
|
Adjusted Net Income does not reflect changes in, or
cash requirements for, our working capital needs;
|
|
|
Adjusted Net Income does not consider the
potentially dilutive impact of equity-based compensation;
|
|
|
Adjusted Net Income does not reflect
acquisition-related costs, one-time cash bonuses paid to our
management or cash payments in connection with a settlement of a
lawsuit, all of which reduced the cash available to us;
|
|
|
we must make certain assumptions in order to
determine the tax effect adjustments for Adjusted Net Income,
which assumptions may not prove to be accurate; and
|
|
|
other companies, including companies in our
industry, may calculate Adjusted Net Income differently, which
reduces its usefulness as a comparative measure. |
|
|
|
Because of these limitations, you should consider Adjusted Net
Income alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted Net Income along with
these other measures in order to fully evaluate our financial
performance. |
8
|
|
|
|
|
The following table provides a reconciliation of net income to
Adjusted Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,743
|
|
Stock based compensation
|
|
|
386
|
|
|
|
365
|
|
|
|
1,088
|
|
Amortization of intangibles
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
Non-recurring stock contribution for a charitable trust
established by the company
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Deferred tax asset valuation reserve reduction
|
|
|
|
|
|
|
(16,800
|
)
|
|
|
|
|
Tax effect of adjustments(a)
|
|
|
(755
|
)
|
|
|
(2,437
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
1,285
|
|
|
$
|
4,149
|
|
|
$
|
5,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For the years ended December 31, 2008 and 2009,
respectively, the tax effect of adjustments has been calculated
on the assumption that the $16,800 deferred tax asset valuation
reserve reduction had taken place prior to the commencement of
each such fiscal year, and a pro forma effective tax rate of 37%
was applied for each of such years. For the year ended
December 31, 2010, the tax effect was determined on a
quarterly basis using our effective tax rate for the applicable
quarter. |
|
|
|
(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 acquisition costs and one-time bonus payments incurred
in 2010. We use Adjusted Free Cash Flow as a measure of
liquidity because it assists us in assessing our 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 or one-time management bonuses
associated with the initial public offering, which reduced the
cash available to us;
|
|
|
Adjusted Free Cash Flow does not include acquisition
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,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
6,582
|
|
|
$
|
4,501
|
|
|
$
|
5,890
|
|
Purchase of property and equipment
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(832
|
)
|
Capitalization of software development costs
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
(648
|
)
|
Free Cash Flow
|
|
|
6,003
|
|
|
|
3,596
|
|
|
|
4,410
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
10,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, although AECsofts agreements
with its customers typically have one-year terms with automatic
renewal provisions. As the AECsoft agreements expire, we intend
to make efforts to sign these customers to our typical
multi-year agreements, although there is no assurance that we
will be successful in doing so. Failure to migrate the AECsoft
customers to multi-year contracts could adversely impact our
renewal rates. Over the past three fiscal years, our average
annual customer renewal rate, on a dollar basis, has been
approximately 100%. 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. For instance, if we are not successful in either
selling the new AECsoft modules to our existing and prospective
customers or selling our procurement software suite and services
to AECsofts customers, we may not realize some of the
potential benefits of this acquisition.
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 continuing
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
11
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 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 expect to continue to develop and acquire new product and
service offerings with no guarantee that we will be able to
market those acquired products and services successfully or to
integrate any acquired businesses into our operations
effectively.
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. As part of this strategy, we recently
acquired AECsoft, which is a leading provider of supplier
management and sourcing technology. We can offer no assurances
that AECsofts product offering will be favorably received
by either our current customers or prospective customers. If we
are unsuccessful in marketing the AECsoft product offering, our
operating results will suffer and we may not realize the
expected benefits of the acquisition. 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
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.
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, including
the AECsoft products that we have acquired, 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
12
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 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:
|
|
|
|
|
enhance our existing products and services;
|
|
|
develop new products, services and technologies that address the
increasingly sophisticated and varied needs of our target
markets; and
|
|
|
respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
|
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
13
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:
|
|
|
|
|
their comfort with current purchasing and asset management
procedures;
|
|
|
the costs and resources required to adopt new business
procedures;
|
|
|
reductions in capital expenditures or technology spending
budgets;
|
|
|
the price, performance and availability of competing solutions;
|
|
|
security and privacy concerns; or
|
|
|
general reticence about technology or the Internet.
|
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 69% of our
customers and approximately 61% of our 2010 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 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 18% of our customers
and approximately 28% of our 2010 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 3%
of our 2010 revenues came from the state and local government
market and approximately 10% of our customers and approximately
8% of our 2010 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
14
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 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:
|
|
|
|
|
potential customers internal approval processes;
|
|
|
budgetary constraints for technology spending;
|
|
|
customers concerns about implementing new procurement
methods and strategies; and
|
|
|
seasonal and other timing effects.
|
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.
15
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:
|
|
|
|
|
concentrated sales to large customers;
|
|
|
our ability to retain and increase sales to existing customers
and to attract new customers;
|
|
|
the timing and success of new product and module introductions
or upgrades by us or our competitors;
|
|
|
changes in our pricing policies or those of our competitors;
|
|
|
renewal rates of existing customers;
|
|
|
potential consolidation among our customers within the life
sciences market;
|
|
|
potential foreign currency exchange gains and losses associated
with expenses and sales denominated in currencies other than the
U.S. dollar;
|
|
|
the amount and timing of expenditures related to development,
adaptation or acquisition of technologies, products or
businesses;
|
|
|
competition, including entry into the industry by new
competitors and new offerings by existing competitors; and
|
|
|
general economic, industry and market conditions that impact
expenditures for technology solutions in our target markets.
|
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.
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 2011 as compared to 2010 in
order to support anticipated revenue growth. Furthermore, as a
result of our recent initial public offering in September 2010,
we began incurring significant legal, accounting and other
expenses in 2010 that we had not incurred previously 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, 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.
16
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.
The failure to integrate successfully businesses that we have
acquired or may acquire, including our recent acquisition of
AECsoft, 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:
|
|
|
|
|
the integration of new operations, products, services and
personnel;
|
|
|
the diversion of resources from our existing businesses, sites
and technologies;
|
|
|
the inability to generate revenues from new products and
services sufficient to offset associated acquisition costs;
|
|
|
the maintenance of uniform standards, controls, procedures and
policies;
|
|
|
the acquired business requiring greater resources than
anticipated;
|
|
|
accounting effects that may adversely affect our financial
results;
|
|
|
the impairment of employee and customer relations as a result of
any integration of new management personnel;
|
|
|
dilution to existing stockholders from the issuance of equity
securities; and
|
|
|
liabilities or other problems associated with an acquired
business.
|
In particular, we recently completed our acquisition of AECsoft.
The integration of AECsoft into our business is ongoing and
represents a significant undertaking for our management team. We
can offer no assurances that we will successfully complete this
integration or realize the expected benefits of this
acquisition. Our failure to successfully manage the risks
associated with this acquisition could adversely affect our
business and operating results.
We may also have difficulty in effectively assimilating and
integrating future acquired 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 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.
17
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.
While we have funded our business through our cash flows from
operations and the proceeds of our initial public offering in
September 2010, we may need to raise additional funds to achieve
our future strategic objectives, including the execution of our
strategy to pursue acquisitions. 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:
|
|
|
|
|
develop and enhance our solution;
|
|
|
continue to expand our technology development, sales
and/or
marketing organizations;
|
|
|
hire, train and retain employees; or
|
|
|
respond to competitive pressures or unanticipated working
capital requirements.
|
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:
|
|
|
|
|
devote greater resources to marketing and promotional campaigns;
|
|
|
devote substantially more resources to product development;
|
|
|
secure exclusive arrangements with indirect sales channels that
impede our sales;
|
|
|
develop more extensive client bases and broader client
relationships than we have; and
|
|
|
enter into strategic or commercial relationships with larger,
more established and well-financed companies.
|
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. These competitive pressures could have a material
adverse effect on our revenue growth and results of operations.
18
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 three third-party data centers to conduct our operations,
consisting of our primary operating center located in Durham,
North Carolina, a fully redundant disaster recovery platform
located in Scottsdale, Arizona and an operating center located
in Houston, Texas for our acquired AECsoft product offering. 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.
19
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, (ii) re-develop our solution,
20
(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.
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.
21
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 calls 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
in this Risk Factors section of this prospectus
could result in our actual operating results being different
from our guidance, and those differences may be adverse and
material.
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. 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.
22
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 began incurring significant legal, accounting, investor
relations and other expenses as a result of our initial public
offering in September 2010 that we had not incurred previously
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 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 December 31, 2010, we had net operating loss
carryforwards of approximately $194 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
23
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 the Ownership of Our Common Stock
Our stock price may be volatile, and investors may be unable
to sell their shares at or above their purchase 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:
|
|
|
|
|
variations in our quarterly operating results;
|
|
|
decreases in market valuations of similar companies;
|
|
|
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;
|
|
|
failure by us or our competitors to meet analysts
projections or guidance that we or our competitors may give to
the market; and
|
|
|
fluctuations in stock market prices and volumes.
|
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 will limit your ability to influence corporate
matters.
As of December 31, 2010, our directors, executive officers
and holders of more than 5% of our common stock, together with
their affiliates, beneficially owned, in the aggregate,
approximately 70.6% of our common stock. After giving effect to
the sale of common stock in this offering by us and the selling
stockholders, these stockholders will beneficially own, in the
aggregate, approximately 55.4% of our common stock. 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
24
management and affairs of our company. Accordingly, this
concentration of ownership might harm the market price of our
common stock by:
|
|
|
|
|
delaying, deferring or preventing a change in corporate control;
|
|
|
impeding a merger, consolidation, takeover or other business
combination involving us; or
|
|
|
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
|
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, 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.
As of February 28, 2011, we had 20,889,052 outstanding
shares of common stock. The 6,900,000 shares sold in our
initial public offering are tradable without restriction. Of the
remaining shares:
|
|
|
|
|
24,902 shares became eligible for sale immediately upon the
completion of our initial public offering, 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; and
|
|
|
13,966,976 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.
|
The lock-up
agreements executed in connection with our initial public
offering that cover 13,641,773 shares are expected to
expire on March 23, 2011, and the
lock-up
agreements covering 325,203 shares issued in connection
with our acquisition of AECsoft are expected to expire on
June 30, 2011. The representatives of the underwriters for
our initial public offering may, in their sole discretion and at
any time without notice, release all or any portion of the
securities subject to
lock-up
agreements.
In connection with this offering, holders of
13,597,957 shares of our common stock and holders of
547,224 shares of our common stock issuable upon exercise
of outstanding options, including in each case all of our
officers and directors, have entered into lock-up agreements
that are expected to expire 90 days from the date of this
offering.
Following this offering, holders of 10,084,530 shares of
our common stock will be entitled to rights with respect to the
registration of these shares under the Securities Act. 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.
In addition, we have registered 4,307,736 shares of common
stock that have been issued or reserved for future issuance
under our stock incentive plan. Of these shares,
3,243,753 shares are outstanding or subject to the exercise
of outstanding options as of February 28, 2011 and will be
eligible for sale, in some cases subject to vesting
requirements, after the expiration of the
lock-up
agreements.
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:
|
|
|
|
|
a classified board of directors with three-year staggered terms;
|
|
|
not providing for cumulative voting in the election of directors;
|
25
|
|
|
|
|
authorizing the board of directors to issue, without stockholder
approval, preferred stock with rights senior to those of our
common stock;
|
|
|
prohibiting stockholder action by written consent; and
|
|
|
requiring advance notification of stockholder nominations and
proposals.
|
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.
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:
|
|
|
|
|
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.
|
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
$13.4 million. This estimate is based upon an assumed
public offering price of $14.67 per share, which was the last
reported sale price of our common stock on March 4, 2011,
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. We intend to use these net proceeds for
working capital and general corporate purposes. We may also use
a portion of the proceeds to expand our business through
acquisitions of complementary businesses, products or
technologies. We have no agreements or commitments with respect
to any acquisitions at this time. 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.
PRICE
RANGE OF COMMON STOCK
Our common stock has been listed on the NASDAQ Global Market
under the symbol SQI since September 24, 2010.
The following table presents, for the periods indicated, the
range of high and low per share sales prices of our common
stock, as reported on the NASDAQ Global Market. Our fiscal year
ends on December 31.
|
|
|
|
|
|
|
|
|
Year Ending December 31, 2011:
|
|
High
|
|
Low
|
|
January 1, 2011 through March 4, 2011
|
|
$
|
15.79
|
|
|
$
|
12.21
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010:
|
|
High
|
|
Low
|
|
October 1, 2010 through December 31, 2010
|
|
$
|
14.11
|
|
|
$
|
10.50
|
|
September 24, 2010 through September 30, 2010
|
|
|
13.75
|
|
|
|
11.00
|
|
On March 4, 2011, the last reported sale price of our
common stock on the NASDAQ Global Market was $14.67.
As of February 28, 2011, we had approximately
80 stockholders of record of our common stock, including
Cede & Co., which holds shares of our common
stock on behalf of an indeterminate number of beneficial owners.
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 the board of directors deems relevant.
29
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2010:
|
|
|
|
|
on an actual basis; and
|
|
|
on a pro forma basis to reflect the sale of shares in this
offering at an assumed public offering price of $14.67 per
share, which was the last reported sale price of our common
stock on March 4, 2011, after deducting estimated
underwriting discounts and commissions, offering expenses
payable by us.
|
The information below is illustrative only and our
capitalization following the completion of this offering will be
adjusted based on the actual 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 December 31, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(Unaudited; in thousands, except share and per share data)
|
|
|
Cash and cash equivalents
|
|
$
|
17,494
|
|
|
$
|
30,870
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,494
|
|
|
$
|
50,870
|
|
|
|
|
|
|
|
|
|
|
Current liabilities excluding current portion of deferred
revenues
|
|
$
|
4,251
|
|
|
$
|
4,251
|
|
Deferred revenues
|
|
|
38,201
|
|
|
|
38,201
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value; 50,000,000 shares
authorized and 20,532,443 shares issued and outstanding,
actual; and 21,532,443 issued and outstanding, pro forma
|
|
|
20
|
|
|
|
21
|
|
Additional paid-in capital
|
|
|
50,462
|
|
|
|
63,837
|
|
Notes receivable from stockholders
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Accumulated deficit
|
|
|
(16,232
|
)
|
|
|
(16,232
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,235
|
|
|
|
47,611
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
76,687
|
|
|
$
|
90,063
|
|
|
|
|
|
|
|
|
|
|
The table and calculations above are based on the number of
shares of common stock outstanding as of December 31, 2010
and exclude:
|
|
|
|
|
an aggregate of 733,651 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $2.76 per share;
|
|
|
an aggregate of 26,080 shares issuable upon the exercise of
a then outstanding warrant at an exercise price of $0.08 per
share; and
|
|
|
an aggregate of 1,462,498 shares reserved for issuance
under our 2004 Stock Incentive Plan.
|
30
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, 2008, 2009 and 2010, under the heading
Non-GAAP Operating Data relating to Adjusted
Net Income and Adjusted Free Cash Flow for each of the three
years ended December 31, 2008, 2009 and 2010 and under the
heading Balance Sheet Data as of December 31,
2009 and 2010 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, 2006 and 2007, under the heading
Non-GAAP Operating Data relating to Adjusted
Net Income and Adjusted Free Cash Flow for each of the two years
ended December 31, 2006 and 2007 and under the heading
Balance Sheet Data as of December 31, 2006,
2007 and 2008 have been derived from our audited financial
statements not included in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,183
|
|
|
$
|
20,107
|
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
42,477
|
|
Cost of revenues(1)(2)
|
|
|
4,766
|
|
|
|
6,101
|
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
9,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,417
|
|
|
|
14,006
|
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
33,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,124
|
|
|
|
6,908
|
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
8,395
|
|
Sales and marketing
|
|
|
5,954
|
|
|
|
7,213
|
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
11,592
|
|
General and administrative
|
|
|
2,531
|
|
|
|
2,717
|
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
5,810
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
3,631
|
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,240
|
|
|
|
19,124
|
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
31,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(7,823
|
)
|
|
|
(5,118
|
)
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,130
|
|
Interest and other income (expense), net
|
|
|
(78
|
)
|
|
|
118
|
|
|
|
113
|
|
|
|
27
|
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,901
|
)
|
|
|
(5,000
|
)
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
2,857
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
16,821
|
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,901
|
)
|
|
|
(5,000
|
)
|
|
|
1,117
|
|
|
|
19,429
|
|
|
|
1,743
|
|
Dividends on redeemable preferred stock
|
|
|
2,038
|
|
|
|
2,207
|
|
|
|
2,395
|
|
|
|
2,595
|
|
|
|
2,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(9,939
|
)
|
|
$
|
(7,207
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
16,834
|
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.76
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.76
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
1.16
|
|
|
$
|
(0.02
|
)
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,058
|
|
|
|
13,492
|
|
|
|
13,800
|
|
|
|
14,061
|
|
|
|
15,754
|
|
Diluted
|
|
|
13,058
|
|
|
|
13,492
|
|
|
|
13,800
|
|
|
|
14,450
|
|
|
|
15,754
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income(3)
|
|
$
|
(4,270
|
)
|
|
$
|
(2,604
|
)
|
|
$
|
1,285
|
|
|
$
|
4,149
|
|
|
$
|
5,536
|
|
Adjusted Free Cash Flow(4)
|
|
$
|
1,636
|
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
10,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,218
|
|
|
$
|
7,791
|
|
|
$
|
13,502
|
|
|
$
|
17,132
|
|
|
$
|
17,494
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Working capital excluding deferred revenues
|
|
|
4,899
|
|
|
|
7,631
|
|
|
|
14,273
|
|
|
|
19,963
|
|
|
|
41,147
|
|
Total assets
|
|
|
24,883
|
|
|
|
26,332
|
|
|
|
32,922
|
|
|
|
55,211
|
|
|
|
76,687
|
|
Deferred revenues
|
|
|
19,164
|
|
|
|
26,124
|
|
|
|
31,590
|
|
|
|
34,275
|
|
|
|
38,201
|
|
Redeemable preferred stock
|
|
|
26,778
|
|
|
|
28,985
|
|
|
|
31,477
|
|
|
|
34,072
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(26,403
|
)
|
|
|
(33,461
|
)
|
|
|
(34,391
|
)
|
|
|
(17,158
|
)
|
|
|
34,235
|
|
|
|
|
(1) |
|
Amounts include stock-based compensation expense, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
83
|
|
Research and development
|
|
|
|
|
|
|
56
|
|
|
|
53
|
|
|
|
86
|
|
|
|
236
|
|
Sales and marketing
|
|
|
|
|
|
|
42
|
|
|
|
150
|
|
|
|
83
|
|
|
|
167
|
|
General and administrative
|
|
|
|
|
|
|
9
|
|
|
|
158
|
|
|
|
163
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
110
|
|
|
$
|
386
|
|
|
$
|
365
|
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Cost of revenues includes amortization of capitalized software
development costs of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Amortization of capitalized software development costs
|
|
$
|
235
|
|
|
$
|
114
|
|
|
$
|
154
|
|
|
$
|
167
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Adjusted Net Income, a non-GAAP operating measure, consists of
net income (loss) plus our non-cash, stock-based compensation
expense, amortization of intangible assets, acquisition costs
incurred in 2010, compensation expense relating to management
bonuses paid in connection with our initial public offering in
2010, a stock contribution to fund a charitable trust
established by us in 2010 and settlement and legal costs related
to a patent infringement lawsuit settled in 2009, less the gain
realized upon the sale of a warrant in 2010 and the tax benefit
in 2009 from the release of the valuation reserve on our
deferred tax asset. Adjusted Net Income is determined on a
tax-effected basis. For 2010, we used our quarterly effective
tax rate to determine the tax effect for Adjusted Net Income.
For 2009 and 2008, we used our pro forma effective tax rate
assuming the reduction of the valuation reserve had occurred the
prior year to determine the tax effect for Adjusted Net Income.
We use Adjusted Net Income as a measure of operating performance
because it assists us in comparing performance on a consistent |
32
|
|
|
|
|
basis, as it removes from our operating results the impact of
our capital structure, acquisition-related costs, the one-time
costs associated with non-recurring events and such non-cash
items such as stock-based compensation expense and amortization
of intangible assets, which can vary depending upon accounting
methods. We believe Adjusted Net Income 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 non-cash items such as stock-based
compensation expense and amortization of intangible assets,
which can vary depending upon accounting methods, 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 Net Income 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 Net Income does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted Net Income does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted Net Income does not reflect acquisition-related costs,
one-time cash bonuses paid to our management or cash payments in
connection with a settlement of a lawsuit, all of which reduced
the cash available to us;
|
|
|
we must make certain assumptions in order to determine the tax
effect adjustments for Adjusted Net Income, which assumptions
may not prove to be accurate; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Net Income differently, which reduces its
usefulness as a comparative measure.
|
Because of these limitations, you should consider Adjusted Net
Income alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted Net Income along with
these other measures in order to fully evaluate our financial
performance.
The following table provides a reconciliation of net income to
Adjusted Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(7,901
|
)
|
|
$
|
(5,000
|
)
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,743
|
|
Stock based compensation
|
|
|
|
|
|
|
110
|
|
|
|
386
|
|
|
|
365
|
|
|
|
1,088
|
|
Amortization of intangibles
|
|
|
3,631
|
|
|
|
2,286
|
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
Non-recurring stock contribution for a charitable trust
established by the company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Deferred tax asset valuation reserve reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,800
|
)
|
|
|
|
|
Tax effect of adjustments(a)
|
|
|
|
|
|
|
|
|
|
|
(755
|
)
|
|
|
(2,437
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss)
|
|
$
|
(4,270
|
)
|
|
$
|
(2,604
|
)
|
|
$
|
1,285
|
|
|
$
|
4,149
|
|
|
$
|
5,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For the years ended December 31, 2008 and 2009,
respectively, the tax effect of adjustments has been calculated
on the assumption that the $16,800 deferred tax asset valuation
reserve reduction had taken place prior to the commencement of
each such fiscal year, and a pro forma effective tax rate of 37%
was applied for each of such years. For the year ended
December 31, 2010, the tax effect was determined on a
quarterly basis using our effective tax rate for the applicable
quarter. |
33
|
|
|
(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 acquisition costs and one-time bonus payments incurred
in 2010. We use Adjusted Free Cash Flow as a measure of
liquidity because it assists us in assessing our 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 or one-time management bonuses associated with
the initial public offering, which reduced the cash available to
us;
|
|
|
Adjusted Free Cash Flow does not include acquisition 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 operating activities to Adjusted Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
2,227
|
|
|
$
|
4,693
|
|
|
$
|
6,582
|
|
|
$
|
4,501
|
|
|
$
|
5,890
|
|
Purchase of property and equipment
|
|
|
(531
|
)
|
|
|
(695
|
)
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(832
|
)
|
Capitalization of software development costs
|
|
|
(60
|
)
|
|
|
(362
|
)
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
1,636
|
|
|
|
3,636
|
|
|
|
6,003
|
|
|
|
3,596
|
|
|
|
4,410
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
1,636
|
|
|
$
|
3,636
|
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
10,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
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 for a multi-module sale 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. AECsofts agreements
with its customers typically have one-year terms with automatic
renewal provisions. As the AECsoft agreements expire, we intend
to make efforts to sign these customers to our typical
multi-year agreements, although there is no assurance that we
will be successful in doing so. We sell primarily through our
direct sales channel and, to a very limited extent, through
indirect sales channels. As of December 31, 2010, we had
195 customers operating in 14 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 fiscal year ended December 31, 2010,
revenues increased 17% to $42.5 million from
$36.2 million for the fiscal year ended December 31,
2009. For the fiscal year ended December 31, 2009, revenues
increased 21% to $36.2 million from $29.8 million for
the fiscal year ended December 31, 2008.
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
Net Income. To analyze cash flow, we primarily use Adjusted Free
Cash Flow.
For the years ended December 31, 2008, 2009 and 2010, the
higher education market accounted for approximately 54%, 56% and
61%, respectively, of our revenues, the life sciences market
accounted for approximately 35%, 31% and 28%, respectively, of
our revenues, the healthcare market accounted for approximately
9%, 9% and 8%, respectively, of our revenues and the state and
local government markets accounted for approximately 2%, 4% and
3%, 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
35
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 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 Net Income and Adjusted Free Cash Flow are
the primary non-GAAP financial metrics upon which to measure our
business. Adjusted Net Income consists of net income (loss) plus
our non-cash, stock-based compensation expense, amortization of
intangible assets, acquisition costs incurred in 2010,
compensation expense relating to management bonuses paid in
connection with our initial public offering in 2010, a stock
contribution to fund a charitable trust established by us in
2010 and settlement and legal costs related to a patent
infringement lawsuit settled in 2009, less the gain realized
upon the sale of a warrant in 2010 and the tax benefit in 2009
from the reduction of the valuation reserve on our deferred tax
asset. Adjusted Net Income is determined on a tax-effected
basis. For 2010, we used our quarterly effective tax rate to
determine the tax effect for Adjusted Net Income. For 2009 and
2008, we used our pro forma effective tax rate assuming the
reduction of the valuation reserve had occurred the prior year
to determine the tax effect for Adjusted Net Income. Because
Adjusted Net Income excludes certain non-cash expenses such as
amortization, stock-based compensation and a stock contribution
in 2010, as well as acquisition costs incurred in 2010 and the
one-time impact of the settlement of a patent litigation suit
and a tax benefit from the reduction of a valuation reserve in
2009 and the sale of a warrant and one-time bonus payments in
2010, 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 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 acquisition costs
and one-time bonus payments 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 Net Income and Adjusted Free
Cash Flow in the preparation of our budgets and to measure and
monitor our financial performance. Adjusted Net Income 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 Net Income and a reconciliation of
Adjusted Net Income to net income, see
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
36
government markets. We have funded our operations through our
cash flow from operations and the proceeds from our initial
public offering in September 2010. We generated Adjusted Net
Income of $1.3 million, $4.1 million and
$5.5 million in 2008, 2009 and 2010, respectively. We
generated Adjusted Free Cash Flow of $6.0 million,
$6.8 million and $10.6 million in 2008, 2009 and 2010,
respectively. We generated net income of $1.1 million,
$19.4 million and $1.7 million in 2008, 2009 and 2010,
respectively.
No customer accounted for more than 10% of our total revenues in
2008, 2009 and 2010. Our ten largest customers accounted for no
more than 25% of our total revenues in 2009 and 2010,
respectively.
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.
On September 29, 2010, we completed our initial public
offering of 6,900,000 shares of common stock at an offering
price of $9.50 per share. We issued and sold
6,000,000 shares and the selling stockholders sold
900,000 shares pursuant to the exercise in full of the
underwriters over-allotment option. We received proceeds
of approximately $50.6 million after payment of
underwriting discounts and commissions and legal, accounting and
other fees incurred in connection with the offering. On
September 30, 2010, we used approximately
$36.2 million of the net proceeds to redeem all outstanding
shares of our preferred stock.
In January 2011, we acquired all of the capital stock of
AECsoft, which is a leading provider of supplier management and
sourcing technology. The purchase price consisted of
approximately $9 million in cash and 350,568 shares of
our common stock. The issuance of 25,365 of these shares is
subject to successful completion of certain performance targets
under an earn-out arrangement with a former shareholder of
AECsoft. Additionally, 299,838 shares of our common stock
may be issued under an earn-out arrangement with the former
shareholders of AECsoft, based on successful achievement of
certain performance targets over the next three fiscal years and
continued employment with us. The shares will be recognized as
compensation expense in the statement of operations over the
requisite service period of the award. The performance targets
relate to the amount of revenue we recognize from AECsofts
products and services during each of 2011, 2012 and 2013. If the
performance conditions are met in full, we will issue
121,951 shares of common stock on or about March 31,
2012, 121,951 shares of common stock on or about
March 31, 2013 and 81,301 shares of common stock on or
about March 31, 2014. The purchase price included
$1.275 million in cash and 103,659 shares of common
stock that have been deposited in escrow to satisfy potential
indemnification claims. The purchase price will be subject to
adjustment based on the level of AECsofts cash and cash
equivalents and certain other items as of the closing date.
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
37
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, on a dollar basis, has been approximately
100% over the last three fiscal years. We believe these annual
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. We also expect cost of revenues to increase
as a percentage of revenues in the short-term due to our
acquisition of AECsoft but remain relatively consistent
thereafter.
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 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.
38
Therefore, we expect that our general and administrative
expenses will increase in absolute dollars. Through 2011, we
expect that our general and administrative expenses also will
increase slightly 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 Net Income. Adjusted Net Income, a non-GAAP
operating measure, consists of net income (loss) plus our
non-cash, stock-based compensation expense, amortization of
intangible assets, acquisition costs incurred in 2010,
compensation expense relating to management bonuses paid in
connection with our initial public offering in 2010, a stock
contribution to fund a charitable trust established by us in
2010 and settlement and legal costs related to a patent
infringement lawsuit settled in 2009, less the gain realized
upon the sale of a warrant in 2010 and the tax benefit in 2009
from the release of the valuation reserve on our deferred tax
asset. Adjusted Net Income is determined on a tax-effected
basis. For 2010, we used our quarterly effective tax rate to
determine the tax effect for Adjusted Net Income. For 2009 and
2008, we used our pro forma effective tax rate assuming the
reduction of the valuation reserve had occurred the prior year
to determine the tax effect for Adjusted Net Income. We use
Adjusted Net Income 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, acquisition-related costs, the one-time
costs associated with non-recurring events and such non-cash
items such as stock-based compensation expense and amortization
of intangible assets, which can vary depending upon accounting
methods. We believe Adjusted Net Income 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 non-cash items such as stock-based
compensation expense and amortization of intangible assets,
which can vary depending upon accounting methods, 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 Net Income 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 Net Income does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted Net Income does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted Net Income does not reflect acquisition-related costs,
one-time cash bonuses paid to our management or cash payments in
connection with a settlement of a lawsuit, all of which reduced
the cash available to us;
|
|
|
we must make certain assumptions in order to determine the tax
effect adjustments for Adjusted Net Income, which assumptions
may not prove to be accurate; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Net Income differently, which reduces its
usefulness as a comparative measure.
|
Because of these limitations, you should consider Adjusted Net
Income alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted Net Income along with
these other measures in order to fully evaluate our financial
performance.
39
The following table provides a reconciliation of net income to
Adjusted Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,743
|
|
Stock based compensation
|
|
|
386
|
|
|
|
365
|
|
|
|
1,088
|
|
Amortization of intangibles
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
Non-recurring stock contribution for a charitable trust
established by the company
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Deferred tax asset valuation reserve reduction
|
|
|
|
|
|
|
(16,800
|
)
|
|
|
|
|
Tax effect of adjustments(1)
|
|
|
(755
|
)
|
|
|
(2,437
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
1,285
|
|
|
$
|
4,149
|
|
|
$
|
5,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the years ended December 31, 2008 and 2009,
respectively, the tax effect of adjustments has been calculated
on the assumption that the $16,800 deferred tax asset valuation
reserve reduction had taken place prior to the commencement of
each such fiscal year, and a pro forma effective tax rate of 37%
was applied for each of such years. For the year ended
December 31, 2010, the tax effect was determined on a
quarterly basis using our effective tax rate for the applicable
quarter. |
Adjusted Free Cash Flow. 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 acquisition costs
and one-time bonus payments incurred in 2010. We use Adjusted
Free Cash Flow as a measure of liquidity because it assists us
in assessing our 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 or one-time management bonuses associated with
the initial public offering, which reduced the cash available to
us;
|
|
|
Adjusted Free Cash Flow does not include acquisition 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.
40
The following table provides a reconciliation of net cash
provided by operating activities to Adjusted Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
6,582
|
|
|
$
|
4,501
|
|
|
$
|
5,890
|
|
Purchase of property and equipment
|
|
|
(480
|
)
|
|
|
(685
|
)
|
|
|
(832
|
)
|
Capitalization of software development costs
|
|
|
(99
|
)
|
|
|
(220
|
)
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
6,003
|
|
|
|
3,596
|
|
|
|
4,410
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
6,003
|
|
|
$
|
6,785
|
|
|
$
|
10,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
41
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. 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 was not been a public market for our common stock
from July 2004 until September 2010, 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%
|
|
1.3% 3.0%
|
Expected life of award (in years)
|
|
6.25
|
|
6.25
|
|
6.25
|
42
Prior to our initial public offering in September 2010, we
typically granted options on a semi-annual basis. The following
table summarizes by grant date the number of stock options
granted from January 1, 2008 through December 31,
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)
|
|
|
73,561
|
|
|
$
|
2.60
|
|
|
$
|
2.10
|
|
July 23, 2008(3)
|
|
|
31,500
|
|
|
$
|
3.16
|
|
|
$
|
2.56
|
|
January 22, 2009
|
|
|
174,547
|
|
|
$
|
2.04
|
|
|
$
|
1.63
|
|
July 22, 2009
|
|
|
17,500
|
|
|
$
|
1.90
|
|
|
$
|
1.53
|
|
January 21, 2010
|
|
|
223,599
|
|
|
$
|
2.26
|
|
|
$
|
1.82
|
|
April 20, 2010
|
|
|
79,500
|
|
|
$
|
8.18
|
|
|
$
|
6.61
|
|
October 29, 2010
|
|
|
28,500
|
|
|
$
|
11.45
|
|
|
$
|
9.12
|
|
November 1 December 31, 2010
|
|
|
9,000
|
|
|
$
|
10.99 13.38
|
|
|
$
|
8.75 10.68
|
|
|
|
|
(1) |
|
The per share exercise price of option from January 23,
2008 to April 20, 2010 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. After September 24, 2010,
the per share exercise price of option represents the closing
sale price of our common stock on the date of grant. |
|
(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 10 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 $2.04 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 10 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 prior to September 24, 2010, and subsequently as
determined by the closing sale price of our common stock on the
NASDAQ Global Market on the date of termination) for vested
restricted stock. The shares generally vest ratably over two to
four years. As of December 31, 2010, there were
2,032,286 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 December 31, 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
|
|
|
292,137
|
|
|
$
|
2.60
|
|
|
|
$1.38 - $1.81
|
|
January 22, 2009
|
|
|
159,024
|
|
|
$
|
2.04
|
|
|
|
$1.41 - $2.04
|
|
January 21, 2010
|
|
|
95,861
|
|
|
$
|
2.26
|
|
|
|
$1.58
|
|
43
|
|
|
(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 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
Prior to our initial public offering on September 24, 2010,
we 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. Subsequent to September 24, 2010, we have
granted stock-based awards at exercise or purchase prices
equivalent to the fair value of our common stock as of the date
of the grant, as measured by the closing sale price of our
common stock on the NASDAQ Global Market on the date of the
grant.
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 until September 2010, 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
44
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 73,561 stock options with an
exercise price of $2.60. Additionally, we issued
292,137 shares of restricted stock with a purchase price of
$2.60. 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 $2.60 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 $2.60.
July 2008
Grants
In July 2008, we granted 31,500 stock options with an exercise
price of $3.16. 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 $3.16 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.
45
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 $3.16 per share.
January
2009 Grants
In January 2009, we granted 174,547 stock options with an
exercise price of $2.04. Additionally, we issued
159,024 shares of restricted stock with a purchase price of
$2.04. 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 $2.04 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 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 $2.04 per share.
July 2009
Grants
In July 2009, we granted 17,500 stock options with an exercise
price of $1.90. 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 $1.90 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
46
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 $1.90 per share.
January
2010 Grants
In January 2010, we granted 223,599 stock options with an
exercise price of $2.26. Additionally, we issued
95,861 shares of restricted stock with a purchase price of
$2.26. 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 $2.26 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 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 $2.26 per share.
April
2010 Grants
In April 2010, we granted 79,500 stock options with an exercise
price of $8.18. 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 $8.18 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
47
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. The
difference between the initial public offering price of $9.50
per share and the fair value that was used for the April 2010
grants results 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 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 28%. This resulted in an aggregate
common equity value of $83.8 million.
Under the initial public offering scenario, we applied a
multiple to our forecasted fiscal year 2011 revenue. 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.
The increase in the common equity value under the initial public
offering scenario in this valuation as compared to the initial
public offering scenario with respect to our January 2010 grants
is due both to changes in our valuation methodology and an
increase in the multiple applied in this scenario. The revenue
multiple increased between December 31, 2009 and
March 31, 2010 from 1.8 to 4.3. The valuation methodologies
and assumptions that were used to establish the fair value of
our common stock for both the January 2010 and April 2010 grants
are not inconsistent with any of our financial statement
assertions.
Although our methodologies for the private company scenario and
sale scenario are consistent with our prior valuations, we made
two changes in our methodology under the initial public offering
scenario in this valuation. Since a registration statement for
an initial public offering had been filed at the time of this
valuation, we determined that these changes were appropriate to
reflect the then current environment for initial public
offerings. The first change in our methodology was to use
forecasted fiscal year 2011 revenue in our analysis, as opposed
to using revenue for the most recently completed fiscal year as
had been used for prior valuations. At the time of this
valuation, it appeared likely that our initial public offering
would occur in the second half of 2010. We believe the use of
forecasted revenue provides greater consistency with the
expected valuation methodology for an initial public offering
occurring after the mid-point of the current year. As a result,
the revenue multiple was applied to our forecasted fiscal year
2011 revenue as opposed to our fiscal year 2009 revenue used in
the initial public offering scenario with respect to our January
2010 grants.
The second change in methodology was to use the upper quartile
revenue multiple from the guideline public companies rather than
the mean revenue multiple from the guideline public companies
used in the initial public offering scenario with respect to our
January 2010 grants. We determined the use of the upper quartile
revenue multiple from the guideline public companies to be more
representative of our company based on our increased earnings
and cash flows for forecasted fiscal year 2011 as opposed to
valuations based on prior fiscal periods where we determined the
use of the mean revenue multiple from the guideline public
companies to be more appropriate in light of our lower earnings
and cash flows for those periods. In addition, the upper
quartile companies included those who underwent the more recent
initial public offerings and were the most similar to us in
size, growth and profitability.
48
The guideline public companies used in the valuation for the
April 2010 grants consisted of SaaS companies that underwent
initial public offerings between March 31, 2007 and
March 31, 2010 and that are similar to us in size, growth
and profitability. The revenue multiples were determined by
dividing the enterprise value as of the applicable valuation
date by the preceding 12 months of revenue as of the
applicable valuation date, We believe that the use of revenue
multiples is a common and appropriate valuation method for
smaller, earlier stage public companies such as us.
In addition to the changes in methodology used in the valuation
for our April 2010 grants, the multiple increase resulted from
updating the revenue multiples for each of the guideline public
companies as of the new valuation date. We believe that
enterprise values of the guideline public companies increased
over this period at a greater rate than their increases in
revenue, resulting in a significant increase in the applicable
revenue multiples. We believe the increase in enterprise values
reflected a broader increase in valuations of public companies
as the increases in their stock prices were consistent with
increases in many stock market indices during this period.
Accordingly, increases in fair value do not necessarily
correlate with revenue growth. We believe our companys
valuation as a public company would have increased commensurate
with those of the upper quartile of the guideline public
companies due to the similarities between us and those
companies, particularly our comparable earnings and revenue
growth rates. Further, because these guideline public companies
all underwent initial public offerings within the past three
years, we believe these companies to be in a similar stage in
the development and growth of their business as our company.
Specifically, our net income growth rates for 2009 and the first
quarter of 2010 generally exceeded the growth rates for the
guideline public companies, while our revenue growth rates for
these periods were comparable to those of the guideline public
companies. We further believe that our forecasted net income and
revenue growth rates compare favorably to those of the guideline
public companies.
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
$8.18 per share.
Grants
Following Our Initial Public Offering
Following our initial public offering on September 24,
2010, all stock option grants were granted with an exercise
price equal to the closing price of our common stock on the
NASDAQ Global Market on the date of grant.
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
49
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, 2010. 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.
Results
of Operations
The following table sets forth, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
29,784
|
|
|
$
|
36,179
|
|
|
$
|
42,477
|
|
Cost of revenues
|
|
|
6,723
|
|
|
|
7,494
|
|
|
|
9,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,061
|
|
|
|
28,685
|
|
|
|
33,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,307
|
|
|
|
8,059
|
|
|
|
8,395
|
|
Sales and marketing
|
|
|
9,280
|
|
|
|
10,750
|
|
|
|
11,592
|
|
General and administrative
|
|
|
3,942
|
|
|
|
3,703
|
|
|
|
5,810
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
537
|
|
|
|
403
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,066
|
|
|
|
26,104
|
|
|
|
31,986
|
|
Income from operations
|
|
|
995
|
|
|
|
2,581
|
|
|
|
1,130
|
|
Interest and other income, net
|
|
|
113
|
|
|
|
27
|
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,108
|
|
|
|
2,608
|
|
|
|
2,857
|
|
Income tax benefit (expense)
|
|
|
9
|
|
|
|
16,821
|
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,117
|
|
|
$
|
19,429
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
The following table sets forth, for the periods indicated, our
results of operations expressed as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
23
|
|
|
|
21
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
77
|
|
|
|
79
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
28
|
|
|
|
22
|
|
|
|
20
|
|
Sales and marketing
|
|
|
31
|
|
|
|
30
|
|
|
|
27
|
|
General and administrative
|
|
|
13
|
|
|
|
10
|
|
|
|
13
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
74
|
|
|
|
72
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3
|
|
|
|
7
|
|
|
|
3
|
|
Interest and other income, net
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4
|
|
|
|
7
|
|
|
|
7
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
47
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4
|
%
|
|
|
54
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Revenues. Revenues for 2010 were $42.5 million, an
increase of $6.3 million, or 17%, over revenues of
$36.2 million for 2009. The increase in revenues resulted
primarily from an increase in the number of customers from 156
as of December 31, 2009 to 195 as of December 31,
2010, as well as recognition of a full years revenues for
the new customers added in 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 in 2010 was
$9.4 million, an increase of $1.9 million, or 25%,
over cost of revenues of $7.5 million in 2009. As a
percentage of revenues, cost of revenues increased slightly to
22% in 2010 from 21% in 2009. The increase in dollar amount
primarily resulted from a $1.6 million increase in
employee-related costs attributable to our existing personnel
and additional implementation service personnel. We had
72 full-time employee equivalents in our implementation
services, supplier enablement services, customer support and
client partner organizations at December 31, 2010, compared
to 56 full-time employee equivalents at December 31,
2009.
Research and Development Expenses. Research and
development expenses for 2010 were $8.4 million, an
increase of $0.3 million, or 4%, from research and
development expenses of $8.1 million for 2009. As a
percentage of revenues, research and development expenses
decreased to 20% in 2010 from 22% in 2009. The increase in
dollar amount was primarily due to a $0.6 million increase
in employee-related costs attributable to our existing personnel
and additional research and development personnel, partially
offset by a $0.4 million increase in capitalization of
software development costs. We had 60 full-time employee
equivalents in our research and development organization at
December 31, 2010, compared to 50 full-time employee
equivalents at December 31, 2009.
Sales and Marketing Expenses. Sales and marketing
expenses for 2010 were $11.6 million, an increase of
$0.8 million, or 7%, over sales and marketing expenses of
$10.8 million for 2009. As a percentage of revenues, sales
and marketing expenses decreased to 27% in 2010 from 30% in
2009. The increase in dollar amount is primarily
51
due to an increase of $0.1 million in employee-related
costs from our existing personnel and additional sales and
marketing headcount, an increase of $0.3 million in
amortized commission expense and an increase of
$0.3 million of marketing expenditures. We had
46 full-time employee equivalents in our sales and
marketing organization at December 31, 2010, compared to
45 full-time employee equivalents at December 31, 2009.
General and Administrative Expenses. General and
administrative expenses for 2010 were $5.8 million, an
increase of $2.1 million, or 57%, from general and
administrative expenses of $3.7 million for 2009. As a
percentage of revenues, general and administrative expenses
increased to 14% in 2010 from 10% in 2009. The increase in
dollar amount was primarily due to a $0.6 million increase
in employee-related costs attributable to our existing personnel
and additional general and administrative personnel, a
$0.4 million increase in stock compensation expense, a
$0.2 million one-time expense related to a contribution of
stock to fund a charitable trust established by us,
$0.3 million of public company costs and $0.3 million
of acquisition related costs attributable to our acquisition of
AECsoft in January 2011. We had 14 full-time employee
equivalents in our general and administrative organization at
December 31, 2010, compared to 11 full-time employee
equivalents at December 31, 2009.
Management Bonuses Associated with Initial Public
Offering. In 2010, we paid one-time cash bonuses to certain
members of management in connection with the initial public
offering. The one-time expense from management bonuses
associated with the initial public offering for the year ended
December 31, 2010 was $5.9 million, or 14% of revenues.
Litigation Settlement and Associated Legal Expenses.
Litigation settlement and associated legal expenses for 2010
were $0 compared to litigation settlement and associated legal
expenses for 2009 of $3.2 million, or 9% of revenues. 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. There were no similar
costs incurred in 2010.
Amortization of Intangible Assets. Amortization of
intangible assets for 2010 was $0.3 million, a decrease of
$0.1 million, or 25%, over amortization of intangible
assets of $0.4 million for 2009. As a percentage of
revenues, amortization of intangible assets was 1% in 2010 and
2009. 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 2010
was $1.1 million, a decrease of $1.5 million, or 58%,
from income from operations of $2.6 million for 2009. As a
percentage of revenues, income from operations decreased to 3%
in 2010 from 7% in 2009. The decrease in dollar amount was
primarily the result of the management bonuses associated with
the initial public offering, our increased expenses required to
support our additional revenues and our public company costs as
well as expenses associated with our acquisition of AECsoft in
January 2011, partially offset by the increase in revenues and
the decrease in litigation settlement and associated legal fees.
Income tax benefit (expense). Income tax expense for the
year ended December 31, 2010 was ($1.1) million
compared to a $16.8 million benefit for the year ended
December 31, 2009. The change in income tax benefit
(expense) was due to the reversal of our valuation reserve
against our deferred tax asset of $16.8 million in December
2009 and the subsequent tax effecting of our pre-tax net income
in 2010. The reversal was due to our attaining sufficient
positive evidence to support the likelihood of realizing the
deferred tax asset.
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
52
cancellation of a reseller agreement recognized in that year. We
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 software 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 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
53
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 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.
Quarterly
Results of Operations
The following table sets forth our unaudited operating results,
Adjusted Net Income and Adjusted Free Cash Flow for each of the
eight quarters preceding and including the three-month period
ended December 31, 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 from which the data below is
derived 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. 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,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,595
|
|
|
$
|
8,811
|
|
|
$
|
9,049
|
|
|
$
|
9,724
|
|
|
$
|
10,126
|
|
|
$
|
10,562
|
|
|
$
|
10,771
|
|
|
$
|
11,018
|
|
Cost of revenues
|
|
|
1,847
|
|
|
|
1,901
|
|
|
|
1,879
|
|
|
|
1,867
|
|
|
|
2,109
|
|
|
|
2,337
|
|
|
|
2,329
|
|
|
|
2,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,748
|
|
|
|
6,910
|
|
|
|
7,170
|
|
|
|
7,857
|
|
|
|
8,017
|
|
|
|
8,225
|
|
|
|
8,442
|
|
|
|
8,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,230
|
|
|
|
2,130
|
|
|
|
1,968
|
|
|
|
1,731
|
|
|
|
2,037
|
|
|
|
1,882
|
|
|
|
2,173
|
|
|
|
2,303
|
|
Sales and marketing
|
|
|
2,694
|
|
|
|
2,652
|
|
|
|
2,528
|
|
|
|
2,876
|
|
|
|
3,138
|
|
|
|
2,831
|
|
|
|
2,815
|
|
|
|
2,808
|
|
General and administrative
|
|
|
1,000
|
|
|
|
945
|
|
|
|
805
|
|
|
|
953
|
|
|
|
1,380
|
|
|
|
1,255
|
|
|
|
1,471
|
|
|
|
1,704
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
100
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
101
|
|
|
|
100
|
|
|
|
101
|
|
|
|
101
|
|
|
|
76
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,025
|
|
|
|
5,927
|
|
|
|
8,491
|
|
|
|
5,661
|
|
|
|
6,631
|
|
|
|
6,043
|
|
|
|
12,422
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
723
|
|
|
|
983
|
|
|
|
(1,321
|
)
|
|
|
2,196
|
|
|
|
1,386
|
|
|
|
2,182
|
|
|
|
(3,980
|
)
|
|
|
1,542
|
|
Interest and other income (expense), net
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
1,687
|
|
|
|
1
|
|
|
|
29
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
738
|
|
|
|
999
|
|
|
|
(1,321
|
)
|
|
|
2,192
|
|
|
|
3,073
|
|
|
|
2,183
|
|
|
|
(3,951
|
)
|
|
|
1,552
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,821
|
|
|
|
(1,143
|
)
|
|
|
(909
|
)
|
|
|
1,486
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
738
|
|
|
$
|
999
|
|
|
$
|
(1,321
|
)
|
|
$
|
19,013
|
|
|
$
|
1,930
|
|
|
$
|
1,274
|
|
|
$
|
(2,465
|
)
|
|
$
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
|
(Unaudited; in thousands)
|
|
Non-GAAP Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income(1)
|
|
$
|
585
|
|
|
$
|
815
|
|
|
$
|
1,236
|
|
|
$
|
1,513
|
|
|
$
|
1,292
|
|
|
$
|
1,405
|
|
|
$
|
1,497
|
|
|
$
|
1,342
|
|
Adjusted Free Cash Flow(2)
|
|
$
|
(2,326
|
)
|
|
$
|
1,686
|
|
|
$
|
2,829
|
|
|
$
|
4,596
|
|
|
$
|
158
|
|
|
$
|
2,607
|
|
|
$
|
4,953
|
|
|
$
|
2,845
|
|
|
|
|
(1) |
|
Adjusted Net Income, a non-GAAP operating measure, consists of
net income (loss) plus our non-cash, stock-based compensation
expense, amortization of intangible assets, acquisition costs
incurred in 2010, compensation expense relating to management
bonuses paid in connection with our initial public offering in
2010, a stock contribution to fund a charitable trust
established by us in 2010 and settlement and legal costs related
to a patent infringement lawsuit settled in 2009, less the gain
realized upon the sale of a warrant in 2010 and the tax benefit
in 2009 from the release of the valuation reserve on our
deferred tax asset. Adjusted Net Income is determined on a
tax-effected basis. For 2010, we used our quarterly effective
tax rate to determine the tax effect for Adjusted Net Income.
For 2009 and 2008, we used our pro forma effective tax rate
assuming the reduction of the valuation reserve had occurred the
prior year to determine the tax effect for Adjusted Net Income.
We believe Adjusted Net Income 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 Net Income 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 Net Income does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
Adjusted Net Income does not consider the potentially dilutive
impact of equity-based compensation;
|
|
|
Adjusted Net Income does not reflect acquisition-related costs,
one-time cash bonuses paid to our management or cash payments in
connection with a settlement of a lawsuit, all of which reduced
the cash available to us;
|
|
|
we must make certain assumptions in order to determine the tax
effect adjustments for Adjusted Net Income, which assumptions
may not prove to be accurate; and
|
|
|
other companies, including companies in our industry, may
calculate Adjusted Net Income differently, which reduces its
usefulness as a comparative measure.
|
Because of these limitations, you should consider Adjusted Net
Income alongside other financial performance measures, including
various cash flow metrics, net income and our other GAAP
results. Our management reviews Adjusted Net Income along with
these other measures in order to fully evaluate our financial
performance.
55
The following table provides a reconciliation of net income
(loss) to Adjusted Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income (loss)
|
|
$
|
738
|
|
|
$
|
999
|
|
|
$
|
(1,321
|
)
|
|
$
|
19,013
|
|
|
$
|
1,930
|
|
|
$
|
1,274
|
|
|
$
|
(2,465
|
)
|
|
$
|
1,004
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
100
|
|
|
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
101
|
|
|
|
100
|
|
|
|
101
|
|
|
|
101
|
|
|
|
76
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
Stock-based compensation
|
|
|
90
|
|
|
|
95
|
|
|
|
92
|
|
|
|
88
|
|
|
|
608
|
|
|
|
148
|
|
|
|
149
|
|
|
|
183
|
|
Non-recurring stock contribution to fund a charitable trust
established by the company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
|
|
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation reserve reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of adjustments(a)
|
|
|
(344
|
)
|
|
|
(479
|
)
|
|
|
(725
|
)
|
|
|
(889
|
)
|
|
|
378
|
|
|
|
(92
|
)
|
|
|
(2,388
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
585
|
|
|
$
|
815
|
|
|
$
|
1,236
|
|
|
$
|
1,513
|
|
|
$
|
1,292
|
|
|
$
|
1,405
|
|
|
$
|
1,497
|
|
|
$
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For the year ended December 31, 2009, the tax effect of
adjustments has been calculated on the assumption that the
$16,800 deferred tax asset valuation reserve reduction had taken
place prior to the commencement of such fiscal year, and a pro
forma effective tax rate of 37% was applied for such year. For
the year ended December 31, 2010, the tax effect was
determined on a quarterly basis using our effective tax rate for
the applicable quarter. |
|
|
|
(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 acquisition costs and one-time bonus payments incurred
in 2010. We use Adjusted Free Cash Flow as a measure of
liquidity because it assists us in assessing our 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 or one-time management bonuses associated with
the initial public offering, which reduced the cash available to
us;
|
|
|
Adjusted Free Cash Flow does not include acquisition costs;
|
|
|
Adjusted Free Cash Flow removes the impact of accrual basis
accounting on asset accounts and non-debt liability accounts; and
|
56
|
|
|
|
|
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,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(2,055
|
)
|
|
$
|
1,777
|
|
|
$
|
(34
|
)
|
|
$
|
4,813
|
|
|
$
|
462
|
|
|
$
|
3,104
|
|
|
$
|
(733
|
)
|
|
$
|
3,057
|
|
Purchase of property and equipment
|
|
|
(271
|
)
|
|
|
(191
|
)
|
|
|
(65
|
)
|
|
|
(158
|
)
|
|
|
(102
|
)
|
|
|
(277
|
)
|
|
|
(103
|
)
|
|
|
(350
|
)
|
Capitalization of software development costs
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
(125
|
)
|
|
|
(202
|
)
|
|
|
(220
|
)
|
|
|
(99
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
(2,326
|
)
|
|
|
1,586
|
|
|
|
(194
|
)
|
|
|
4,530
|
|
|
|
158
|
|
|
|
2,607
|
|
|
|
(935
|
)
|
|
|
2,580
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
100
|
|
|
|
3,023
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,888
|
|
|
|
|
|
Acquisition-related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Free Cash Flow
|
|
$
|
(2,326
|
)
|
|
$
|
1,686
|
|
|
$
|
2,829
|
|
|
$
|
4,596
|
|
|
$
|
158
|
|
|
$
|
2,607
|
|
|
$
|
4,953
|
|
|
$
|
2,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
21
|
|
|
|
22
|
|
|
|
21
|
|
|
|
19
|
|
|
|
21
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79
|
|
|
|
78
|
|
|
|
79
|
|
|
|
81
|
|
|
|
79
|
|
|
|
78
|
|
|
|
78
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
26
|
|
|
|
24
|
|
|
|
22
|
|
|
|
18
|
|
|
|
20
|
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
Sales and marketing
|
|
|
31
|
|
|
|
30
|
|
|
|
28
|
|
|
|
29
|
|
|
|
31
|
|
|
|
27
|
|
|
|
26
|
|
|
|
25
|
|
General and administrative
|
|
|
12
|
|
|
|
11
|
|
|
|
9
|
|
|
|
10
|
|
|
|
14
|
|
|
|
12
|
|
|
|
13
|
|
|
|
16
|
|
Management bonuses associated with initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
1
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
70
|
|
|
|
67
|
|
|
|
94
|
|
|
|
58
|
|
|
|
66
|
|
|
|
57
|
|
|
|
115
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
23
|
|
|
|
13
|
|
|
|
21
|
|
|
|
(37
|
)
|
|
|
14
|
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
9
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
23
|
|
|
|
30
|
|
|
|
21
|
|
|
|
(37
|
)
|
|
|
14
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
(11
|
)
|
|
|
(9
|
)
|
|
|
14
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
9
|
%
|
|
|
11
|
%
|
|
|
(15
|
)%
|
|
|
196
|
%
|
|
|
19
|
%
|
|
|
12
|
%
|
|
|
(23
|
)%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues increased sequentially in each of the quarters
presented primarily due to the increase in the number of total
customers.
Gross profit, in absolute dollars, also increased sequentially
for the quarters presented, except for a slight decrease in the
fourth quarter of 2010 as compared to the prior quarter,
primarily due to revenue growth.
Total operating expenses, in absolute dollars, have generally
increased over the eight quarters presented, while the quarterly
fluctuations have been as a result of timing of capitalization
of software development costs, 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 $5.9 million in lieu of issuing shares
of common stock under the plan. We incurred compensation expense
for such bonuses in the quarter ending September 30, 2010.
As a result, total operating expenses for such quarter increased
significantly and income from operations for such quarter
decreased significantly, each as compared to prior quarters.
Liquidity
Net Cash
Flows from Operating Activities
Net cash provided by operating activities was $5.9 million
during 2010, $4.5 million during 2009 and $6.6 million
during 2008. 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 as our new business sales
normally fluctuate quarterly, primarily due
58
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 $45 million during 2010,
$38 million during 2009 and $36 million during 2008.
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. In addition, in 2010
we paid one-time bonuses in the amount of $5.9 million to
our executives in the third quarter in connection with our
initial public offering. The cash expenditures for employee
salaries, including incentive payments, were approximately
$27 million during 2010, $20 million during 2009 and
$18 million during 2008.
For 2010, net cash provided by operating activities of
$5.9 million was primarily the result of $1.7 million
of net income plus $1.1 million of stock-based
compensation, a $3.9 million increase in deferred revenue
and a $0.9 million decrease in deferred taxes, less a
$1.7 million gain on the sale of warrants.
For 2009, net cash provided by operating activities of
$4.5 million was primarily the result of $19.4 million
of net income, plus 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
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
$6.6 million was primarily a result of $1.1 million of
net income, plus 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.
Our deferred revenues were $38.2 million at
December 31, 2010 and $34.3 million at
December 31, 2009. The increase in deferred revenues
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 December 31, 2010, we had net operating loss
carryforwards of approximately $194 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 fiscal year ended December 31, 2010, net cash used
by investing activities was $19.4 million, consisting of
the purchase of $20.0 million of short-term investments,
various capital expenditures of $0.8 million and
capitalization of $0.6 million of software development
costs, offset by proceeds from the sale of warrants of
$1.7 million and 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 expected 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
59
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
Flows from Financing Activities
For the fiscal year ended December 31, 2010, net cash
provided by financing activities was $13.9 million,
consisting primarily of $53.0 million in proceeds from our
public offering net of underwriting discounts, offset by
$2.4 million expenditures for public offering costs, a
$36.2 million payment for the redemption of all outstanding
preferred stock, and a $0.4 million repayment of our line
of credit. 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 from the issuance of preferred stock and the
issuance of common stock under the 2004 Stock Incentive Plan.
Line of
Credit
During 2010, we 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, 2009 and 2010, 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
formal agreements or commitments with respect to any
acquisitions at this time.
We believe our cash and cash equivalents, the proceeds from our
initial public 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.
60
Contractual
and Commercial Commitment Summary
The following table summarizes our contractual obligations as of
December 31, 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
|
|
$
|
5,645
|
|
|
$
|
668
|
|
|
$
|
2,075
|
|
|
$
|
1,832
|
|
|
$
|
1,070
|
|
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.
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, 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 cash flow from
operations 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 cash flow from operations is lowest in
our first quarter, and due to the timing of client budget
cycles, our cash flow from operations is lower in our third
quarter as compared to our second 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.
Recent
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 financial position,
results of operations or cash flows.
In October 2009, the Financial Accounting Standards Boards
Emerging Issues Task Force revised its guidance on revenue
recognition for multiple-deliverable revenue arrangements. The
amendments in this guidance 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
61
guidance will allow the use of an estimated selling price if
neither VSOE nor third-party evidence is available. The guidance
will require additional disclosures of information about an
entitys multiple-deliverable arrangements. The
requirements of the guidance 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 do not expect the adoption of
this guidance to have a material impact on our financial
position, results of operations or cash flows.
62
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. As of December 31,
2010, we serve 195 customers operating in 14 countries and
offer our solution in five languages and 22 currencies. In
addition, as a result of our January 2011 acquisition of
AECsoft, we have added more than 100 additional customers
operating in four countries. Our value proposition has led to an
average annual customer renewal rate, on a dollar basis, of
approximately 100% over the last three fiscal years. 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. In September 2010, we
completed an initial public offering of our common stock,
raising net proceeds of approximately $51 million prior to
the redemption of our outstanding preferred stock for
$36 million.
In January 2011, we acquired all of the capital stock of
AECsoft, which is a leading provider of supplier management and
sourcing technology. AECsofts technology will be
incorporated into our product offering as new Total Supplier
Manager, Sourcing Director and Supplier Diversity Manager
modules. AECsoft will also provide increased functionality for
some of our preexisting modules. The purchase price consisted of
approximately $9 million in cash and 350,568 shares of
our common stock. The issuance of 25,365 of these shares is
subject to successful completion of certain performance targets
under an earn-out arrangement with a former shareholder of
AECsoft. Additionally, 299,838 shares of our common stock
may be issued under an earn-out arrangement with the former
shareholders of AECsoft, based on successful achievement of
certain performance targets over the next three fiscal years and
continued employment with us. The shares will be recognized as
compensation expense in the statement of operations over the
requisite service period of the award. The performance targets
relate to the amount of revenue we recognize from AECsofts
products and services during each of 2011, 2012 and 2013. If the
performance conditions are met in full, we will issue
121,951 shares of common stock on or about March 31,
2012, 121,951 shares of common
63
stock on or about March 31, 2013 and 81,301 shares of
common stock on or about March 31, 2014. The purchase price
included $1.275 million in cash and 103,659 shares of
common stock that have been deposited in escrow to satisfy
potential indemnification claims. The purchase price is subject
to adjustment based on the level of AECsofts cash and cash
equivalents and certain other items as of the closing date.
Our revenues have grown to $42.5 million in 2010 from
$29.8 million in 2008, and our Adjusted Free Cash Flow
increased to $10.6 million in 2010 from $6.0 million
in 2008 (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
2008, 2009 or 2010. 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 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:
|
|
|
|
|
identify which suppliers have the required goods and services;
|
|
|
negotiate purchasing or contractual relationships;
|
|
|
establish a mechanism to transact business;
|
|
|
find, compare, approve and order the necessary goods and
services;
|
|
|
receive, inspect and pay for the goods and services; and
|
|
|
analyze spending for potential savings and contract compliance.
|
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.
64
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:
|
|
|
|
|
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 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.
|
|
|
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.
|
|
|
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.
|
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:
|
|
|
|
|
are implemented on-premise, and thus are expensive to deploy and
maintain;
|
|
|
are generalized horizontal market solutions with limited
industry-specific supplier participation, content and
functionality;
|
|
|
require each organization to have its own customized
one-to-one
connections to each supplier; and
|
|
|
lack managed service capabilities to enable suppliers.
|
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
65
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 our customers to over 30,000 unique suppliers.
Our solution provides the following key benefits:
|
|
|
|
|
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 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).
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
Visibility into suppliers. Our solution provides
customers with greater insight into their supplier base by
identifying supplier data and qualities, such as supplier
capabilities and diversity qualifications, that may impact
purchasing decisions.
|
|
|
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.
|
66
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:
|
|
|
|
|
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 27% compound annual growth
rate in the average transaction volume by customers through our
system over the last four 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, on a dollar basis, of
approximately 100% over the last three fiscal years.
|
|
|
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.
|
|
|
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 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.
|
|
|
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 75% in 2010.
|
|
|
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.
|
Our
Growth Strategy
We seek to become the leading provider of strategic procurement
solutions for indirect goods and services. Our key strategic
initiatives include:
|
|
|
|
|
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 primarily
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
|
67
|
|
|
|
|
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.
|
|
|
|
|
|
Capitalizing on cross-selling opportunities into our
installed customer base. As of December 31, 2010, our
solution was being used by 195 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. In
addition, we intend to leverage our acquisition of AECsoft by
selling our full procurement software suite to AECsoft customers
as well as selling the new AECsoft modules to our existing and
prospective customers.
|
|
|
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 existing solution and
broaden our solution offerings. For example, in January 2011, we
acquired AECsoft which is a leading provider of supplier
management and sourcing technology. We also may pursue
acquisitions that allow us to expand into new verticals or
geographies where we do not have a significant presence.
|
|
|
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. In addition,
AECsoft has customers in other vertical markets that may
represent opportunities for our vertical market expansion.
|
|
|
Investing in international expansion to acquire new
customers. We believe that the market outside the United
States offers us significant growth potential. As of
December 31, 2010, we have customers operating in 14
countries and offer our solution in five languages and 22
currencies, although many of our international sales have
consisted of sales to multinational organizations with
operations 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.
|
68
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.
69
The following table provides an overview of the modules of our
solution (modules indicated by * incorporate
technology acquired from AECsoft):
|
|
|
|
|
|
Module
|
|
|
Key Features
|
Sourcing Director*
|
|
|
|
|
Manages and expedites the bid creation process
|
|
|
|
|
|
Provides ability to create auctions, invite supplier
participants and monitor and control the reverse auction process
in real-time
|
|
|
|
|
|
Provides self-service access for registered suppliers to view
events, enter responses, review award decisions and manage their
own profiles
|
|
|
|
|
|
Allows buyers to post Requests for Proposal, or RFPs, online
|
|
|
|
|
|
Supports response and scoring for post-RFP analysis
|
|
|
|
|
|
|
Spend Director
|
|
|
|
|
Enables a critical mass of suppliers
|
|
|
|
|
|
Promotes preferred suppliers
|
|
|
|
|
|
Provides an intuitive procurement user environment
|
|
|
|
|
|
Provides visibility into spending
|
|
|
|
|
|
Enhances visibility into contract spending and compliance,
including comparison of contract budget versus contract spending
|
|
|
|
|
|
|
Requisition Manager
|
|
|
|
|
Creates and submits error-free requisitions electronically
|
|
|
|
|
|
Previews approval workflow and tracks requisitions online
|
|
|
|
|
|
Routes requisitions electronically based on any requisition
attribute
|
|
|
|
|
|
Provides buyers and managers flexible approval options and 24/7
remote access
|
|
|
|
|
|
Consolidates requisitions to minimize shipping fees and maximize
discounts
|
|
|
|
|
|
Analyzes requisition data to identify savings opportunities and
audit contract compliance
|
|
|
|
|
|
|
Order Manager
|
|
|
|
|
Exchanges purchase documents electronically and securely with
suppliers
|
|
|
|
|
|
Manages purchase documents automatically, eliminating paper
processes
|
|
|
|
|
|
Communicates order status to requisitioners electronically
|
|
|
|
|
|
Tracks order status automatically with participating suppliers
|
|
|
|
|
|
Integrates directly with SciQuest Requisition Manager or
existing ERP and financial systems
|
|
|
|
|
|
Analyzes order data to identify saving opportunities
|
|
|
|
|
|
|
Settlement Manager
|
|
|
|
|
Integrates order/receipt/invoice data
|
|
|
|
|
|
Automates receipt creation
|
|
|
|
|
|
Supports automated matching of invoices with purchase orders
and/or receipts
|
|
|
|
|
|
Streamlines invoice management
|
|
|
|
|
|
Avoids error-prone manual data entry
|
|
|
|
|
|
|
70
|
|
|
|
|
|
Module
|
|
|
Key Features
|
Supplier Contract Management and Authoring
|
|
|
|
|
Creates a central repository to track contract information, such
as pricing terms and expiration and renewal dates
|
|
|
|
|
|
Enables contract authoring by using pre-defined contract
templates
|
|
|
|
|
|
Records contract history, including change orders, approvals and
addendums
|
|
|
|
|
|
Tracks potential contract issues and resolution details
|
|
|
|
|
|
Enables RFP and contract management collaboration, including
document redlining during contract negotiation phase
|
|
|
|
|
|
|
Total Supplier Manager*
|
|
|
|
|
Creates an online, centralized repository of all suppliers
|
|
|
|
|
|
Provides insights into supplier capabilities during the initial
registration process by incorporating commodity/category
specific information
|
|
|
|
|
|
Automates supplier setup processes to help migrate suppliers
from prospect to active status
|
|
|
|
|
|
Identifies and classifies diverse suppliers and appends
additional industry codes
|
|
|
|
|
|
Supports collection and validation of insurance certificates and
other risk-related documentation
|
|
|
|
|
|
Collects and reports on supplier compliance and sustainability
information
|
|
|
|
|
|
|
Supplier Diversity Manager*
|
|
|
|
|
Enables prospective suppliers to register and be listed in
organization-wide diversity directory
|
|
|
|
|
|
Tracks suppliers diversity certifications and expiration
dates
|
|
|
|
|
|
Automates communications regarding diversity certification
notifications or expirations
|
|
|
|
|
|
Identifies and classifies diverse suppliers within the vendor
master directory
|
|
|
|
|
|
Enables searching for diverse suppliers from over 300 databases
using dynamic ranking and scoring
|
|
|
|
|
|
Supports 2nd tier (subcontractor) reporting of direct, indirect
or project-based sub spends
|
|
|
|
|
|
|
Materials Management
|
|
|
|
|
Provides comprehensive, stockroom-level inventory management,
reducing backorders and stockouts
|
|
|
|
|
|
Integrates available onsite inventory with product searches to
avoid redundant purchases
|
|
|
|
|
|
Maintains trusted inventory count
|
|
|
|
|
|
Manages multiple inventory locations
|
|
|
|
|
|
Controls user access to inventory
|
|
|
|
|
|
|
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 for a
multi-module sale 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.
71
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 $7 billion in 2010. 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.
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
72
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
As of December 31, 2010, we serve 195 customers
operating in 14 countries and offer our solution in five
languages and 22 currencies. As of December 31, 2010, we
had over 120,000 active users of our solution within our
customer organizations. In 2008, 2009 and 2010, 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
2008, 2009 and 2010. Our ten largest customers accounted for no
more than 25% of our total revenues in 2009 or 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 130 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 36 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 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.
73
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, Sanofi-Aventis, The Scripps
Research Institute
|
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
|
In addition to the customers discussed above, we have added more
than 100 additional customers as a result of our AECsoft
acquisition. AECsofts customer base spans multiple
vertical markets, including markets that we have not previously
pursued. As we integrate AECsoft into our operations, we intend
to evaluate AECsofts customer base to identify
opportunities to further our expansion into new vertical
markets. We also intend to leverage our acquisition of AECsoft
by selling our full procurement software suite to AECsoft
customers as well as selling the new AECsoft modules to our
existing and prospective customers.
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;
|
74
|
|
|
|
|
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.
|
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.
75
As of December 31, 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 innovative solutions. The 2011
NextLevel conference was attended by approximately 400
customers, prospects, suppliers, partners and other attendees.
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.
76
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 solutions are 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.
The multi-tenant, on-demand applications 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 solutions have 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 paid 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.
The AECsoft technology has been developed using the
Microsoft.Net architecture and SQL Server database management
system. The AECsoft products are hosted in a data center located
in Houston, Texas that is comparable to our data center
facilities.
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
enhancements 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
77
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 December 31, 2010, our product development
organization consisted of 60 employees.
Our research and development expenses were $8.3 million,
$8.1 million and $8.4 million in 2008, 2009 and 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 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 two issued U.S. patents (which expire in 2023 and
2026, respectively), 14 pending U.S. patent applications
and one pending foreign patent application. 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 45,000 square feet
of office space. This lease expires in January 2017. We also
maintain an office in Newtown
78
Square, Pennsylvania, where we currently lease approximately
5,500 square feet of space. This lease expires in February
2016. In connection with our acquisition of AECsoft, we have
also assumed a lease for approximately 3,400 square feet of
office space in Houston, Texas. This lease expires in December
2013.
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 December 31, 2010, we had 192 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 December
1999 initial public offering contained material misstatements or
omissions regarding the underwriters allocation practices
and compensation and that the 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,
2009 and 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.
79
MANAGEMENT
Executive
Officers and Directors
The following table sets forth the names, ages and positions of
our executive officers and directors as of March 1, 2011:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Stephen J. Wiehe
|
|
|
47
|
|
|
President, Chief Executive Officer and Director
|
Rudy C. Howard
|
|
|
53
|
|
|
Chief Financial Officer
|
James B. Duke
|
|
|
47
|
|
|
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)
|
|
|
64
|
|
|
Director
|
Jeffrey T. Barber(1)
|
|
|
58
|
|
|
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 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 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
80
with PricewaterhouseCoopers. Mr. Howard holds a B.A. in
Accounting from North Carolina State University, and he is a
Certified Public Accountant.
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
81
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 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 and
is 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 are divided among the
three classes as follows:
|
|
|
|
|
The Class I directors are Messrs. Buckley and Gillis
and their terms will expire at the annual meeting of
stockholders to be held in 2011;
|
|
|
The Class II directors are Messrs. Barber and Wiehe
and their terms will expire at the annual meeting of
stockholders to be held in 2012; and
|
|
|
The Class III director is Mr. Fenton and his term will
expire at the annual meeting of stockholders to be held in 2013.
|
82
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.
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. Fenton, Gillis, Barber
and Buckley.
Board
Committees
Audit
Committee
The audit committee oversees our corporate accounting and
financial reporting processes. The audit committee will also:
|
|
|
|
|
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;
|
|
|
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;
|
|
|
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;
|
|
|
review our financial statements and review our critical
accounting policies and estimates; and
|
|
|
prepare the audit committee report that SEC rules require to be
included in our annual proxy statement and annual report on
Form 10-K.
|
The current members of the audit committee are
Messrs. Barber, Buckley and Fenton. Mr. Barber serves
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 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 NASDAQ
and SEC rules and regulations. We intend to comply with future
requirements to the extent they become applicable to us.
Copies of the charter for our audit committee are 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 Compensation Discussion and Analysis section of
this prospectus.
83
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 NASDAQ. Mr. Gillis
serves as the chairman of the compensation committee. The
composition of the compensation committee meets the requirements
for independence under current NASDAQ 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 NASDAQ and SEC rules and
regulations. We intend to comply with future requirements to the
extent they become applicable to us.
Copies of the charter for our compensation committee are
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 Governance Committee
The nominating and governance committee oversees and assists our
board of directors in reviewing and recommending nominees for
election as directors. The nominating and governance committee
will also:
|
|
|
|
|
assess the performance of the members of our board of directors;
|
|
|
oversee guidelines for the composition of our board of
directors; and
|
|
|
review and administer our corporate governance principles.
|
The current members of the nominating and 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 NASDAQ. Mr. Fenton
serves as the chairman of the nominating and governance
committee. The compensation of the nominating and governance
committee meets the requirements for independence under current
NASDAQ and SEC rules and regulations. Our board of directors has
adopted a nominating and governance committee charter. We
believe that the nominating and governance committee charter and
the functioning of the nominating and governance committee
comply with the applicable requirements of NASDAQ and SEC rules
and regulations. We intend to comply with future requirements to
the extent they become applicable to us.
Copies of the charter for our nominating and governance
committee are 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:
|
|
|
|
|
Annual retainer
|
|
$
|
20,000
|
|
In-person board of directors and committee meeting fees
|
|
$
|
2,000
|
|
Telephonic board of directors and committee meeting fees
|
|
$
|
500
|
|
Audit committee chair retainer
|
|
$
|
10,000
|
|
Compensation committee chair retainer
|
|
$
|
5,000
|
|
Nominating and corporate governance committee chair retainer
|
|
$
|
5,000
|
|
Initial grant of stock options
|
|
|
22,500
|
|
Annual grant of stock options
|
|
|
13,750
|
|
84
Prior to 2010, we did not pay 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 director and committee meetings.
The following table sets forth information regarding
compensation earned by our non-employee directors during 2010:
Director
Compensation Table for Year Ended December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or Paid
|
|
|
|
|
|
|
Name
|
|
in Cash
|
|
Stock Awards(1)
|
|
Option Awards(2)
|
|
Total
|
|
Jeffrey T. Barber
|
|
$
|
42,000
|
|
|
|
|
|
|
$
|
148,725
|
|
|
$
|
190,725
|
|
Timothy J.Buckley
|
|
$
|
30,000
|
|
|
|
|
|
|
$
|
148,725
|
|
|
$
|
178,725
|
|
Noel J. Fenton
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
$
|
35,000
|
|
Daniel F. Gillis
|
|
$
|
34,000
|
|
|
$
|
27,650
|
|
|
|
|
|
|
$
|
61,650
|
|
|
|
|
(1) |
|
These amounts reflect the fair value of the stock award as of
the date of grant. |
|
(2) |
|
These amounts reflect the fair value of the option award as of
the date of grant. |
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, employee or 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 is 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.
85
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The following is a discussion and analysis of the compensation
arrangements for our named executive officers for 2010 as well
as the actions taken in 2011 that affect the current and future
compensation of our named executive officers. Our named
executive officers for 2010 were Stephen Wiehe, our President
and Chief Executive Officer, James Duke, our Chief Operating
Officer, Rudy Howard, our Chief Financial Officer, Jeffrey
Martini, our Senior Vice President of Worldwide Sales, and
Gamble Heffernan, our Vice President of Marketing and Strategy.
Compensation
Objectives
Our compensation committees primary objectives with
respect to executive compensation are to:
|
|
|
|
|
attract, motivate, reward and retain high quality executives
necessary to formulate and execute our business strategy;
|
|
|
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;
|
|
|
build a strong link between an individuals performance and
his or her compensation; and
|
|
|
further align the interests of management with our stockholders
by providing equity incentive compensation.
|
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.
Compensation
Process
General. 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. 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.
2010 Compensation Process. Our historical executive
compensation programs through 2010 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 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 have been
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.
In January 2010, our chief executive officer provided 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 contained the chief executive
officers recommendations for base salaries, bonuses and
86
equity awards for each named executive officer. The compensation
committee then deliberated and made compensation determinations
for the named executive officers, which generally consisted of
the chief executive officers recommendations with some
modifications. During this deliberation, the compensation
committee evaluated 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 review of other pay practices of comparable public
companies. The review of other pay practices consisted 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. Our chief executive officer participated in the
compensation committees deliberations with respect to the
other named executive officers, but he was not present when the
compensation committee deliberated and determined his own
compensation.
2011 Compensation Process. Commencing in 2011, our
compensation committee began formalizing its approach to the
development and implementation of our executive compensation
program. Following our initial public offering, the compensation
committee believes that it has been important to review the
executive compensation practices of other public companies that
are similar in business and size to us to ensure that our
executive compensation program is consistent with those
practices.
In establishing executive compensation levels for 2011, the
compensation committee developed a peer group comprised solely
of
U.S.-based
publicly traded companies that generally have a SaaS business
model and that are similar in size to our company based on
revenue and market capitalization. We refer to this peer group
as the 2011 Peer Group. In establishing the 2011 Peer Group, the
compensation committee selected those companies that it believes
are used by investors and securities analysts to value our
company and otherwise measure our performance, excluding the
companies that have only recently become publicly traded and
therefore had not disclosed compensation data since their
initial public offering. The 2011 Peer Group consists of
athenahealth Inc., Concur Technologies Inc., Constant Contact,
Inc., DealerTrack Holdings, Inc., DemandTec, Inc., Kenexa
Corporation, NetSuite Inc. Omniture, Inc., RightNow
Technologies, Inc., Salary.com, Inc., SuccessFactors, Inc.,
Taleo Corporation, The Ultimate Software Group, Inc. and Vocus,
Inc.
The median revenue of the 2011 Peer Group was $194 million
for the most recently completed fiscal year for which executive
compensation was available and the median market capitalization
of the 2011 Peer Group was $1,195 million as of
January 17, 2011. The compensation committee recognized
that most companies within the 2011 Peer Group are larger than
us with respect to revenue and market capitalization and took
those disparities into account when determining compensation
levels, as discussed below. The compensation committee intends
to review the peer group composition annually.
The compensation committee based its review of executive
compensation levels on benchmark data from the 2011 Peer Group
for base salary, annual cash incentive bonuses and equity awards
provided by Equilar, an information services firm with products
focused on analyzing and benchmarking executive and director
compensation. Equilar draws data from proxy statements and
reports filed with the Securities and Exchange Commission.
Although the compensation committee is authorized to retain an
independent compensation consultant, it believes that with its
subscription to the Equilar database it can rely on our
management to gather data and present information to the
compensation committee in a more cost-efficient manner.
Accordingly, in January 2011, our chief executive officer
provided a report to the compensation committee with respect to
the relevant compensation data for the 2011 Peer Group for each
named executive officer together with a summary of such
officers performance in the prior year, including his or
her achievement of bonus criteria.
Determining
Market Levels and Impact on Compensation Decisions
Our compensation program seeks to provide competitive total
compensation to each of our named executive officers while
taking into account the unique requirements and skills of each
of our named executive officers. Our compensation committee
compared our compensation practices and levels by each
compensation component
87
described below. The purpose of this analysis is to determine
whether the compensation offered to each named executive
officer, both in its totality and with respect to each of the
constituent components, is competitive with the applicable
market comparables that the compensation committee has reviewed
for the corresponding period.
Because the companies in the 2011 Peer Group are generally
larger than us with respect to revenues and market
capitalization, the compensation committee generally considered
2011 compensation to be competitive for our named executive
officers if total compensation approximated the
25th percentile of compensation offered by the 2011 Peer
Group. Where total compensation or a specific component of
compensation does not approximate this target, the compensation
committee used the competitive data as a factor for its
compensation determination but may have also taken into account
factors specific to a named executive officer in making its
final compensation decisions, including each named executive
officers position and functional role, seniority,
performance and overall level of responsibility.
Compensation
Components
The primary elements of our executive compensation program are:
|
|
|
|
|
base salary;
|
|
|
annual cash incentive bonuses;
|
|
|
equity incentive awards; and
|
|
|
insurance and other employee benefits and compensation.
|
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 benchmark data from the 2011
Peer Group, 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 2010, our named executive officers received salary increases
ranging from approximately 3% to 5% as compared to 2009. In
January 2011, our named executive officers received salary
increases from approximately 4% to 17% as compared to 2010. The
larger percentage increases for 2011 represent an adjustment
based on the compensation committees analysis of the 2011
Peer Group data now that we are a public company.
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.
88
Each executives bonus is based on a target bonus amount
and the achievement of bonus criteria, which historically have
been 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.
The compensation committee did not set the bonus criteria for
2010 at its January meeting, other than for Mr. Martini.
Rather than specifying certain quantitative metrics at the
beginning of the fiscal year as bonus criteria for each named
executive officer and assigning a specific weighting of the
bonus criteria to each metric, the compensation committee
determined to examine each named executive officers
performance after the conclusion of the fiscal year in light of
multiple metrics that it determines to be relevant to that
officers performance and then determine the bonus amount
based on the entirety of their performance. It was determined
that Mr. Martinis bonus would continue to be
determined based solely on sales commissions.
For 2010, when a component of the bonus criteria is
quantitative, the full targeted bonus amount attributable to
that component was paid if the performance fell between 90% and
110% of the targeted goal. If performance exceeded 110% of the
goal, 150% of the target bonus amount attributable to that
component was paid. If performance was less than 75% of the
goal, no bonus amount attributable to that component was paid.
If performance was between 75% and 90% of the goal, then the
bonus amount attributable to that component was 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 2010 was $150,000,
and he received a bonus of $168,750, representing 113% of his
target. In determining the bonus amount, the compensation
committee noted that 2010 revenues of $42.5 million
exceeded our budgeted revenues of $42.4 million, 2010
Adjusted Net Income of $5.5 million exceeded our budgeted
Adjusted Net Income of $4.5 million by approximately 20%,
2010 Adjusted Free Cash Flow of $10.6 million exceeded our
budgeted Adjusted Free Cash Flow of $10.5 million by
approximately 1% and all customer satisfaction levels exceeded
their targets by at least 4%. The compensation committee further
noted our successful initial public offering in 2010 and the
instrumental role of Mr. Wiehe in that success.
Mr. Howards target bonus amount for 2010 was $84,000,
and he received a bonus of $94,500, representing 113% of his
target. In determining the bonus amount, the compensation
committee noted that 2010 revenues of $42.5 million
exceeded our budgeted revenues of $42.4 million, 2010
Adjusted Net Income of $5.5 million exceeded our budgeted
Adjusted Net Income of $4.5 million by approximately 20%,
2010 Adjusted Free Cash Flow of $10.6 million exceeded our
budgeted Adjusted Free Cash Flow of $10.5 million by
approximately 1% and all customer satisfaction levels exceeded
their targets by at least 4%. The compensation committee further
noted our successful initial public offering in 2010 and the
instrumental role of Mr. Howard in that success.
For further discussion of Adjusted Net Income and a
reconciliation of Adjusted Net Income 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.
Mr. Dukes target bonus amount for 2010 was $125,000,
and he received a bonus of $141,250, representing 113% of his
target. In determining the bonus amount, the compensation
committee noted that all customer satisfaction level exceeded
their target by at least 4%, that all production availability
goals had been met and that all billable hour targets had all
been exceeded.
89
Mr. Martinis target bonus amount for 2010 was
$285,000, and he received a bonus of $292,846, representing 103%
of his target. Mr. Martinis bonus was based solely on
sales commissions based on bookings.
Ms. Heffernans target bonus amount for 2010 was
$64,750, and she received a bonus of $64,750, representing 100%
of her target. In determining the bonus amount, the compensation
committee determined that Ms. Heffernans bonus should
be based largely on bookings and noted that our company had met
its budgeted bookings.
For 2011, the compensation committee established target bonus
amounts for the named executive officers as follows:
|
|
|
|
|
Stephen J. Wiehe
|
|
$
|
250,000
|
|
Rudy C. Howard
|
|
$
|
120,000
|
|
James B. Duke
|
|
$
|
160,000
|
|
Jeffrey A. Martini
|
|
$
|
260,000
|
|
C. Gamble Heffernan
|
|
$
|
67,500
|
|
The compensation committee also determined to establish more
specific bonus criteria than it had used for the 2010 bonuses.
Mr. Wiehes bonus criteria were established as
follows: 25% based on attainment of our budgeted revenues of
$54.0 million, 25% based on attainment of targeted Adjusted
Net Income per share of $0.045, 25% based on attainment of
targeted Adjusted Free Cash Flow of $13.0 million and 25%
based on attainment of targeted customer satisfaction levels.
Mr. Howards bonus criteria were established as
follows: 25% based on attainment of our budgeted revenues of
$54.0 million, 25% based on attainment of targeted Adjusted
Net Income per share of $0.045, 25% based on attainment of
targeted Adjusted Free Cash Flow of $13.0 million and 25%
based on attainment of targeted customer satisfaction levels.
Mr. Dukes bonus criteria were established as follows:
35% based on attainment of targeted customer satisfaction
levels, 30% based on attainment of system availability goals and
35% based on attainment of professional services utilization
goals. Mr. Martinis bonus consists solely of sales
commissions based on bookings. Ms. Heffernans bonus
will be based solely on the extent to which our company meets
its budgeted bookings.
The compensation committee further determined that (i) 100%
achievement by an individual of his or her bonus criteria would
result in 100% of the bonus being paid, (ii) less than 100%
achievement by an individual of his or her bonus criteria would
result in the bonus amount being determined by the compensation
committee in its discretion, and (iii) greater than 100%
achievement by an individual of his or her bonus criteria would
result in 100% of the bonus being paid plus such additional
amounts as may determined by the compensation committee in its
discretion. Any amounts determined by the compensation committee
in its discretion due to overachievement or underachievement of
bonus criteria are generally expected to correlate to the extent
of such overachievement or underachievement. The bonus criteria,
in particular those consisting of bookings, revenues, Adjusted
Net Income and Adjusted Free Cash Flow, are subject to equitable
adjustment in the event of any subsequent acquisitions in 2011.
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 a
limited number of non-executive employees 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
90
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.
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 initial
equity awards provide that one-quarter of the award vests on the
first anniversary of the hire 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. Prior to our
initial public offering, equity awards were typically made twice
a year, in January and July. Since our initial public offering,
we typically grant annual equity awards in January and equity
awards to new hires promptly following commencement of
employment.
In 2011, our compensation committee recommended, and our board
approved, additional stock option grants to the named executive
officers. These grants were intended to ensure that the equity
holdings of each named executive officer, as a percentage of our
outstanding common stock, are at competitive levels as compared
to the 2011 Peer Group.
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. Prior to our initial public offering, the fair value of
our common stock was determined by our board of directors, based
in large part on third-party valuations. Since our initial
public offering, the fair value of our common stock is
determined by reference to the closing price of our common stock
on the date of grant.
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 or February of each
year. In general, 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
generally equals 25% of that individuals initial equity
award at their time of employment. Vesting is in 48 successive
equal monthly installments.
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 could 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
91
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 were 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 the initial public
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 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 established an aggregate bonus pool of $5,888,044 by
calculating the aggregate initial value of the shares that would
have been issued under the Exit Event Bonus Plan assuming a per
share price for our common stock of $14.18. Under the Exit Event
Bonus Plan, this assumed initial public offering price would
have resulted in the issuance of approximately
415,000 shares of our common stock, which at such price
would have an aggregate value equal to the established bonus
pool of $5,888,044. We believed that this assumed price was
appropriate to reflect both the value of our common stock at the
time of the initial public offering 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 were 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 individual bonus amounts paid to our named executive
officers upon the initial public offering in September 2010 were
as follows:
|
|
|
|
|
Stephen J. Wiehe
|
|
$
|
2,237,457
|
|
James B. Duke
|
|
$
|
1,236,489
|
|
Jeffrey A. Martini
|
|
$
|
1,236,489
|
|
C. Gamble Heffernan
|
|
$
|
294,402
|
|
Rudy C. Howard
|
|
$
|
88,321
|
|
Change of
Control Benefits
Pursuant to change of control agreements and our stock incentive
plan, 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
92
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 received restricted
stock awards paid the purchase price for such shares by
executing promissory notes for such amount, which notes were
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 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) and Jeffrey Martini ($149,345). 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.
93
Summary
Compensation Table
The following table provides information regarding the
compensation earned in 2010 and 2009 by our named executive
officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus(1)
|
|
Awards(2)
|
|
Awards(3)
|
|
Compensation(4)
|
|
Total(1)
|
|
Stephen J. Wiehe
|
|
|
2010
|
|
|
$
|
350,000
|
|
|
$
|
2,406,207
|
|
|
$
|
68,196
|
|
|
|
|
|
|
$
|
417,551
|
|
|
$
|
3,241,954
|
|
President, Chief
|
|
|
2009
|
|
|
$
|
338,000
|
|
|
$
|
145,688
|
|
|
$
|
79,286
|
|
|
|
|
|
|
$
|
40,939
|
|
|
$
|
603,913
|
|
Executive Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rudy C. Howard
|
|
|
2010
|
|
|
$
|
240,000
|
|
|
$
|
182,821
|
|
|
|
|
|
|
$
|
285,238
|
|
|
$
|
2,500
|
|
|
$
|
710,559
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Duke
|
|
|
2010
|
|
|
$
|
245,000
|
|
|
$
|
1,377,739
|
|
|
$
|
39,224
|
|
|
|
|
|
|
$
|
271,465
|
|
|
$
|
1,933,428
|
|
Chief Operating Officer
|
|
|
2009
|
|
|
$
|
234,000
|
|
|
$
|
119,091
|
|
|
$
|
74,429
|
|
|
|
|
|
|
$
|
2,500
|
|
|
$
|
430,020
|
|
Jeffrey A. Martini
|
|
|
2010
|
|
|
$
|
192,500
|
|
|
$
|
1,529,335
|
|
|
$
|
16,391
|
|
|
|
|
|
|
$
|
151,845
|
|
|
$
|
1,890,071
|
|
Senior Vice President
|
|
|
2009
|
|
|
$
|
185,000
|
|
|
$
|
213,118
|
|
|
$
|
43,552
|
|
|
|
|
|
|
$
|
2,500
|
|
|
$
|
444,170
|
|
of Worldwide Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Gamble Heffernan
|
|
|
2010
|
|
|
$
|
200,000
|
|
|
$
|
359,152
|
|
|
|
|
|
|
|
|
|
|
$
|
2,500
|
|
|
$
|
561,652
|
|
Vice President of
|
|
|
2009
|
|
|
$
|
195,000
|
|
|
$
|
62,511
|
|
|
|
|
|
|
$
|
102,138
|
|
|
$
|
2,500
|
|
|
$
|
358,816
|
|
Marketing and Strategy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2010, this consists of management cash bonuses upon the
initial public offering, paid in lieu of issuing shares of
common stock under the Exit Event Bonus Plan and cash bonuses
paid under our annual discretionary cash incentive bonus
program. See the Executive Compensation
Compensation Discussion and Analysis Exit Event
Bonus Plan section of this prospectus and the
Executive Compensation Compensation Discussion
and Analysis Annual Bonuses section of this
prospectus for a description of these programs. For bonuses
earned in 2010, $2,237,457 of Mr. Wiehes bonus was
paid in 2010, $88,321 of Mr. Howards bonus was paid
in 2010, $1,236,489 of Mr. Dukes bonus was paid in
2010, $1,398,644 of Mr. Martinis bonus was paid in
2010 and $294,402 of Ms. Heffernans bonus was paid in
2010, all other bonuses earned in 2010 were paid in January 2011. |
|
|
|
For 2009, this consists of cash bonuses paid under our annual
discretionary cash incentive bonus program. See the
Executive Compensation Compensation Discussion
and Analysis Annual Bonuses section of this
prospectus for a description of this program. For bonuses earned
in 2009, $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 2010, Mr. Wiehe, Mr. Duke and
Mr. Martini were issued 43,162, 24,825 and
10,374 shares of restricted stock, respectively, at a
purchase price of $2.26 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, as determined by
an outside valuation expert and approved by our board of
directors. This reflects the fair value of the restricted stock
awards. |
|
|
|
In January 2009, Mr. Wiehe, Mr. Duke and
Mr. Martini were issued 47,017, 47,017 and
27,427 shares of restricted stock, respectively, at a
purchase price of $2.04 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, as determined by
an outside valuation expert and approved by our board of
directors. This reflects the fair value of the restricted stock
awards. |
|
(3) |
|
In January 2010, Mr. Howard was issued 156,724 stock
options at an exercise price of $2.26 per share. The stock
options vest 25% on December 31, 2010 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. |
94
|
|
|
|
|
In January 2009, Ms. Heffernan was issued 62,500 stock
options at an exercise price of $2.04 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) |
|
For 2010 and 2009, this includes a 401(k) match of $2,500 for
each individual and a car allowance for Mr. Wiehe of
$38,439. For 2010, this includes debt forgiveness in the amount
of $376,612 for Mr. Wiehe, $268,965 for Mr. Duke and
$149,345 for Mr. Martini. |
Grants of
Plan-Based Awards in 2010
The following table provides information regarding grants of
plan-based awards to our named executive officers in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
Estimated
|
|
All other
|
|
Option
|
|
|
|
|
|
|
|
|
Future Payouts
|
|
Stock
|
|
Awards:
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
under Non-
|
|
Awards:
|
|
Number of
|
|
Base Price
|
|
Fair Value of
|
|
|
|
|
Equity
|
|
Number of
|
|
Securities
|
|
of Option
|
|
Stock and
|
|
|
|
|
Incentive Plan
|
|
Shares of
|
|
Underlying
|
|
Awards
|
|
Option
|
Name
|
|
Grant Date
|
|
Target ($) (1)
|
|
Stock (#)
|
|
Options (#)
|
|
($/share)
|
|
Awards ($)
|
|
Stephen J. Wiehe
|
|
|
January 21, 2010
|
|
|
$
|
150,000
|
|
|
|
43,162
|
|
|
|
|
|
|
|
|
|
|
$
|
68,196
|
|
Rudy C. Howard
|
|
|
January 21, 2010
|
|
|
$
|
84,000
|
|
|
|
|
|
|
|
156,724
|
|
|
$
|
2.26
|
|
|
$
|
285,238
|
|
James B. Duke
|
|
|
January 21, 2010
|
|
|
$
|
125,000
|
|
|
|
24,825
|
|
|
|
|
|
|
|
|
|
|
$
|
39,224
|
|
Jeffrey A. Martini
|
|
|
January 21, 2010
|
|
|
$
|
285,000
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
$
|
16,391
|
|
C. Gamble Heffernan
|
|
|
January 21, 2010
|
|
|
$
|
64,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash bonuses paid under the cash incentive bonus program for
2010 are also disclosed in the Summary Compensation
Table above. |
Outstanding
Equity Awards at December 31, 2010
The following table provides information concerning outstanding
equity awards held by our named executive officers at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Number of Shares
|
|
Market Value of
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
or Units of Stock
|
|
Shares or Units of
|
|
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Option
|
|
That Have Not
|
|
Stock That Have
|
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Expiration Date
|
|
Vested
|
|
Not Vested(3)
|
|
|
|
Stephen J. Wiehe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,880
|
|
|
$
|
726,999
|
|
|
|
|
|
Rudy C. Howard
|
|
|
39,181
|
|
|
|
117,543
|
|
|
$
|
2.26
|
|
|
|
January 21, 2020(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Duke
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,127
|
|
|
$
|
548,072
|
|
|
|
|
|
Jeffrey A. Martini
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,494
|
|
|
$
|
279,637
|
|
|
|
|
|
C. Gamble Heffernan
|
|
|
30,552
|
|
|
|
29,948
|
|
|
$
|
2.04
|
|
|
|
January 22, 2019(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This option vested 39,181 shares on December 31, 2010,
with the remaining shares vesting in equal monthly installments
of 3,265 shares thereafter beginning February 4, 2011
until January 4, 2014. |
|
(2) |
|
This option vested 15,625 shares on November 4, 2009,
with the remaining shares vesting in equal monthly installments
of 1,302 shares thereafter beginning December 4, 2009
until November 4, 2012. |
95
|
|
|
(3) |
|
This represents the close of market price on December 31,
2010 of $13.01 per share. |
Option
Exercises and Stock Vested During 2010
The following table provides information regarding the exercise
of stock options and the vesting of stock awards held by our
named executive officers during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of
|
|
Value
|
|
|
Acquired
|
|
Value Realized on
|
|
Shares Acquired
|
|
Realized on
|
Name
|
|
on Exercise
|
|
Exercise(1)
|
|
on Vesting
|
|
Vesting(2)
|
|
Stephen J. Wiehe
|
|
|
|
|
|
|
|
|
|
|
27,030
|
|
|
$
|
302,852
|
|
Rudy C. Howard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Duke
|
|
|
|
|
|
|
|
|
|
|
19,054
|
|
|
$
|
209,782
|
|
Jeffrey A. Martini
|
|
|
|
|
|
|
|
|
|
|
12,950
|
|
|
$
|
148,284
|
|
Gamble C. Heffernan
|
|
|
2,000
|
|
|
$
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The value realized on exercise represents (1) the
difference between (a) the value of our common stock as of
the date of exercise (as determined by our board of directors)
and (b) the per share price (2) multiplied by the
number of shares acquired on exercise. |
|
(2) |
|
The value realized on vesting represents (1) the difference
between (a) the value of our common stock (close of market
price on December 31, 2010 of $13.01 per share) and
(b) the per share price (2) multiplied by the number
of shares acquired on exercise. |
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.
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 following their employment with us and
providing for ownership and assignment of intellectual property
rights to us.
96
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 eighteen 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, 2010. 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 $13.01, the closing
price of our common stock as of December 31, 2010, and the
exercise price.
Stephen
J. Wiehe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
|
|
Salary, Bonus &
|
|
Health
|
|
Shares of
|
Triggering Event
|
|
Unused Vacation
|
|
Benefits
|
|
Restricted Stock
|
|
Termination by us without cause
|
|
$
|
700,000
|
|
|
$
|
5,188
|
|
|
$
|
244,942
|
|
Termination by executive for good reason
|
|
$
|
525,000
|
|
|
$
|
2,594
|
|
|
$
|
244,942
|
|
Death or disability
|
|
$
|
350,000
|
|
|
|
|
|
|
$
|
244,942
|
|
James B.
Duke
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
|
|
|
|
Shares of
|
Triggering Event
|
|
Salary
|
|
Restricted Stock
|
|
Termination by us without cause
|
|
$
|
245,000
|
|
|
$
|
195,661
|
|
Termination by executive for good reason
|
|
$
|
245,000
|
|
|
$
|
195,661
|
|
Death or disability
|
|
$
|
245,000
|
|
|
$
|
195,661
|
|
97
Rudy C.
Howard
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
Triggering Event
|
|
Salary
|
|
Stock Options
|
|
Termination by us without cause
|
|
$
|
240,000
|
|
|
$
|
386,096
|
|
Termination by executive for good reason
|
|
$
|
240,000
|
|
|
$
|
386,096
|
|
Death or disability
|
|
$
|
240,000
|
|
|
$
|
386,096
|
|
The table below sets forth the benefits potentially payable to
Mr. Martini 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 took place on
December 31, 2010. 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 $13.01, the closing price
of our common stock as of December 31, 2010, as determined
by our board of directors, and the exercise price.
|
|
|
|
|
|
|
|
|
|
|
Vesting of
|
|
Vesting of
|
|
|
Unvested Shares
|
|
Unvested
|
|
|
of Restricted Stock
|
|
Stock Options
|
|
Jeffrey A. Martini
|
|
$
|
103,099
|
|
|
|
|
|
C. Gamble Heffernan
|
|
|
|
|
|
$
|
171,406
|
|
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 reserved for
issuance is 4,307,736. 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.
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
98
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 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 plus
interest 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,
99
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 have filed with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the stock
incentive plan.
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 established an aggregate bonus pool of
$5,888,044 by calculating the aggregate initial value of the
shares that would have been issued under the Exit Event Bonus
Plan assuming a per share price for our common stock of $14.18,
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 approximately 415,000 shares of our common
stock, which at such price would have an aggregate value equal
to the established bonus pool of $5,888,044. 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 these bonuses in the Executive
Compensation Compensation Discussion and
Analysis Exit Event Bonus Plan section of this
prospectus.
100
The individual bonus amounts paid to our named executive
officers upon the initial public offering in September 2010 were
as follows:
|
|
|
|
|
Stephen J. Wiehe
|
|
$
|
2,237,457
|
|
James B. Duke
|
|
$
|
1,236,489
|
|
Jeffrey A. Martini
|
|
$
|
1,236,489
|
|
C. Gamble Heffernan
|
|
$
|
294,402
|
|
Rudy C. Howard
|
|
$
|
88,321
|
|
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.
Limitation
of Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation 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:
|
|
|
|
|
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
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
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 also
provides that:
|
|
|
|
|
we will indemnify our directors and officers to the fullest
extent permitted by law;
|
|
|
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
|
|
|
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.
|
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.
101
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.
102
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.
Registration
Rights
We have entered into a stockholders agreement with our former
preferred stockholders, which includes Messrs. Wiehe, Duke
and Gillis. This agreement 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.
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
103
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.
104
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our common stock as of December 31, 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; (iv) each person or group of affiliated persons
known by us to be the beneficial owner of more than 5% of our
common stock; and (v) our other selling stockholders
selling shares in this offering.
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
December 31, 2010. For purposes of calculating each
persons or groups percentage ownership, stock
options exercisable within 60 days after December 31,
2010 are included for that person or group.
Percentage of beneficial ownership is based on
20,532,443 shares of common stock outstanding as of
December 31, 2010 and 21,532,443 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 (*).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership After this Offering
|
|
|
|
|
|
|
|
|
Number
|
|
Percent
|
|
Number
|
|
Percent
|
|
|
|
|
|
|
|
|
(Assuming No
|
|
(Assuming No
|
|
(Assuming
|
|
(Assuming
|
|
|
|
|
|
|
Number of
|
|
Exercise
|
|
Exercise
|
|
Full Exercise
|
|
Full Exercise
|
|
|
Beneficial Ownership Prior to this Offering
|
|
Shares
|
|
of
|
|
of
|
|
of
|
|
of
|
Name
|
|
Shares
|
|
Percentage
|
|
Offered
|
|
Over-Allotment)
|
|
Over-Allotment)
|
|
Over-Allotment)
|
|
Over-Allotment)
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Wiehe(1)
|
|
|
895,752
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
895,752
|
|
|
|
4.2
|
%
|
|
|
795,752
|
|
|
|
3.7
|
%
|
James B. Duke
|
|
|
508,266
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
508,266
|
|
|
|
2.4
|
%
|
|
|
408,266
|
|
|
|
1.9
|
%
|
Jeffrey A. Martini
|
|
|
219,426
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
219,426
|
|
|
|
1.0
|
%
|
|
|
169,426
|
|
|
|
*
|
|
Jennifer G. Kaelin
|
|
|
156,008
|
|
|
|
*
|
|
|
|
|
|
|
|
156,008
|
|
|
|
*
|
|
|
|
141,008
|
|
|
|
*
|
|
Rudy C. Howard(2)
|
|
|
42,446
|
|
|
|
*
|
|
|
|
|
|
|
|
42,446
|
|
|
|
*
|
|
|
|
42,446
|
|
|
|
*
|
|
C. Gamble Heffernan(3)
|
|
|
35,156
|
|
|
|
*
|
|
|
|
|
|
|
|
35,156
|
|
|
|
*
|
|
|
|
35,156
|
|
|
|
*
|
|
Noel J. Fenton(4)
|
|
|
7,300,000
|
|
|
|
35.6
|
%
|
|
|
1,906,297
|
|
|
|
5,393,703
|
|
|
|
25.0
|
%
|
|
|
5,300,000
|
|
|
|
24.4
|
%
|
Daniel F. Gillis(5)
|
|
|
132,491
|
|
|
|
*
|
|
|
|
|
|
|
|
132,491
|
|
|
|
*
|
|
|
|
132,491
|
|
|
|
*
|
|
Jeffrey T. Barber(6)
|
|
|
5,156
|
|
|
|
*
|
|
|
|
|
|
|
|
5,156
|
|
|
|
*
|
|
|
|
5,156
|
|
|
|
*
|
|
Timothy J. Buckley(7)
|
|
|
5,156
|
|
|
|
*
|
|
|
|
|
|
|
|
5,156
|
|
|
|
*
|
|
|
|
5,156
|
|
|
|
*
|
|
All executive officers and directors as a group (10 people)
|
|
|
9,299,858
|
|
|
|
45.2
|
%
|
|
|
1,906,297
|
|
|
|
7,393,561
|
|
|
|
34.3
|
%
|
|
|
7,034,858
|
|
|
|
32.4
|
%
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds associated with Trinity Ventures(8)
|
|
|
7,300,000
|
|
|
|
35.6
|
%
|
|
|
1,906,297
|
|
|
|
5,393,703
|
|
|
|
25.0
|
%
|
|
|
5,300,000
|
|
|
|
24.4
|
%
|
Funds associated with Intersouth Partners(9)
|
|
|
2,643,138
|
|
|
|
12.9
|
%
|
|
|
690,220
|
|
|
|
1,952,918
|
|
|
|
9.1
|
%
|
|
|
1,918,991
|
|
|
|
8.9
|
%
|
Massachusetts Financial Services Company(10)
|
|
|
1,482,970
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
1,482,970
|
|
|
|
6.9
|
%
|
|
|
1,482,970
|
|
|
|
6.8
|
%
|
Wasatch Advisors, Inc.(11)
|
|
|
1,137,953
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
1,137,953
|
|
|
|
5.3
|
%
|
|
|
1,137,953
|
|
|
|
5.2
|
%
|
Other Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
River Cities SBIC III, L.P.(12)
|
|
|
882,808
|
|
|
|
4.3
|
%
|
|
|
230,533
|
|
|
|
652,275
|
|
|
|
3.0
|
%
|
|
|
640,943
|
|
|
|
3.0
|
%
|
Venture Lending & Leasing IV, LLC(13)
|
|
|
327,757
|
|
|
|
1.6
|
%
|
|
|
85,589
|
|
|
|
242,168
|
|
|
|
1.1
|
%
|
|
|
227,757
|
|
|
|
1.1
|
%
|
Bruce Boehm(14)
|
|
|
170,418
|
|
|
|
*
|
|
|
|
15,000
|
|
|
|
155,418
|
|
|
|
*
|
|
|
|
155,418
|
|
|
|
*
|
|
Dorrian Porter(15)
|
|
|
28,324
|
|
|
|
*
|
|
|
|
7,396
|
|
|
|
20,928
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Bradley Stevens(16)
|
|
|
1,366
|
|
|
|
*
|
|
|
|
357
|
|
|
|
1,009
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
(1) |
|
Includes 7,546 shares held by Mr. Wiehe as custodian
for Andrew John Wiehe and Stephanie Elizabeth Wiehe, over which
Mr. Wiehe has voting and investment power. |
|
(2) |
|
Consists of shares subject to options that are exercisable
within 60 days of the date of the table. |
105
|
|
|
(3) |
|
Includes 33,156 shares subject to options that are
exercisable within 60 days of the date of the table. |
|
(4) |
|
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.
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. |
|
(5) |
|
Includes 51,620 shares held by Gillis Company, LLC, over
which Mr. Gillis has sole voting and investment power. The
address for Mr. Gillis and Gillis Company, LLC is 5 Masters
Court, Potomac, MD 20854. |
|
(6) |
|
Consists of shares subject to options that are exercisable
within 60 days of the date of the table. |
|
(7) |
|
Consists of shares subject to options that are exercisable
within 60 days of the date of the table. |
|
(8) |
|
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. The
address for each of these Trinity funds is 3000 Sand Hill Road,
Building 4, Suite 160, Menlo Park, CA 94025. |
|
(9) |
|
Consists of shares held by Intersouth Partners V, L.P.,
Intersouth Affiliates V, L.P., and Intersouth Partners VI,
L.P. Intersouth Associates V, LLC is the general partner of
Intersouth Partners V, L.P. and Intersouth
Affiliates V, L.P, and Intersouth Associates VI, LLC is the
general partner of Intersouth Partners VI, L.P. Dennis Dougherty
and Mitch Mumma, as the Member Managers of Intersouth
Associates V, LLC and Intersouth Associates VI, LLC, share
voting and investment power with respect to the shares owned by
Intersouth Partners V, L.P., Intersouth Affiliates V,
L.P. and Intersouth Partners VI, L.P. The address for each of
these Intersouth funds is 406 Blackwell Street, Suite 200,
Durham, NC 27701. |
|
(10) |
|
The address for Massachusetts Financial Services Company is 500
Boylston Street, Boston, MA 02116. |
|
(11) |
|
The address for Wasatch Advisors, Inc. is 150 Social Hall
Avenue, Salt Lake City, UT 84111. |
|
(12) |
|
RCCF Management, Inc. is the general partner of River Cities
SBIC III, L.P. Edwin T. Robinson and R. Glen Mayfield, as the
sole officers and directors of RCCF Management, Inc., share
voting and investment power with respect to the shares owned by
River Cities SBIC III, L.P. The address for River Cities SBIC
III, L.P. is 3737 Glenwood Avenue, Suite 100, Raleigh, NC
27612. |
|
(13) |
|
Westech Investment Advisors, Inc. is the Managing Member of
Venture Lending & Leasing IV, LLC. Ronald W. Swenson,
Salvador O. Gutierrez, Jay L. Cohan, Maurice C. Werdegar, Martin
D. Eng and David R. Wanek, as the control persons of Westech
Investment Advisors, Inc., share voting and investment power
with respect to the shares owned by Venture Lending &
Leasing IV, LLC. From July 2004 until October 2007, we were a
borrower under a loan agreement with Venture Lending &
Leasing IV, LLC. The address for Venture Lending &
Leasing IV, LLC is 2010 North First Street, Suite 310,
San Jose, CA 95131. |
|
(14) |
|
The address for Mr. Boehm is 2109 N. Lakeshore
Drive, Chapel Hill, NC 27514. |
|
(15) |
|
The address for Mr. Porter is 35 Sharon Court, Menlo Park,
CA 94025. |
|
(16) |
|
Mr. Stevens served as our Vice President of Marketing from
May 2007 to July 2008. The address for Mr. Stevens is 9821
Longford Drive, Raleigh, NC 27615. |
106
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.
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
Our authorized capital stock consists of 50,000,000 shares
of common stock, $0.001 par value per share, and
5,000,000 shares of preferred stock, $0.001 par value
per share.
As of February 28, 2011, there were 20,899,052 shares
of common stock outstanding held by approximately
80 stockholders of record of our common stock, including
Cede & Co., which holds shares of our common stock on
behalf of an indeterminate number of beneficial owners. As of
February 28, 2011, there were no shares of preferred stock
outstanding.
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. Our common stock is 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 4,777,927 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.
107
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
Following this offering, holders, or their transferees, of
approximately 10,084,530 shares of our common stock
(9,709,221 shares if the underwriters over-allotment
option is exercised in full) 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 our
initial public 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
108
registration statement filed pursuant to demand or piggyback
registration rights, the selling stockholders indemnify us for
material misstatements or omissions attributable to them.
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 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
our board of directors is 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
109
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 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:
|
|
|
|
|
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;
|
|
|
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
|
|
|
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.
|
Section 203 defines a business combination to include:
|
|
|
|
|
any merger or consolidation involving the corporation and the
interested stockholder;
|
|
|
any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
|
|
|
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
|
|
|
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.
|
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.
110
SHARES ELIGIBLE
FOR FUTURE SALE
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 February 28, 2011, we will have outstanding an
aggregate of 21,899,052 shares of our common stock. Of
these shares, the 6,900,000 shares sold in our initial
public offering and 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 13,999,052 shares of common stock to be
outstanding after this offering (13,558,743 shares if the
underwriters over-allotment option is exercised in full)
will be restricted securities under Rule 144.
Of these restricted securities, 13,597,957 shares will be
subject to transfer restrictions for 90 days from the date
of this prospectus pursuant to
lock-up
agreements (13,157,648 shares if the underwriters
over-allotment option is exercised in full). 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
In connection with this offering, holders of
13,597,957 shares of our common stock and holders of
547,224 shares of our common stock issuable upon exercise
of outstanding options, including in each case all of our
officers and directors, 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 90 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 90 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
90-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
90-day
lock-up
period will be extended automatically if (i) during the
last 17 days of the
90-day
restricted period we issue an earnings release or announce
material news or a material event or (ii) prior to the
expiration of the
90-day
restricted period, we announce that we will release earnings
results during the 15-day period following the last day of the
90-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.
The lock-up
agreements executed in connection with our initial public
offering covering 13,641,773 shares are expected to expire
on March 23, 2011, and the
lock-up
agreements covering 325,203 shares issued in connection
with our acquisition of AECsoft are expected to expire on
June 30, 2011. The representatives of the underwriters for
our initial public offering may, in their sole discretion and at
any time without notice, release all or any portion of the
securities subject to the initial public offering
lock-up
agreements.
111
Rule 144
In general, under Rule 144 as currently in effect, a person
who is not deemed to have been one of our affiliates for
purposes of 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:
|
|
|
|
|
1% of the number of shares of our common stock then
outstanding; or
|
|
|
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.
|
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, 13,999,052 shares of our common
stock will be eligible for sale under Rule 144
(13,558,743 shares if the underwriters over-allotment
option is exercised in full), 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.
Stock
Options and Restricted Stock Awards
We have filed 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. The shares registered on
Form S-8
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
10,084,530 shares of common stock (9,709,221 shares if
the underwriters over-allotment option is exercised in
full) 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.
112
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:
|
|
|
|
|
an individual who is a citizen or a resident of the United
States;
|
|
|
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;
|
|
|
an estate whose income is subject to U.S. federal income
taxation regardless of its source;
|
|
|
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
|
|
|
an entity that is disregarded as separate from its owner if all
of its interests are owned by a single person described above.
|
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:
|
|
|
|
|
insurance companies and financial institutions;
|
|
|
tax-exempt organizations;
|
|
|
controlled foreign corporations and passive foreign investment
companies;
|
|
|
partnerships or other pass-through entities;
|
|
|
regulated investment companies or real estate investment trusts;
|
|
|
pension plans;
|
113
|
|
|
|
|
persons who received our common stock as compensation;
|
|
|
brokers and dealers in securities;
|
|
|
owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
|
|
|
former citizens or residents of the United States subject to tax
as expatriates.
|
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.
114
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:
|
|
|
|
|
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 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;
|
|
|
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;
|
|
|
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 Tax Withholding and Information
Reporting; or
|
|
|
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.
|
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.
In addition to backup withholding, the Hiring Incentives to
Restore Employment Act of 2010, or the HIRE Act, requires that
dividends and certain other payments made after
December 31, 2012 to
non-U.S. entities
(including without limitation foreign financial institutions and
foreign corporations) be subject to a 30% withholding tax if the
non-U.S. entity
does not meet certain disclosure requirements. If the
non-U.S. entity
is a foreign financial institution,
115
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 information and disclosure
regarding certain accounts owned by U.S. persons held 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. Certain
non-financial foreign entities, including publicly traded
corporations, are not required to provide such certification. 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 backup withholding or the HIRE Act.
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,
individual non-U.S. holders of our common stock may be subject
to U.S. federal estate tax at a maximum rate of 35% on taxable
U.S. assets that exceed $60,000 in value. 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.
116
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 the aggregate number of shares of
common stock set forth opposite their respective names:
|
|
|
|
|
Underwriters
|
|
Number of Shares
|
|
Stifel, Nicolaus & Company, Incorporated
|
|
|
|
|
William Blair & Company, L.L.C.
|
|
|
|
|
JMP Securities LLC
|
|
|
|
|
Pacific Crest Securities LLC
|
|
|
|
|
Canaccord Genuity Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Stifel, Nicolaus & Company, Incorporated is the
book-running manager and William Blair & Company,
L.L.C., JMP Securities LLC, Pacific Crest Securities LLC and
Canaccord Genuity Inc. are co-managers.
Of the 3,935,393 shares to be purchased by the
underwriters, 1,000,000 shares will be purchased from
us and 2,935,393 shares 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 ,
2011.
Over-Allotment
Option
We and the selling stockholders have granted a
30-day
over-allotment option to the underwriters to purchase up to a
total of 590,309 additional shares of our common stock at the
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.
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. 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.
117
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Without Over-
|
|
|
|
|
Per Share
|
|
Allotment
|
|
With Over-Allotment
|
|
Public offering price
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to us
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to selling stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
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
90 days after the date of this prospectus.
We have agreed that for a period of 90 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 90-day
restricted period described in the preceding two paragraphs will
be automatically extended if: (1) during the last
17 days of the
90-day
restricted period we issue an earnings release or announce
material news or a material event or (2) prior to the
expiration of the
90-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
90-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
Our common stock is listed on the NASDAQ Global Market under the
symbol SQI.
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
118
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.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the Relevant Implementation
Date) it has not made and will not make an offer of shares
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000; and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by our company of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State, and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
119
United
Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive that are also (i) investment
professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005
(the Order) or (ii) high net worth entities,
and other persons to whom it may lawfully be communicated,
falling within Article 49(2)(a) to (d) of the Order
(each such person being referred to as a relevant
person). This prospectus and its contents are confidential
and should not be distributed, published or reproduced (in whole
or in part) or disclosed by recipients to any other persons in
the United Kingdom. Any person in the United Kingdom that is not
a relevant person should not act or rely on this document or any
of its contents.
Hong
Kong
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
Japan
The shares offered in this prospectus have not been registered
and will not be registered under the Securities and Exchange Law
of Japan. The shares have not been offered or sold and will not
be offered or sold, directly or indirectly, in Japan or to or
for the account of any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan)
or to others for re-offering or resale,
120
directly or indirectly, in Japan or to a resident of Japan,
except (i) pursuant to an exemption from the registration
requirements of the Securities and Exchange Law and (ii) in
compliance with any other applicable requirements of the
Financial Instruments and Exchange Law and any other applicable
laws, regulations and ministerial guidelines of Japan.
Switzerland
This document as well as any other material relating to the
shares which are the subject of the offering contemplated by
this Prospectus (the Shares) do not constitute an
issue prospectus pursuant to Article 652a of the Swiss Code
of Obligations. The Shares will not be listed on the SWX Swiss
Exchange and, therefore, the documents relating to the Shares,
including, but not limited to, this document, do not claim to
comply with the disclosure standards of the listing rules of SWX
Swiss Exchange and corresponding prospectus schemes annexed to
the listing rules of the SWX Swiss Exchange.
The Shares are being offered in Switzerland by way of a private
placement, i.e. to a small number of selected investors only,
without any public offer and only to investors who do not
purchase the Shares with the intention to distribute them to the
public. The investors will be individually approached by our
company from time to time.
This document as well as any other material relating to the
Shares are personal and confidential and do not constitute an
offer to any other person. This document may only be used by
those investors to whom it has been handed out in connection
with the offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without express consent of our company. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
Australia
This document has not been lodged with the Australian Securities
& Investments Commission and is only directed to certain
categories of exempt persons. Accordingly, if you receive this
document in Australia:
(a) you confirm and warrant that you are either:
(i) a sophisticated investor under section
708(8)(a) or (b) of the Corporations Act 2001 (Cth) of Australia
(Corporations Act);
(ii) a sophisticated investor under section
708(8)(c) or (d) of the Corporations Act and that you have
provided an accountants certificate to our company which
complies with the requirements of section 708(8)(c)(i) or
(ii) of the Corporations Act and related regulations before the
offer has been made; or
(iii) a professional investor within the
meaning of section 708(11)(a) or (b) of the Corporations Act,
and to the extent that you are unable to confirm or warrant that
you are an exempt sophisticated investor or professional
investor under the Corporations Act any offer made to you under
this document is void and incapable of acceptance.
(b) you warrant and agree that you will not offer any of
the shares issued to you pursuant to this document for resale in
Australia within 12 months of those shares being issued
unless any such resale offer is exempt from the requirement to
issue a disclosure document under section 708 of the
Corporations Act.
121
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,
2010 and 2009, and for each of the three years in the period
ended December 31, 2010, 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. We are
subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and are required to file
annual, quarterly and current reports, proxy statements and
other information with the SEC. These documents are publicly
available, free of charge, on our website (www.sciquest.com) as
soon as reasonably practicable after filing such documents with
the SEC.
You can read the registration statement and our future filings
with the SEC over the Internet at the SECs website at
www.sec.gov. You may request copies of the filing, at no cost,
by telephone at (919) 659-2100 or by mail at SciQuest,
Inc., 6501 Weston Parkway, Suite 200, Cary, North Carolina
27513. You may also read and copy any document we file with the
SEC at its public reference facility at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference
Section of the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference
facilities.
122
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, 2010 and 2009, and the related
statements of operations, stockholders equity (deficit),
and cash flows for each of the three years in the period ended
December 31, 2010. 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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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, 2010 and 2009, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2010, in
conformity with U.S. generally accepted accounting
principles.
Raleigh, North Carolina
March 9, 2011
F-2
SCIQUEST,
INC.
(In thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,494
|
|
|
$
|
17,132
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
350
|
|
Accounts receivable
|
|
|
6,400
|
|
|
|
4,846
|
|
Prepaid expenses and other current assets
|
|
|
1,297
|
|
|
|
834
|
|
Deferred tax assets
|
|
|
207
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
45,398
|
|
|
|
23,339
|
|
Property and equipment, net
|
|
|
1,993
|
|
|
|
1,307
|
|
Goodwill
|
|
|
6,765
|
|
|
|
6,765
|
|
Intangible assets, net
|
|
|
1,039
|
|
|
|
1,340
|
|
Deferred project costs
|
|
|
5,667
|
|
|
|
5,148
|
|
Deferred tax assets
|
|
|
15,675
|
|
|
|
16,623
|
|
Other
|
|
|
150
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,687
|
|
|
$
|
54,565
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Redeemable Preferred Stock
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
51
|
|
|
$
|
46
|
|
Accrued liabilities
|
|
|
4,200
|
|
|
|
2,980
|
|
Line of credit
|
|
|
|
|
|
|
350
|
|
Deferred revenues
|
|
|
28,305
|
|
|
|
27,066
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,556
|
|
|
|
30,442
|
|
Deferred revenues, less current portion
|
|
|
9,896
|
|
|
|
7,209
|
|
Series A redeemable preferred stock at redemption value,
$0.001 par value; 222,073 shares authorized; zero and
222,073 shares issued and outstanding at December 31,
2010 and 2009, respectively
|
|
|
|
|
|
|
34,072
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares
authorized; 20,532,443 and 14,342,284 shares issued and
outstanding as of December 31, 2010 and 2009, respectively
|
|
|
20
|
|
|
|
14
|
|
Additional paid-in capital
|
|
|
50,462
|
|
|
|
|
|
Notes receivable from stockholders
|
|
|
(15
|
)
|
|
|
(769
|
)
|
Accumulated deficit
|
|
|
(16,232
|
)
|
|
|
(16,403
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
34,235
|
|
|
|
(17,158
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable preferred stock, and
stockholders equity (deficit)
|
|
$
|
76,687
|
|
|
$
|
54,565
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-3
SCIQUEST,
INC.
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
42,477
|
|
|
$
|
36,179
|
|
|
$
|
29,784
|
|
Cost of revenues
|
|
|
9,361
|
|
|
|
7,494
|
|
|
|
6,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,116
|
|
|
|
28,685
|
|
|
|
23,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,395
|
|
|
|
8,059
|
|
|
|
8,307
|
|
Sales and marketing
|
|
|
11,592
|
|
|
|
10,750
|
|
|
|
9,280
|
|
General and administrative
|
|
|
5,810
|
|
|
|
3,703
|
|
|
|
3,942
|
|
Management bonuses associated with initial public offering
|
|
|
5,888
|
|
|
|
|
|
|
|
|
|
Litigation settlement and associated legal expenses
|
|
|
|
|
|
|
3,189
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
301
|
|
|
|
403
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,986
|
|
|
|
26,104
|
|
|
|
22,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,130
|
|
|
|
2,581
|
|
|
|
995
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
40
|
|
|
|
37
|
|
|
|
200
|
|
Interest expense
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(22
|
)
|
Other income (expense), net
|
|
|
1,689
|
|
|
|
(4
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,727
|
|
|
|
27
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,857
|
|
|
|
2,608
|
|
|
|
1,108
|
|
Income tax (expense) benefit
|
|
|
(1,114
|
)
|
|
|
16,821
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,743
|
|
|
|
19,429
|
|
|
|
1,117
|
|
Dividends on redeemable preferred stock
|
|
|
2,079
|
|
|
|
2,595
|
|
|
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(336
|
)
|
|
$
|
16,834
|
|
|
$
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.09
|
)
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
1.16
|
|
|
$
|
(0.09
|
)
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,754
|
|
|
|
14,061
|
|
|
|
13,800
|
|
Diluted
|
|
|
15,754
|
|
|
|
14,450
|
|
|
|
13,800
|
|
The accompanying notes are an integral part of the financial
statements.
F-4
SCIQUEST,
INC.
(In thousands except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional Paid-In
|
|
|
Notes Receivable
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
from Stockholders
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Balance as of December 31, 2007
|
|
|
13,981,729
|
|
|
|
14
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
(33,433
|
)
|
|
|
(33,461
|
)
|
Issuance of restricted stock
|
|
|
292,137
|
|
|
|
|
|
|
|
760
|
|
|
|
(724
|
)
|
|
|
|
|
|
|
36
|
|
Repurchase of restricted stock
|
|
|
(130,104
|
)
|
|
|
|
|
|
|
(229
|
)
|
|
|
130
|
|
|
|
|
|
|
|
(99
|
)
|
Exercise of common stock options
|
|
|
18,135
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Issuance of common stock
|
|
|
1,615
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Stock-based compensation
|
|
|
12,500
|
|
|
|
|
|
|
|
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
|
|
|
14,176,012
|
|
|
|
14
|
|
|
|
|
|
|
|
(617
|
)
|
|
|
(33,788
|
)
|
|
|
(34,391
|
)
|
Issuance of restricted stock
|
|
|
159,024
|
|
|
|
|
|
|
|
196
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
25
|
|
Repurchase of restricted stock
|
|
|
(7,802
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(15
|
)
|
Exercise of common stock options
|
|
|
15,050
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
365
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(551
|
)
|
|
|
|
|
|
|
(2,044
|
)
|
|
|
(2,595
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,429
|
|
|
|
19,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
14,342,284
|
|
|
|
14
|
|
|
|
|
|
|
|
(769
|
)
|
|
|
(16,403
|
)
|
|
|
(17,158
|
)
|
Proceeds from public offering, net of underwriting discounts and
offering costs
|
|
|
6,000,000
|
|
|
|
6
|
|
|
|
50,583
|
|
|
|
|
|
|
|
|
|
|
|
50,589
|
|
Exercise of common stock options
|
|
|
17,241
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Contribution of stock to fund a charitable trust established by
the Company
|
|
|
25,000
|
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Issuance of restricted stock
|
|
|
95,861
|
|
|
|
|
|
|
|
216
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
39
|
|
Repurchase of restricted stock
|
|
|
(143,543
|
)
|
|
|
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
(273
|
)
|
Exercise of warrants
|
|
|
195,600
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Payments on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Forgiveness of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
927
|
|
|
|
(927
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
1,088
|
|
Dividends accrued on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,434
|
)
|
|
|
|
|
|
|
(645
|
)
|
|
|
(2,079
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,743
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
20,532,443
|
|
|
$
|
20
|
|
|
$
|
50,462
|
|
|
$
|
(15
|
)
|
|
$
|
(16,232
|
)
|
|
$
|
34,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-5
SCIQUEST,
INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,743
|
|
|
$
|
19,429
|
|
|
$
|
1,117
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,093
|
|
|
|
1,214
|
|
|
|
1,285
|
|
Gain on sale of investment
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,088
|
|
|
|
365
|
|
|
|
386
|
|
Contribution of stock to fund a charitable trust established by
the Company
|
|
|
238
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
918
|
|
|
|
(16,800
|
)
|
|
|
|
|
Loss from disposal of property and equipment
|
|
|
2
|
|
|
|
140
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,554
|
)
|
|
|
(1,340
|
)
|
|
|
(285
|
)
|
Prepaid expense and other current assets
|
|
|
(463
|
)
|
|
|
40
|
|
|
|
(117
|
)
|
Deferred project costs and other assets
|
|
|
(626
|
)
|
|
|
(362
|
)
|
|
|
(833
|
)
|
Accounts payable
|
|
|
5
|
|
|
|
(255
|
)
|
|
|
(181
|
)
|
Accrued liabilities and other
|
|
|
1,220
|
|
|
|
(615
|
)
|
|
|
(257
|
)
|
Deferred revenues
|
|
|
3,926
|
|
|
|
2,685
|
|
|
|
5,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,890
|
|
|
|
4,501
|
|
|
|
6,582
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition of capitalized software development costs
|
|
|
(648
|
)
|
|
|
(220
|
)
|
|
|
(99
|
)
|
Purchase of property and equipment
|
|
|
(832
|
)
|
|
|
(685
|
)
|
|
|
(480
|
)
|
Purchase of short-term investments
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of investment
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
Restricted cash returned
|
|
|
350
|
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,430
|
)
|
|
|
(905
|
)
|
|
|
(929
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public offering, net of underwriting discount
|
|
|
53,010
|
|
|
|
|
|
|
|
|
|
Initial public offering costs
|
|
|
(2,421
|
)
|
|
|
|
|
|
|
|
|
Redemption of preferred stock
|
|
|
(36,151
|
)
|
|
|
|
|
|
|
|
|
Issuance of common and restricted stock
|
|
|
39
|
|
|
|
25
|
|
|
|
40
|
|
Repurchases of restricted stock
|
|
|
(273
|
)
|
|
|
(15
|
)
|
|
|
(99
|
)
|
Repayment of notes payable
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
Collection of notes receivable from stockholders
|
|
|
4
|
|
|
|
18
|
|
|
|
19
|
|
Proceeds from exercise of warrants
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
29
|
|
|
|
6
|
|
|
|
2
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,902
|
|
|
|
34
|
|
|
|
58
|
|
Net increase in cash and cash equivalents
|
|
|
362
|
|
|
|
3,630
|
|
|
|
5,711
|
|
Cash and cash equivalents at beginning of year
|
|
|
17,132
|
|
|
|
13,502
|
|
|
|
7,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
17,494
|
|
|
$
|
17,132
|
|
|
$
|
13,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on redeemable preferred stock
|
|
$
|
2,079
|
|
|
$
|
2,595
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
F-6
SCIQUEST,
INC.
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
|
|
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. The Company is headquartered in
Cary, North Carolina.
Initial
Public Offering
On September 24, 2010, the Company completed its initial
public offering of 6,000,000 shares of common stock at an
offering price of $9.50 per share, and the additional sale of
900,000 shares of common stock by selling stockholders
pursuant to the underwriters over-allotment option. The
Company received net proceeds of $50,589, after payment of
underwriting discounts and commissions and legal, accounting and
other fees incurred in connection with the offering. $36,151 of
the net proceeds were used to redeem all outstanding shares of
Series A redeemable preferred stock. The Company also
recognized compensation expense of $5,888 related to management
bonuses associated with the initial public offering paid under
its Exit Event Bonus Plan (refer to Note 12).
|
|
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.
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 recognized when there is persuasive evidence of an
arrangement, the service has been provided or delivered to the
F-7
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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)
Concentrations
As of December 31, 2010, no individual customer comprised
more than 10% of the accounts receivable balance. As of
December 31, 2009, three customers comprised 17%, 12% and
12%, respectively, of the accounts receivable balance. During
each of the years ended December 31, 2010, 2009 and 2008,
no individual customer comprised more than 10% of the
Companys revenues. During the year ended December 31,
2010, approximately 94% of the Companys revenue was from
sales transactions originating in the United States. During each
of the years ended December 31, 2009 and 2008,
approximately 93% 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 at
December 31, 2009, the Company maintained restricted cash
in an amount equal to its outstanding line of credit. As of
December 31, 2009, restricted cash totaled $350. During
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
December 31, 2010.
Short-Term
Investments
Management determines the appropriate classification of
investments at the time of purchase and evaluates such
determination as of each balance sheet date. The Companys
investments were classified as
available-for-sale
securities and were stated at fair value at December 31,
2010. Realized gains and losses are included in other income
(expense) based on the specific identification method. There
were no realized gains or losses for the year ended
December 31, 2010. Net unrealized gains and losses on
available-for-sale
securities are reported as a component of other comprehensive
income (loss), net of tax. As of December 31, 2010, there
were no unrealized gains on
available-for-sale
securities. The Company regularly monitors and evaluates the
fair value of its investments to identify
other-than-temporary
declines in value. Management believes no such declines in value
existed at December 31, 2010.
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, 2010 and 2009.
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.
F-9
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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.
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, 2010. 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 fair value of 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 5, 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, 2010 and 2009.
F-10
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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 $635, $433 and $524 for the years
ended December 31, 2010, 2009 and 2008, respectively.
Stock-Based
Compensation
Stock-based payments to employees, including grants of employee
stock options, are recognized in the statement 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 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, 2010, 2009 and 2008
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.
Income
(Loss) 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)
The following summarizes the calculation of basic and diluted
net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,743
|
|
|
$
|
19,429
|
|
|
$
|
1,117
|
|
Less: Dividends on redeemable preferred stock
|
|
|
2,079
|
|
|
|
2,595
|
|
|
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
|
(336
|
)
|
|
|
16,834
|
|
|
|
(1,278
|
)
|
Weighted average common shares, basic
|
|
|
15,754,002
|
|
|
|
14,061,007
|
|
|
|
13,799,768
|
|
Basic net (loss) income attributable to common stockholders per
share
|
|
$
|
(0.02
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(336
|
)
|
|
$
|
16,834
|
|
|
$
|
(1,278
|
)
|
Weighted average common shares, basic
|
|
|
15,754,002
|
|
|
|
14,061,007
|
|
|
|
13,799,768
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
|
|
|
172,662
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
213,054
|
|
|
|
|
|
Nonvested shares of restricted stock
|
|
|
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares, diluted
|
|
|
15,754,002
|
|
|
|
14,450,154
|
|
|
|
13,799,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income attributable to common stockholders
per share
|
|
$
|
(0.02
|
)
|
|
$
|
1.16
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The treasury effect of the following equity instruments has been
excluded from diluted net (loss) income per common share as its
effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Nonvested restricted stock
|
|
|
|
|
|
|
39,191
|
|
|
|
228,087
|
|
Common stock options
|
|
|
111,000
|
|
|
|
5,125
|
|
|
|
296,882
|
|
Common stock warrants
|
|
|
|
|
|
|
|
|
|
|
221,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
111,000
|
|
|
|
44,316
|
|
|
|
746,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 operating and reporting segment.
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,
F-12
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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.
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.
Recent
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 financial position,
results of operations or 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 does not expect the adoption of this guidance to have a
material impact on its financial position, results of operations
or cash flows.
F-13
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
|
|
3.
|
Cash
Equivalents and Short-Term Investments
|
The components of cash equivalents and short-term investments at
December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cash equivalents
|
|
$
|
8,755
|
|
|
|
|
|
|
|
|
|
|
$
|
8,755
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,755
|
|
|
|
|
|
|
|
|
|
|
$
|
28,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of cash equivalents and short-term investments at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cash equivalents
|
|
$
|
16,776
|
|
|
|
|
|
|
|
|
|
|
$
|
16,776
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,776
|
|
|
|
|
|
|
|
|
|
|
$
|
16,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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. 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 sheet.
During 2010, 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.
|
|
4.
|
Fair
Value Measurements
|
Under U.S. GAAP, fair value is defined as the price that
would be received to sell an asset or paid to transfer a
liability (i.e., the exit price) in an orderly
transaction between market participants at the measurement date.
U.S. GAAP also establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable
inputs are obtained from independent sources and can be
validated by a third party, whereas unobservable inputs reflect
assumptions regarding what a third party would use in pricing an
asset or liability. The fair value hierarchy is broken down into
three levels based on the reliability of inputs as follows:
|
|
|
|
|
Level 1 Valuations based on quoted prices in active
markets for identical instruments that the Company is able to
access. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation
of these products does not entail a significant degree of
judgment.
|
|
|
|
Level 2 Valuations based on quoted prices in active
markets for instruments that are similar, or quoted prices in
markets that are not active for identical or similar
instruments, and model-derived valuations in which all
significant inputs and significant value drivers are observable
in active markets.
|
|
|
|
Level 3 Valuations based on inputs that are
unobservable and significant to the overall fair value
measurement.
|
F-14
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
The financial assets for which the Company performs recurring
fair value remeasurements are cash equivalents and short-term
investments.
As of December 31, 2010, the Company had cash equivalents
and short-term investments of $8,755 and $20,000, respectively,
which consist of money market accounts and variable rate demand
notes that are invested in corporate and municipal bonds. These
variable rate demand notes have final maturities between 2020
and 2034, but are puttable by the Company at any time with seven
days notice. Principal and interest invested in these notes are
fully covered by a letter of credit. As of December 31,
2009, the Company had cash equivalents of $16,776, which consist
of money market accounts. These cash equivalents and short-term
investments are classified within Level 1 of the fair value
hierarchy since they are valued using quoted market prices. As
of December 31, 2010 and 2009, the Company did not have any
financial assets or liabilities with observable inputs not
quoted on active markets (Level 2), or without observable
market values that would require a high level of judgment to
determine fair value (Level 3).
The fair value measurements of the Companys financial
assets at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash equivalents
|
|
$
|
8,755
|
|
|
$
|
8,755
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,755
|
|
|
$
|
28,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment
|
Property and equipment consist of the following as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Furniture and equipment
|
|
$
|
605
|
|
|
$
|
579
|
|
Computer software and equipment
|
|
|
4,821
|
|
|
|
3,483
|
|
Leasehold improvements
|
|
|
251
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
5,677
|
|
|
|
4,293
|
|
Less accumulated depreciation and amortization
|
|
|
(3,684
|
)
|
|
|
(2,986
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,993
|
|
|
$
|
1,307
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment
(excluding capitalized internal-use software) for the years
ended December 31, 2010, 2009 and 2008 was $551, $644 and
$594, 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 $648 and $220 during the years
ended December 31, 2010 and 2009, respectively. Net
capitalized software development costs totaled $740 and $333 as
of December 31, 2010 and 2009, respectively. Amortization
expense for the years ended December 31,
F-15
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
2010, 2009 and 2008 related to capitalized software development
costs was $241, $167 and $154, respectively, which is classified
within cost of revenues in the accompanying statements of
operations.
|
|
6.
|
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, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Goodwill
|
|
$
|
6,765
|
|
|
$
|
|
|
|
$
|
6,765
|
|
|
$
|
6,765
|
|
|
$
|
|
|
|
$
|
6,765
|
|
Acquired technology
|
|
|
8,100
|
|
|
|
(8,100
|
)
|
|
|
|
|
|
|
8,100
|
|
|
|
(8,100
|
)
|
|
|
|
|
Customer relationships
|
|
|
5,200
|
|
|
|
(4,591
|
)
|
|
|
609
|
|
|
|
5,200
|
|
|
|
(4,290
|
)
|
|
|
910
|
|
Trademarks
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,495
|
|
|
$
|
(12,691
|
)
|
|
$
|
7,804
|
|
|
$
|
20,495
|
|
|
$
|
(12,390
|
)
|
|
$
|
8,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $301, $403 and $537 for the years ended
December 31, 2010, 2009 and 2008, respectively.
The Company estimates the following amortization expense related
to its customer relationships for the years ended December 31:
|
|
|
|
|
2011
|
|
$
|
225
|
|
2012
|
|
|
167
|
|
2013
|
|
|
125
|
|
2014
|
|
|
92
|
|
|
|
|
|
|
|
|
$
|
609
|
|
|
|
|
|
|
Current accrued liabilities are comprised of the following as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued compensation
|
|
$
|
3,502
|
|
|
$
|
2,321
|
|
Accrued consulting and professional services
|
|
|
30
|
|
|
|
96
|
|
Accrued rent
|
|
|
204
|
|
|
|
239
|
|
Other
|
|
|
464
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,200
|
|
|
$
|
2,980
|
|
|
|
|
|
|
|
|
|
|
F-16
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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. During 2010,
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.
|
|
9.
|
Redeemable
Preferred Stock
|
Authorized Shares As of December 31,
2009, the Company was authorized to issue up to
500,000 shares of $0.001 par value redeemable
preferred stock. On September 20, 2010, the Company filed
an amended and restated certificate of incorporation that
increased the number of authorized shares of $0.001 par
value preferred stock to 5,000,000, of which 222,073 shares
are designated as Series A redeemable preferred stock. As
discussed in Note 1, $36,151 of the net proceeds from the
initial public offering were used to redeem all outstanding
shares of Series A redeemable preferred stock.
Issuance of Stock As of December 31,
2010 and 2009, the Company had outstanding zero and
222,073 shares of $0.001 par value redeemable
preferred stock, respectively. 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 Series A 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
Series A 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 where the additional
paid-in capital balance is reduced to zero, remaining accretion
amounts are applied to accumulated deficit. As of
December 31, 2010 and 2009, cumulative accrued dividends on
the Companys Series A redeemable preferred stock
totaled zero and $11,864, 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
F-17
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Redeemable
|
|
|
|
Redeemable Preferred
|
|
|
Preferred Shares
|
|
|
|
Stock
|
|
|
Outstanding
|
|
|
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
|
|
|
2,079
|
|
|
|
|
|
Redemption of preferred stock
|
|
|
(36,151
|
)
|
|
|
(222,073
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Stockholders
Equity (Deficit)
|
Reverse
Stock Split
On September 20, 2010, the Company filed an amended and
restated certificate of incorporation that (1) effected a
one-for-two
reverse split of all the outstanding shares of common stock,
(2) increased the number of shares of authorized common
stock to 50,000,000 and (3) increased the number of shares
of authorized preferred stock to 5,000,000. All issued and
outstanding common stock and per share amounts contained in the
financial statements have been retroactively adjusted to reflect
this reverse stock split for all periods presented.
Stock
Incentive Plan
The Company adopted a stock incentive plan (the Plan) on
August 27, 2004. The Plan, as amended, allows the Company
to grant up to 4,307,736 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. 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.
F-18
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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 prior to
September 24, 2010, and subsequently as determined by the
closing price of the Companys shares of common stock on
the NASDAQ Global Market on the date of termination) for vested
restricted shares. The shares generally vest ratably over two to
four years. As of December 31, 2010 and 2009, there were
2,032,286 and 2,248,240 shares of vested and unvested
restricted stock outstanding, respectively.
The following summarizes the activity of nonvested shares of
restricted stock for the years ended December 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of Shares
|
|
|
Date Fair Value
|
|
|
Nonvested as of December 31, 2008
|
|
|
222,691
|
|
|
$
|
1.04
|
|
Issued
|
|
|
159,024
|
|
|
|
1.70
|
|
Vested
|
|
|
(204,338
|
)
|
|
|
1.06
|
|
Repurchased
|
|
|
(396
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2009
|
|
|
176,981
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
95,861
|
|
|
|
1.58
|
|
Vested
|
|
|
(98,554
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2010
|
|
|
174,288
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to nonvested
shares of restricted stock is approximately $291 at
December 31, 2010. This amount is expected to be recognized
over a weighted-average period of 2.3 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, 2010 and 2009, the balance outstanding for
these subscription note agreements was $15 and $769,
respectively. 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, 2010 and 2009 are presented as a separate
component of stockholders equity in the accompanying
balance sheets.
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 $0, $11 and $83 during
the years ended December 31, 2010, 2009 and 2008,
respectively, related to such awards.
Restricted stock awards granted after December 31, 2005 are
recognized in the statement of operations 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
F-19
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
purposes. Stock-based compensation expense of $148, $214 and
$147 was recorded during the years ended December 31, 2010,
2009 and 2008, respectively, in connection with these restricted
stock awards.
On March 20, 2010, 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 year ended
December 31, 2010, the Company recognized compensation
expense of $584 related to this modification.
During the years ended December 31, 2010 and 2009, the
Company repurchased 143,543 and 7,802 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.
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
as of
|
|
|
|
Number of Options
|
|
|
Range of Exercise
|
|
Average
|
|
|
Contractual
|
|
|
December 31,
|
|
|
|
Outstanding
|
|
|
Prices
|
|
Exercise Price
|
|
|
Term (In Years)
|
|
|
2010
|
|
|
Balance as of December 31, 2009
|
|
|
443,603
|
|
|
|
$0.08
|
- $ 3.16
|
|
$
|
1.26
|
|
|
|
7.5
|
|
|
$
|
3,067
|
|
Options granted
|
|
|
340,599
|
|
|
|
$2.26
|
- $13.38
|
|
$
|
4.68
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(17,241
|
)
|
|
|
$0.08
|
- $ 2.26
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(33,310
|
)
|
|
|
$0.08
|
- $ 8.18
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
733,651
|
|
|
|
$0.08
|
- $13.38
|
|
$
|
2.76
|
|
|
|
7.7
|
|
|
$
|
7,515
|
|
Vested and expected to vest at December 31, 2010
|
|
|
659,327
|
|
|
|
$0.08
|
- $13.38
|
|
$
|
2.61
|
|
|
|
7.6
|
|
|
$
|
6,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2010
|
|
|
362,004
|
|
|
|
$0.08
|
- $ 8.18
|
|
$
|
1.32
|
|
|
|
6.6
|
|
|
$
|
4,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2009, the Company approved a common stock option
re-pricing program whereby 87,811 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
$2.60 to $3.16 per share, were cancelled and reissued with an
exercise price equal to the then-current estimated fair value of
the Companys common stock, $2.04 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
F-20
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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 December 31, 2010 multiplied by the number of shares
that would have been received by the option holders had all
option holders exercised their options on December 31,
2010. The aggregate intrinsic value of options exercised during
the years ended December 31, 2010, 2009 and 2008 was $127,
$24 and $47, respectively.
The total unrecognized compensation cost related to outstanding
stock options is $1,196 at December 31, 2010. This amount
is expected to be recognized over a weighted-average period of
3.1 years.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at December 31, 2010
|
|
|
Options Exercisable at
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
|
|
|
Contractual Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise Price
|
|
Number
|
|
|
(Yrs.)
|
|
|
Exercise Price
|
|
|
Number
|
|
|
Exercise Price
|
|
|
$0.08 - $0.14
|
|
|
170,540
|
|
|
|
4.8
|
|
|
$
|
0.10
|
|
|
|
167,245
|
|
|
$
|
0.10
|
|
$1.90 - $2.04
|
|
|
227,965
|
|
|
|
7.8
|
|
|
|
2.03
|
|
|
|
128,342
|
|
|
|
2.04
|
|
$2.60 - $3.16
|
|
|
224,146
|
|
|
|
9.0
|
|
|
|
2.27
|
|
|
|
57,980
|
|
|
|
2.29
|
|
$8.18 - $13.38
|
|
|
111,000
|
|
|
|
9.5
|
|
|
|
9.38
|
|
|
|
8,437
|
|
|
|
8.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
733,651
|
|
|
|
7.7
|
|
|
$
|
2.76
|
|
|
|
362,004
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2009
|
|
|
2008
|
|
|
Estimated dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected stock price volatility
|
|
|
100.00%
|
|
|
|
100.00%
|
|
|
|
100.00%
|
|
Weighted-average risk-free interest rate
|
|
|
1.3% - 3.0%
|
|
|
|
1.9% - 2.8%
|
|
|
|
2.6% - 3.6%
|
|
Expected life of options (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Stock-based compensation expense of $356, $140 and $56 was
recorded during the years ended December 31, 2010, 2009 and
2008, respectively, related to the Companys outstanding
stock options. The weighted average grant date fair value per
share for stock options granted in 2010, 2009 and 2008 was
$3.76, $0.91 and $1.12, respectively.
During the year ended December 31, 2008, the Company issued
12,500 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, 2010 and 2009, the Company had warrants
outstanding representing 26,080 and 221,680 shares of
common stock, respectively, with all of the warrants being
exercisable as of December 31, 2010 and 2009 to
F-21
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
purchase the Companys common stock at $0.08 per share.
These warrants expire during 2011. 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.
Charitable
Donation
On September 23, 2010, the Company made a contribution of
25,000 shares of its outstanding common stock as a
charitable donation to an unrelated charitable foundation to
fund a charitable trust established by the Company. The Company
recognized $238 as general and administrative expense during the
year ended December 31, 2010 related to this donation,
which was calculated using the Companys public offering
price of $9.50 per share.
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.
The following are the components of income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(102
|
)
|
|
$
|
21
|
|
|
$
|
9
|
|
State
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
21
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(905
|
)
|
|
|
12,535
|
|
|
|
|
|
State
|
|
|
(12
|
)
|
|
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(917
|
)
|
|
|
16,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
$
|
(1,114
|
)
|
|
$
|
16,821
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
71,626
|
|
|
$
|
73,587
|
|
Research and development tax credits
|
|
|
1,415
|
|
|
|
1,344
|
|
Compensation accruals
|
|
|
207
|
|
|
|
177
|
|
Deferred revenues
|
|
|
3,822
|
|
|
|
2,785
|
|
Depreciation and amortization
|
|
|
|
|
|
|
25
|
|
Other credits
|
|
|
177
|
|
|
|
74
|
|
Other
|
|
|
174
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
77,421
|
|
|
|
77,996
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(60,550
|
)
|
|
|
(60,550
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
16,871
|
|
|
|
17,446
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
250
|
|
|
|
|
|
Customer contracts
|
|
|
235
|
|
|
|
351
|
|
Trade names
|
|
|
166
|
|
|
|
166
|
|
Stock compensation
|
|
|
52
|
|
|
|
|
|
Capitalized software costs
|
|
|
286
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
989
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
15,882
|
|
|
$
|
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, 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.
At December 31, 2009, unrecognized tax benefits of $368,
net of federal tax benefits, would have increased the
Companys deferred tax assets with a corresponding increase
to the valuation allowance if recognized. During 2010, the
Company recognized an increase in unrecognized benefits of $70.
As a result, the total amount of unrecognized tax benefits as of
December 31, 2010 is $438. Of the $438 total unrecognized
tax benefits, $438 represents tax positions that, if recognized,
would impact the effective tax rate. The Company does not
believe there will be any material changes in its unrecognized
tax positions over the next twelve months.
The following is a tabular reconciliation of the Companys
change in uncertain tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
368
|
|
|
$
|
|
|
|
$
|
|
|
Increases related to prior year tax positions
|
|
|
70
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
438
|
|
|
$
|
368
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax positions as a component of
income tax expense. As of December 31, 2010 and 2009, the
Company did not have any accrued interest
F-23
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
or penalties associated with any unrecognized tax positions, and
there were no such interest or penalties recognized during the
years ended December 31, 2010, 2009 or 2008. The
Companys open tax years that are subject to federal
examination are 2007 through 2009. All prior years with
applicable net operating losses will remain open to the extent
of the amount of the net operating loss. The Companys open
tax years that are subject to examination by the state taxing
authorities are 2006 through 2009.
As of December 31, 2010, the Company has federal and state
net operating loss carryforwards of approximately $194,048 and
$122,286, 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 the Company to utilize $169,977 of net
federal operating loss carryforwards and tax credit carryovers
due to significant changes in ownership in prior years. These
limitations will 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 $24,071 as of December 31,
2010.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
US federal tax at statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
State taxes (net of federal benefit)
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
Change in valuation allowance
|
|
|
0
|
%
|
|
|
(695
|
)%
|
|
|
(39
|
)%
|
Other nondeductible (benefit) expenses
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
17
|
%
|
Increase in credit carryforwards
|
|
|
(6
|
)%
|
|
|
6
|
%
|
|
|
(17
|
)%
|
Other
|
|
|
1
|
%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
39
|
%
|
|
|
(645
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
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, 2010 or 2009.
The Company is committed to a lease agreement for office space
for its headquarters through January 2017 and is also committed
to another lease through February 2016. Future minimum lease
payments required under leases in effect as of December 31,
2010 are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2011
|
|
$
|
668
|
|
2012
|
|
|
1,015
|
|
2013
|
|
|
1,060
|
|
2014
|
|
|
907
|
|
2015
|
|
|
925
|
|
2016 and thereafter
|
|
|
1,070
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
5,645
|
|
|
|
|
|
|
F-24
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
Rent expense is calculated on a straight-line basis over the
term of the lease. Rent expense recognized under operating
leases totaled approximately $734, $886 and $717 for the years
ended December 31, 2010, 2009 and 2008, respectively.
Management
Bonuses Associated with Initial Public Offering
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 would become due
and payable to the participants in the Exit Event Bonus Plan.
Participation in the Exit Event Bonus Plan would be limited to
those employees selected by the Board of Directors and awarded
units thereunder.
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 total cash bonus was 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. During the year ended December 31, 2010, the Company
recognized compensation expense of approximately $5,888 related
to these cash bonuses, which is recorded in operating expenses
in the accompanying statement of operations.
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, 2010 or 2009
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.
F-25
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
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.
|
|
13.
|
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 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, 2010, 2009
and 2008, the Company paid $291, $277 and $252, respectively, in
discretionary contributions to the Contribution Plan.
Acquisition
On January 1, 2011, the Company completed the acquisition
of all of the issued and outstanding shares of capital stock of
AECsoft USA, Inc. (AECsoft), a privately-owned Texas corporation
and a leading provider of supplier management and sourcing
technology. The acquisition of AECsoft adds comprehensive
supplier management, sourcing and compliance reporting to the
Companys existing strategic procurement and supplier
enablement solution.
The purchase price of approximately $13,300 consisted of $9,000
in cash and 350,568 shares of the Companys common
stock at a fair value of approximately $4,300. The issuance of
25,365 of these shares is subject to successful completion of
certain performance targets under an earn-out arrangement with a
former shareholder of AECsoft. Additionally, 299,838 shares
of the Companys common stock may be issued under an
earn-out arrangement with the former shareholders of AECsoft,
based on successful achievement of certain performance targets
over the next three fiscal years and continued employment with
the Company. The fair value of these shares will be recognized
as compensation expense in the statement of operations over the
requisite service period of the award.
The acquisition of AECsoft occurred subsequent to
December 31, 2010. Accordingly, the results of operations
of the acquired entity are not included in the statement of
operations of SciQuest, Inc. for the year ended
December 31, 2010. The Company is currently in the process
of determining the initial accounting and purchase price
allocation for this acquisition.
F-26
SCIQUEST,
INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(In
thousands except share and per share amounts)
Warrants
On February 8, 2011, warrants representing
26,080 shares of the Companys common stock were
exercised at a purchase price of $0.08 per share. The warrant
holders utilized a cashless exercise option, resulting in
25,928 shares of common stock issued.
|
|
15.
|
Quarterly
Results of Operations (unaudited)
|
The following is a summary of the Companys quarterly
results of operations for the years ended December 31, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
Revenues
|
|
$
|
10,126
|
|
|
$
|
10,562
|
|
|
$
|
10,771
|
|
|
$
|
11,018
|
|
Gross profit
|
|
|
8,017
|
|
|
|
8,225
|
|
|
|
8,442
|
|
|
|
8,432
|
|
Net income (loss)
|
|
|
1,930
|
|
|
|
1,274
|
|
|
|
(2,465
|
)
|
|
|
1,004
|
|
Net income (loss) attributable to common stockholders
|
|
|
1,259
|
|
|
|
581
|
|
|
|
(3,180
|
)
|
|
|
1,004
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.22
|
)
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.22
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
Revenues
|
|
$
|
8,595
|
|
|
$
|
8,811
|
|
|
$
|
9,049
|
|
|
$
|
9,724
|
|
Gross profit
|
|
|
6,748
|
|
|
|
6,910
|
|
|
|
7,170
|
|
|
|
7,857
|
|
Net income (loss)
|
|
|
738
|
|
|
|
999
|
|
|
|
(1,321
|
)
|
|
|
19,013
|
|
Net income (loss) attributable to common stockholders
|
|
|
117
|
|
|
|
359
|
|
|
|
(1,981
|
)
|
|
|
18,339
|
|
Net income (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
$
|
(0.14
|
)
|
|
$
|
1.30
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
(0.14
|
)
|
|
$
|
1.26
|
|
F-27
3,935,393 Shares
Common Stock
PROSPECTUS
March ,
2011
Stifel Nicolaus
Weisel
|
|
|
William
Blair & Company |
JMP Securities |
Pacific Crest Securities |
Canaccord Genuity
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.
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
|
|
$
|
7,709
|
|
FINRA filing fee
|
|
|
7,500
|
|
Legal fees and expenses
|
|
|
150,000
|
|
Accounting fees and expenses
|
|
|
100,000
|
|
Printing and engraving expenses
|
|
|
125,000
|
|
Miscellaneous expenses
|
|
|
59,791
|
|
|
|
|
|
|
Total
|
|
$
|
450,000
|
|
|
|
|
|
|
|
|
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 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 provides
that our directors are not personally liable for breaches of
fiduciary duties to the fullest extent permitted by the Delaware
General Corporation Law. 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.
II-1
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 1,615 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
12,500 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.
On October 19, 2010, we issued 195,600 shares of our
common stock to Venture Lending & Leasing IV, LLC upon
exercise of a warrant in exchange for an aggregate exercise
price of $15,648.
On January 1, 2011, as partial payment of the purchase
price for all of the outstanding capital stock of AECsoft USA,
Inc., we issued an aggregate of 325,203 shares of our
common stock to the former shareholders of AECsoft as follows:
|
|
|
|
|
Tom Ren
|
|
|
133,821
|
|
Ying (Lily) Xiong
|
|
|
133,821
|
|
John Paul Gutierrez
|
|
|
32,196
|
|
Ronald Dressin
|
|
|
25,365
|
|
On February 8, 2011, we issued 25,928 shares of our common
stock to Silicon Valley Bank upon exercise of a warrant in
exchange for an aggregate exercise price of $2,086.
II-2
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Current
|
|
|
Number of
|
|
Exercise Price
|
|
Fair Value
|
|
Exercise
|
Date of Issuance
|
|
Options Granted
|
|
of Option
|
|
per Option(1)
|
|
Price
|
|
July 18, 2007
|
|
|
30,000
|
|
|
$
|
0.14
|
|
|
$
|
1.34
|
|
|
$
|
0.14
|
|
January 23, 2008(2)
|
|
|
73,561
|
|
|
$
|
2.60
|
|
|
$
|
2.10
|
|
|
$
|
2.04
|
|
July 23, 2008(2)
|
|
|
31,500
|
|
|
$
|
3.16
|
|
|
$
|
2.56
|
|
|
$
|
2.04
|
|
January 22, 2009
|
|
|
174,547
|
|
|
$
|
2.04
|
|
|
$
|
1.63
|
|
|
$
|
2.04
|
|
July 22, 2009
|
|
|
17,500
|
|
|
$
|
1.90
|
|
|
$
|
1.53
|
|
|
$
|
1.90
|
|
January 21, 2010
|
|
|
223,599
|
|
|
$
|
2.26
|
|
|
$
|
1.82
|
|
|
$
|
2.26
|
|
April 20, 2010
|
|
|
79,500
|
|
|
$
|
8.18
|
|
|
$
|
6.61
|
|
|
$
|
8.18
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
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 $2.04 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
|
|
|
625
|
|
|
$
|
0.08
|
|
July 11, 2007
|
|
|
562
|
|
|
$
|
0.10
|
|
August 27, 2007
|
|
|
8,210
|
|
|
$
|
0.08
|
|
August 28, 2007
|
|
|
562
|
|
|
$
|
0.10
|
|
September 25, 2007
|
|
|
687
|
|
|
$
|
0.10
|
|
November 30, 2007
|
|
|
625
|
|
|
$
|
0.10
|
|
December 14, 2007
|
|
|
375
|
|
|
$
|
0.14
|
|
January 16, 2008
|
|
|
2,630
|
|
|
$
|
0.08
|
|
March 8, 2008
|
|
|
10,599
|
|
|
$
|
0.08
|
|
March 19, 2008
|
|
|
531
|
|
|
$
|
0.14
|
|
April 1, 2008
|
|
|
719
|
|
|
$
|
0.14
|
|
April 23, 2008
|
|
|
375
|
|
|
$
|
0.14
|
|
July 17, 2008
|
|
|
437
|
|
|
$
|
0.14
|
|
October 1, 2008
|
|
|
438
|
|
|
$
|
0.10
|
|
December 1, 2008
|
|
|
2,125
|
|
|
$
|
0.39
|
|
December 10, 2008
|
|
|
281
|
|
|
$
|
0.14
|
|
February 18, 2009
|
|
|
1,062
|
|
|
$
|
0.10
|
|
March 11, 2009
|
|
|
937
|
|
|
$
|
0.14
|
|
April 3, 2009
|
|
|
2,799
|
|
|
$
|
0.09
|
|
May 8, 2009
|
|
|
3,052
|
|
|
$
|
0.23
|
|
August 6, 2009
|
|
|
562
|
|
|
$
|
2.04
|
|
November 16, 2009
|
|
|
413
|
|
|
$
|
0.46
|
|
December 29, 2009
|
|
|
6,225
|
|
|
$
|
0.49
|
|
March 14, 2010
|
|
|
976
|
|
|
$
|
0.16
|
|
March 31, 2010
|
|
|
859
|
|
|
$
|
2.04
|
|
May 3, 2010
|
|
|
2,000
|
|
|
$
|
2.04
|
|
May 10, 2010
|
|
|
7,552
|
|
|
$
|
2.04
|
|
August 12, 2010
|
|
|
875
|
|
|
$
|
2.04
|
|
August 19, 2010
|
|
|
625
|
|
|
$
|
1.90
|
|
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
|
|
|
|
|
|
|
Shares of
|
|
Per Share
|
|
|
|
|
Restricted
|
|
Purchase Price(s) of
|
|
Fair Value(s)
|
Date of Issuance
|
|
Stock Granted
|
|
Restricted Stock
|
|
per Share(1)
|
|
July 18, 2007
|
|
|
62,500
|
|
|
$
|
0.14
|
|
|
$
|
1.34
|
|
January 23, 2008(2)
|
|
|
292,137
|
|
|
$
|
2.60
|
|
|
$
|
1.38 - $1.81
|
|
January 22, 2009
|
|
|
159,024
|
|
|
$
|
2.04
|
|
|
$
|
1.41 - $2.04
|
|
January 21, 2010
|
|
|
95,861
|
|
|
$
|
2.26
|
|
|
$
|
1.58
|
|
|
|
|
(1) |
|
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 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. |
|
(2) |
|
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 $2.04 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.
II-5
(b) 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-6
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 March 9, 2011.
SciQuest, Inc.
Stephen J. Wiehe
President and Chief Executive Officer
POWER OF
ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Stephen J. Wiehe and Rudy C. Howard, and each of them,
as his attorney-in-fact and agent, with full power of
substitution and resubstitution for him in any and all
capacities, to sign any or all amendments or post-effective
amendments to this registration statement, or any registration
statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with exhibits thereto and other
documents in connection therewith or in connection with the
registration of the shares of common stock under the Securities
Exchange Act of 1934, as amended, with the Securities and
Exchange Commission, granting unto such attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary in connection with such
matters and hereby ratifying and confirming all that such
attorney-in-fact and agent or his substitutes may do or cause to
be done by virtue hereof.
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Stephen
J. Wiehe
Stephen
J. Wiehe
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 9, 2011
|
/s/ Rudy
C. Howard
Rudy
C. Howard
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
March 9, 2011
|
/s/ Noel
J. Fenton
Noel
J. Fenton
|
|
Chairman of the Board of Directors
|
|
March 9, 2011
|
/s/ Daniel
F. Gillis
Daniel
F. Gillis
|
|
Director
|
|
March 9, 2011
|
/s/ Jeffrey
T. Barber
Jeffrey
T. Barber
|
|
Director
|
|
March 9, 2011
|
/s/ Timothy
J. Buckley
Timothy
J. Buckley
|
|
Director
|
|
March 9, 2011
|
II-7
EXHIBIT LIST
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of SciQuest,
Inc. (incorporated herein by reference to Exhibit 3.1 to
the Companys Annual Report on
Form 10-K,
filed March 9, 2011)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of SciQuest, Inc. (incorporated
herein by reference to Exhibit 3.1 to the Companys
Annual Report on
Form 10-K,
filed March 9, 2011)
|
|
4
|
.1
|
|
Specimen Certificate representing shares of common stock of
SciQuest, Inc. (incorporated herein by reference to
Exhibit 4.1 to Amendment No. 5 to
Form S-1
Registration Statement, filed September 2, 2010)
|
|
4
|
.2
|
|
Stockholders Agreement, by and among SciQuest and certain of its
stockholders, dated July 28, 2004 (incorporated herein by
reference to Exhibit 4.2 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
4
|
.3
|
|
Amendment No. 1 to Stockholders Agreement, by and among
SciQuest and certain of its stockholders, dated August 2,
2010 (incorporated herein by reference to Exhibit 4.3 to
Amendment No. 5 to
Form S-1
Registration Statement, filed September 2, 2010)
|
|
5
|
.1*
|
|
Opinion of Morris, Manning & Martin, LLP
|
|
10
|
.1
|
|
SciQuest, Inc. 2004 Stock Incentive Plan+ (incorporated herein
by reference to Exhibit 10.1 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.2
|
|
Amendment No. 2 to SciQuest, Inc. 2004 Stock Incentive
Plan+ (incorporated herein by reference to Exhibit 10.2 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.3
|
|
Amendment No. 3 to SciQuest, Inc. 2004 Stock Incentive
Plan+ (incorporated herein by reference to Exhibit 4.5 to
Form S-8
Registration Statement, filed November 5, 2010)
|
|
10
|
.4
|
|
Form of Stock Option Grant Certificate under the SciQuest, Inc.
2004 Stock Incentive Plan+ (incorporated herein by reference to
Exhibit 10.3 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.5
|
|
Form of Management Subscription Agreement under the SciQuest,
Inc. 2004 Stock Incentive Plan+ (incorporated herein by
reference to Exhibit 10.4 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.6
|
|
Employment Agreement by and between SciQuest, Inc. and Stephen
J. Wiehe, dated February 5, 2002+ (incorporated herein by
reference to Exhibit 10.7 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.7
|
|
Change of Control Agreement by and between SciQuest, Inc. and
Stephen J. Wiehe, dated January 1, 2004+ (incorporated
herein by reference to Exhibit 10.8 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.8
|
|
Change of Control Agreement by and between SciQuest, Inc. and
James B. Duke, dated January 1, 2004+ (incorporated herein
by reference to Exhibit 10.9 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.9
|
|
Change of Control Agreement by and between SciQuest, Inc. and
Rudy C. Howard, dated January 1, 2010+ (incorporated herein
by reference to Exhibit 10.10 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.10
|
|
Amended and Restated Subscription Agreement by and between
SciQuest, Inc. and Daniel F. Gillis, dated January 21,
2010+ (incorporated herein by reference to Exhibit 10.11 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.11
|
|
Subscription Agreement by and between SciQuest, Inc. and Daniel
F. Gillis, dated January 21, 2010+ (incorporated herein by
reference to Exhibit 10.12 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.12
|
|
Form of Indemnification Agreement (incorporated herein by
reference to Exhibit 10.13 to Amendment No. 1 to
Form S-1
Registration Statement, filed May 11, 2010)
|
|
10
|
.13
|
|
Office Lease by and between SciQuest, Inc. and Duke Realty
Limited Partnership, dated May 17, 2005 (incorporated
herein by reference to Exhibit 10.14 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.14
|
|
First Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 21,
2008 (incorporated herein by reference to Exhibit 10.15 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.15
|
|
Second Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 27,
2008 (incorporated herein by reference to Exhibit 10.16 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.16
|
|
Assignment of Lease by and between SciQuest, Inc. and Kroy
Building Products, Inc., dated February 11, 2008
(incorporated herein by reference to Exhibit 10.17 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.17
|
|
Office Lease by and between Duke Realty Limited Partnership and
Kroy Building Products, Inc., dated September 29, 2006
(incorporated herein by reference to Exhibit 10.18 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.18
|
|
Second Amendment to Office Lease by and between SciQuest, Inc.
and Duke Realty Limited Partnership, dated February 21,
2008 (incorporated herein by reference to Exhibit 10.19 to
Form S-1
Registration Statement, filed March 26, 2010)
|
|
10
|
.19
|
|
Master Agreement for U.S. Availability Services between SunGard
Availability Services LP and SciQuest, Inc. (incorporated herein
by reference to Exhibit 10.20 to Amendment No. 1 to
Form S-1
Registration Statement, filed May 11, 2010)
|
|
10
|
.20
|
|
Third Amendment to Office Lease, dated as of October 28,
2010, by and between Duke Realty Limited Partnership and
SciQuest, Inc. (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed November 2, 2010)
|
|
10
|
.21
|
|
Third Amendment to Office Lease, dated as of October 28,
2010, by and between Duke Realty Limited Partnership and
SciQuest, Inc., as successor in interest to Kroy Building
Products, Inc. (incorporated herein by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K,
filed November 2, 2010)
|
|
10
|
.22
|
|
Stock Purchase Agreement, dated December 21, 2010, by and
among SciQuest, Inc., Tom (Yitao) Ren, Ying (Lily) Xiong, John
Paul Gutierrez and Ronald Dressin (incorporated herein by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
filed December 22, 2010)
|
|
21
|
.1
|
|
List of Subsidiaries (incorporated herein by reference to
Exhibit 21.1 to the Companys Annual Report on
Form 10-K, filed March 9, 2011)
|
|
23
|
.1*
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
Consent of Morris, Manning & Martin, LLP (included in
Exhibit 5.1)
|
|
24
|
.1*
|
|
Power of Attorney (included on
Page II-7)
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Indicates management contract or compensatory plan or
arrangement. |