Item 1. Business
Overview
SciQuest is a software, information and services company that provides solutions to enhance research operations for pharmaceutical, biotechnology and other research-based organizations. SciQuest is focused on enabling researchers and their organizations to reduce costs, improve efficiencies, increase quality and speed the process of research.
Our solutions are specifically designed to help scientists find, acquire and manage the critical research materials they use. These materials include chemical and biological compounds, laboratory supplies, and equipment.
We also help the suppliers of research materials to better service their customers through enhanced marketing channels and enriched product information.
Our software products can be utilized independently or integrated with leading software, automation equipment and supplier systems to enhance innovation, reduce costs and improve operational effectiveness.
Our customers include many of the world's leading pharmaceutical, biotechnology, chemical, academic and research organizations, such as Abbott Laboratories, Aventis, Bayer (Aventis CropScience), Burnham Institute, Corixa, Eisai Research Institute, FMC, GlaxoSmithKline, Memorial Sloan-Kettering, OSI Pharmaceuticals, Roche, Pfizer, Proctor & Gamble and Schering-Plough.
Recent Events
In January 2002, we announced the formation of the Publishing and Supplier Services business unit designed to provide suppliers with web, electronic and print marketing channels to promote their products to researchers.
In January 2002, we announced that Aventis CropScience has chosen to license SciQuest's Enterprise Reagent Manager(TM) as its enterprise-wide research asset management solution.
In February 2002, we acquired Textco, Inc., a supplier of software solutions for molecular biologists since 1984. The transaction was paid for with a mixture of cash and SciQuest common stock. Textco's revenues over the past twelve months were approximately five hundred thousand dollars. Textco has software solutions installed at leading commercial and academic research organizations in the U.S. and internationally. Textco's software product portfolio includes the Gene Construction Kit and Gene Inspector solutions, which provide scientists with technology for gene cloning projects, sequence analyses, and experiment tracking via electronic notebooks.
Industry Background
SciQuest is focused on providing technology products and services that streamline the research process for pharmaceutical, biotechnology, chemical, academic and other research organizations. We believe that these sectors represent a large, attractive market opportunity for SciQuest.
Pharmaceutical and biotechnology organizations form one of the largest and most competitive industries in the world. The need for new drugs to treat disease typically grows exponentially as the global population increases and ages. According to the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization, the pharmaceutical and biotechnology industries in the U.S. generated approximately $172 billion of revenues in 2000 and invested a higher percentage of sales in research and development than virtually any other U.S. industry, including electronics, aerospace, computers and automobiles.
Industry analysts estimate that the global pharmaceutical and biotechnology industry is currently spending more than $50 billion on research and development, including an estimated 10%, or $5 to 6 billion, of overall research and development investments targeted for information technology. Information technology spending in this industry is expected to increase dramatically over the next decade. Gartner Dataquest forecasts total U.S. information technology spending by the pharmaceutical industry to increase at a compound annual growth rate of 12.8%. We believe that this growth will be driven by a number of factors.
. Risky, Time-Consuming and Expensive Development Process. It typically takes more than 15 years and $500 million to take a drug from discovery to market. Over the years, this timeline has lengthened and costs have risen, increasing the pressure on companies to streamline the process early on--in the drug discovery phase. Organizations are working to replace older, labor-intensive processes and "black box" analysis with more efficient, technology-based industrial approaches.
. Advances in Genetics Causing Data Explosion. The recent mapping of the human genome has further accelerated innovation and growth within pharmaceutical and biotechnology firms. Advances in genomics and industrial scale biology have created an explosion of data to be tracked and analyzed. Automated research techniques, such as high-throughput screening, have generated an unprecedented amount of chemical entities to be managed. Many companies are now finding that their homegrown legacy systems can no longer handle the volumes of valuable information.
. Pressure Due to Expiring Patents. Patents on top-selling drugs continue to expire, putting pressure on pharmaceutical companies to find new drugs to replace the reduced revenue streams. In 2000, patents expired on 13 of the top 100 drugs representing worldwide sales of $11 billion. By 2005, 53 of the top 100 drugs will be facing patent expiration, underscoring the need for pharmaceutical and biotechnology firms to expedite the drug discovery process.
. Efforts to Increase Value through Mergers. Another noteworthy industry trend is the rise in mergers and acquisitions among pharmaceutical and biotechnology companies. These newly formed companies often find that they have different legacy systems for each organization. Many companies are addressing this problem by implementing new, more efficient information technology systems.
Information technology and services companies, like SciQuest, are well positioned to help scientific organizations face these issues. Currently, many pharmaceutical and biotechnology organizations internally develop their technology. However, software development, systems integration and data management are not always core competencies for these scientific firms. In fact, many research-based organizations are finding outsourcing information technology a more cost-effective and efficient alternative to internally building their own software infrastructure.
This development follows similar outsourcing trends in the pharmaceutical industry, such as outsourcing clinical trials to contract research organizations and sales and marketing efforts to contract sales organizations. Technology solutions like the software developed by SciQuest provide organizations with tools, already developed and tested, that accelerate the research process.
The SciQuest Solutions
SciQuest's solutions are designed to address logistical challenges in the research discovery process. The need for end-to-end supply chain solutions has become increasingly important as research-based organizations invest in new technologies to remain competitive in today's market. High-throughput technology has dramatically increased research volumes, generating an unprecedented amount of chemical entities to be managed. Managing this growing volume of chemicals by traditional means has become a great expense for many organizations and a burden for researchers, taking away time that could be better spent on research and development. Research supply chain solutions, like the software developed by SciQuest, provide organizations with tools that improve the flow of materials and information, thereby accelerating the research process. Our primary focus on a single industry allows us to create a uniquely tailored suite of solutions that we believe is more attractive to research-based organizations and their suppliers than generic multi-industry technology solutions.
In addition, many of our solutions are designed to be compatible with leading enterprise software systems, automation equipment and supplier systems without requiring customers to install additional systems. This compatibility enables organizations to reduce the expense, time and training typically required to install, integrate and support new enterprise software.
SciQuest interacts with a range of professionals throughout customers' organizations, representing departments such as research chemistry, research biology, lab support, environmental health and safety, compound dispensary, purchasing and accounting, facilities and stockroom and information technology. Our solutions serve three primary categories of customers:
Scientists. Our solutions offer scientists electronic tools to streamline the process of researching, locating, comparing, purchasing, tracking and managing laboratory supplies. By reducing the time scientists spend on these functions, our solutions allow them to be more productive and spend more time on research and testing. Our solutions enable a scientist to:
. locate a specific chemical, equipment or supply item;
. receive and track chemicals in containers after they are received from suppliers;
. query internal inventory and suppliers' databases via chemical structure or substructure;
. search an extensive electronic catalog, using our taxonomies, to compare products, attributes and technical data across multiple suppliers;
. consolidate, purchase and track orders from multiple suppliers through the convenience of a single web site, 24 hours a day, seven days a week; and
. access a significant body of articles and information through our SciCentral, BioSupplyNet and SciQuest Buyer's Guide offerings.
Purchasing Professionals. Our solutions allow purchasing professionals to automate order processing, consolidate purchase orders and obtain purchasing information. This provides purchasing professionals with greater access to purchasing information in order to better monitor and control purchasing patterns and to implement and enforce uniform purchasing policies that reduce procurement costs. Our solutions enable purchasing professionals to:
. utilize search and comparative tools to optimize product and supplier selection;
. consolidate purchases from multiple suppliers through a single interface;
. streamline the purchasing process and reduce the likelihood of errors;
. provide real time chemical availability and pricing;
. communicate and control purchasing policies and rules; and
. access detailed purchasing information and reports.
Suppliers. Our solutions provide suppliers with more efficient content management, marketing and commerce tools. Our solutions enable suppliers to:
. market products more cost-effectively through print and electronic access to our global audience of scientists and purchasing professionals;
. access valuable market and customer data;
. leverage our e-commerce functionality for their own initiatives;
. easily update product information;
. syndicate their catalog content to multiple destinations;
. introduce new products to qualified buyers quickly and economically; and
. maintain and enhance contact with their customers.
Strategy
SciQuest is dedicated to enhancing the operational effectiveness of our customers' discovery research efforts. We intend to pursue this mission through the following strategic goals:
Generate Revenue Growth. To achieve our revenue objectives, we must execute with our strengthened sales and professional services teams to sell our current products to new customers and find opportunities to cross-sell new or additional products to existing customers. As a result we have been actively recruiting and training new sales professionals. We have structured compensation packages that motivate our sales organization to sell products that can be delivered in a timely and profitable manner. We also have implemented weekly and monthly reporting and analysis to allow us to track and monitor our progress.
Continue to Create Value for Customers by Delivering Quality Products and Services That Meet Their Needs. Our second goal is to support our customers with quality solutions and services. We have completed a two-year product development plan for each of our products. These strategic plans provide our customers insight into the direction of our products and also allow us to critically evaluate new enhancements or features. Our product managers are now measured on the revenue generated by each product. Development resources for future enhancements are allocated, in part, by the historical and future budgeted revenue of each product. Our customer support organization reports directly into the development organization. This reporting structure allows for rapid feedback between our customers and our product developers. We constantly measure and assess our professional services organization on the quality and value of the services they provide, such as technical consulting, project planning, integration and training services.
Expand Our Product Portfolio. Customer feedback is driving our development. We use customer data and input to develop features and function to enhance our existing products, as well as to provide a source of ideas for new products. We are analyzing our core technologies to identify additional ways to leverage our strengths into new market opportunities. Another way for us to enhance our product portfolio is through acquisitions and joint ventures. We look for complementary companies with installed customer bases, revenues, and core technology platforms essentially complete. We are focused on opportunities where we can simultaneously grow revenues, eliminate redundant overhead, leverage acquired assets effectively and positively impact our path to profitability.
Create Value for Shareholders. For SciQuest to create long-term sustainable shareholder value, we must remain focused on expense control and invest in activities that will generate tangible return on investments. We will constantly review our plans and progress to determine if our assets are being utilized for their best and highest value.
Products and Services
SciQuest is a software, information and services company that provides solutions to enhance research operations for pharmaceutical, biotechnology and other research-based organizations. Leveraging the experience of our existing customer base and our extensive industry knowledge, we have built a market-driven portfolio of products. We also provide professional services to suppliers in the areas of integration, content management, and order management. Our software products are generally licensed by our customers, who pay for maintenance, support, and other professional services. Set forth below is a detailed description of our products and services. We believe this comprehensive offering provides our customers with a unique suite of solutions that can be configured to their specific needs.
Enterprise Reagent Manager(TM) is a chemical requisitioning and inventory management software application used by research scientists, health and safety officers, facilities/stockroom and purchasing/receiving personnel. Enterprise Reagent Manager provides scientists with browser-based capabilities to find, procure and use chemicals, reagents and other research materials they need directly from their desktops. Enterprise Reagent Manager is designed to reduce the cost of managing chemical inventory and automate regulatory tracking and reporting.
ERM FastTrack & FastTrack Plus(TM) are pre-configured software solutions that provide research scientists with browser-based searching, sourcing and tracking capabilities for chemical compounds. These products are designed to meet the needs of smaller research organizations that do not require sophisticated and large-scale solutions as offered through the Enterprise Reagent Manager product.
Enterprise Substance Manager(TM) is a software solution used by research scientists and compound management personnel to manage inventories of proprietary compounds and sample plates used in high throughput screening, genomics and combinatorial chemistry operations. Enterprise Substance Manager provides real-time access to compound data on a local or global basis, maximizes the potential of expensive and highly sophisticated robotics equipment and ensures that drug candidates are tracked and accounted for as they pass through the drug discovery process.
SelectSite SRA(TM) (Sourcing and Requisitioning Application) is an enterprise software solution used by research scientists and purchasing professionals. SelectSite SRA provides capabilities to search, source and order scientific supplies from multiple suppliers. This software is designed to promote adoption of customers' existing electronic procurement systems (e.g., Ariba, Commerce One, SAP), while reducing non-contract and off-contract spending. SelectSite SRA's two million products from over 1,000 suppliers combined with the powerful search tools, rich product data, requisition consolidation, reporting, catalog management and integration with other enterprise software systems, contribute to a more efficient and effective product sourcing and requisitioning process.
SelectSite APA(TM) (Advanced Procurement Application) is an enterprise software solution used by research scientists and purchasing professionals that provides a comprehensive electronic procurement system, which includes an on-line product catalog with over 1,000 suppliers, flexible catalog management, requisition approval routing, electronic order distribution to suppliers, detailed report generation and financial system integration. SelectSite APA is designed to reduce procurement costs by automating internal approval and purchasing processes, reducing order and invoice errors and increasing contract compliance.
Publishing and Supplier Services(TM) provides suppliers with electronic catalog content services and electronic and print channels to promote their products and increase market penetration. These channels include the SciQuest Buyer's Guide, BioSupplyNet, BioSupplyNet Source Book, Smart Store, and SciCentral. Research news and a private portal solution are also offered to customers aiming at enhancing user loyalty on their own Web sites.
SciQuest Global Professional Services provides customers with technical consulting, project planning, integration and training services. The SciQuest team has broad expertise in drug discovery work processes and employs an implementation methodology that focuses on delivering demonstrable results in a disciplined manner. This combination of expertise and predictive processes is designed to deliver significant value to many of the world's leading research organizations.
Sales & Marketing
We market and sell our technology and solutions through direct field sales, traditional and internet marketing initiatives and co-marketing relationships. Our sales force focuses on selling our enterprise compatible solutions and services to research organizations and suppliers.
We leverage a variety of marketing channels to build our brand equity as well as promote our solutions to research organizations and suppliers. These channels include direct marketing, print and online advertising, trade shows and seminars. Our public relations department communicates new products, solutions, service offerings and other enhancements to industry analysts and targeted scientific and business press on a regular basis through a combination of press releases, phone briefings, in-person meetings and trade show appointments.
As of December 31, 2001, we had 42 people in our sales and marketing group.
Technology
Our software products are engineered and quality assured in close collaboration with our enterprise customers, which provides us with customer requirements, product specifications and a validation process. We utilize commercially available operating systems, data management systems, application services and scalable distributed infrastructure to the extent possible, which give us an operating platform that supports reliability, speed-to-market and rapid growth. We have implemented standard practices in areas of development, deployment, production control, administration and monitoring that include:
. version management;
. multiple, segmented development, test, staging and production environments;
. automated regression testing;
. load & stress testing;
. QA processes and procedures;
. application and database performance monitoring;
. application level error tracing;
. standardized development environment for consistent and efficient application development; and
. architectural review and oversight.
The SciQuest product suite is designed for customer deployment through both released and hosted products.
Released Products. Our released, implemented products are designed around an n-tiered architecture based on the Java 2 Enterprise Edition standard. The main product component is built on three architectural building blocks, the Database Server, Web Application Server and the Client Machine. Business logic is encapsulated in Enterprise Java Bean components and user interfaces are dynamic HTML-based and are generated using Java Servlets and Java Server Pages.
. Our database server runs under Oracle 8i (version 8.1.6 or higher) supporting standard platforms that run that product.
. Our Web Application Server comes bundled with BEA WebLogic 5.1, a Java 2 Enterprise Edition compliant web application server. As configured, the product is compatible with Java 2, Java Servlet 2.2, Java Server Pages 1.1 and Enterprise Java Beans 1.1. Other Java 2 Enterprise Edition compliant application servers can be supported through customization using SciQuest services. The product supports Microsoft Windows NT 4.0 and Windows 2000 as application server operating systems. Support for other operating systems that are compatible with Oracle and WebLogic may also be available as needed.
. Our Client Machine is fully browser based, a true thin client, utilizing dynamic HTML and running on MS Internet Explorer 5.0. The product requires Windows 95 or NT 4.0 or Windows 2000 with a 400MHz P3 processor (600-800 MHz recommended) with 64MB of memory (128 MB recommended). Clients require no downloading of application code or applets from the server, except for those dispensary workstations that are integrated with balances for weighing operations. These workstations require a single applet, which is downloaded from the server.
Hosted Products. Our hosted products are similarly built around an n-tiered architecture based on the Java 2 Enterprise Edition standard. Business logic is encapsulated in Enterprise Java Bean components and user interfaces are dynamic HTML-based and are generated using Java Servlets and Java Server Pages. SciQuest hosts all web/application and database servers. The customer is solely responsible for providing a browser-based client environment, running Windows or Mac O/S with MS Internet Explorer 4.5 (4.72 preferred minimum) and above or Netscape Navigator 4.08 (4.73 preferred). Clients require no downloading of application code, plug-ins or applets from the server.
We own all of our hosted production servers and web site hardware. Our web applications run off of multiple redundant product application servers. Our production servers are located at a third-party network operating center located in Raleigh, North Carolina, which provides 24-hour systems support, as well as connectivity to all major Internet bandwidth via redundant high speed T-3 connections. The server and network architecture is designed to provide high speed and reliability for the operation of our hosted applications and communications.
We have contracted service level agreements with our internet service provider, providing up time of 99.997% of network availability. This is accomplished through access to multiple Internet backbones with redundant network connections. 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 regularly 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.
As of December 31, 2001, we had 70 professionals in our development group, which consists of information technology professionals, content management professionals and our Global Professional Services group. Development expenses were $9.1 million in 1999, $17.0 million in 2000 and $11.3 million in 2001.
Intellectual Property
We rely on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products, technology and processes. We pursue the registration of our trademarks in the United States and internationally, however, we may not be able to secure adequate protection for our trademarks in the United States and other countries. We have applied for registration of the marks SCICENTRAL and SCIQUEST SMARTSTORE in the United States and for SCIQUEST.COM and SCIQUEST in the European Union. SCIQUEST, SCIQUEST.COM, SCIMAIL, BIOSUPPLYNET and SELECTSITE are our registered trademarks in the United States. Our software technology is not patented and existing copyright laws offer only limited practical protection. We cannot guarantee that the legal protections on which we rely will be adequate to prevent misappropriation of our technology. Moreover, these protections do not prevent independent third-party development of
competitive products or services. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries do not protect intellectual property to the same extent as do the laws of the United States. We believe our products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties. However, we cannot provide any guarantees about the third-party products sold to customers using SciQuest's SelectSite(R) technology or that third parties will not assert infringement claims against us in the future or that any such assertion will not require us to enter into a license agreement or royalty agreement with the party asserting a claim. If the products purchased by customers using SciQuest's SelectSite technology infringe the proprietary rights of third parties, we may be deemed to infringe those rights by selling such products. Even the successful defense of an infringement claim could result in substantial costs and diversion of our management's efforts.
We also license, and will continue to license, content for our online services from third parties. Additionally, we intend to license a significant portion of our transaction fulfillment system from third parties. These licenses may not be available to us on favorable terms in the future. If we fail to obtain necessary content on favorable terms, it could have a material adverse effect on our business operations.
We also resell third party applications to our customers. If these applications were found to infringe on the intellectual property rights of others and acceptable alternatives are not available, this may have a material adverse effect on our business.
Competition
The market for providing software, information and services for research-based organizations and their suppliers is fragmented, rapidly evolving and intensely competitive. Our primary competition includes the following:
Existing Processes and Internal Legacy Systems. Many research organizations and suppliers have deployed internal resources and systems or may be using existing external technology and service partners to provide for their software, information and services solutions for their discovery research operations. The current economic environment may cause potential customers to decide to continue using existing solutions, thereby postponing upgrades or installations of new systems.
Scientific Software Providers. There are a number of companies, primarily small, privately-owned firms that provide technology to automate and enhance the Discovery Research process. Some of these companies offer products that overlap, and in some cases compete, with our software offerings. Some companies have established brand recognition within the research community and have been competing in the pharmaceutical and biotechnology industry longer than SciQuest.
Enterprise Commerce Providers. A number of enterprise commerce software providers have established technologies, solutions, and customer relationships that provide alternative choices for our potential customers.
Online Scientific Communities. There are a number of web sites that have created e-communities to serve the information needs of the scientists. Traditionally, these communities have provided a means of retrieving scientific information as well as providing discussion groups, bulletin boards and directories. Increasingly, these communities include an e-commerce function that may compete with our technologies and solutions.
Suppliers' E-Commerce Initiatives. Many suppliers and distributors have developed their own e-commerce enabled web sites. These scientific suppliers' online services provide partial solutions that may provide an alternative to SciQuest's SelectSite technology, our electronic sourcing and procurement software.
We believe that companies in this market compete primarily on the basis of brand recognition, number and quality of product offerings, price, ease of use, and customer service and fulfillment capabilities.
Competition is likely to intensify as this market matures. As competitive conditions intensify, competitors may: enter into strategic or commercial relationships with larger, more established and well-financed companies; devote greater resources to marketing and promotional campaigns; secure exclusive arrangements with customers that impede our sales; and devote substantially more resources to product development.
Our current and potential competitors' technology and solutions may achieve greater market acceptance than ours. Many of our existing and potential competitors have longer operating histories in the pharmaceutical and biotechnology industry, greater name recognition, larger customer bases and greater financial, technical and market resources than we do.
In addition, new technologies and the expansion of existing technologies may increase competitive pressures. As a result of increased competition, we may experience reduced revenues and operating margins, as well as loss of market share and brand recognition. We cannot be certain that we will be able to compete successfully against current and future competitors and competition could have a material adverse effect on our revenue growth and earnings.
Employees
As of December 31, 2001, we had 132 full-time employees. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good. During 2001, we reduced the number of full time employees by approximately 240. These reductions were made in order to reduce our overhead costs in 2001 and future years. These reductions affected all departments.
Directors and Executive Officers
Our directors and executive officers and their ages as of December 31, 2001 were as follows:
Stephen J. Wiehe has served as Chief Executive Officer and Director since February 2001. From June 2000 to February 2001, Mr. Wiehe served as Senior Director--Strategic Investments & Mergers and Acquisitions at SAS Institute. From October 1999 to June 2000, Mr. Wiehe served as President and Chief Executive Officer of DataFlux Corporation, which was acquired by SAS Institute. From June 1998 to October 1999, Mr. Wiehe served as Managing Director/Europe and senior executive vice president for Sungard Treasury Systems, a division of SunGard Data Systems, Inc (NYSE: SDS). From June 1996 to June 1998, Mr. Wiehe served as President and Chief Executive Officer of Multinational Computer Models, Inc., which was sold to SunGard Data Systems in 1998. Mr. Wiehe began his career with the General Electric Company. He graduated from its Financial Management Program with honors and became treasurer of GE Plastics. Mr. Wiehe is a graduate of the University of Kentucky.
M. Scott Andrews co-founded SciQuest in November 1995 and serves as a director. Prior to February 2001, Mr. Andrews also served as our Chief Executive Officer. From October 1991 to January 1996, Mr. Andrews was a sales professional for Baxter Healthcare Corporation, a scientific products company, which was acquired by VWR Scientific Products Corporation. From May 1987 to October 1991, Mr. Andrews served in the U.S. Army as an aviation officer. Mr. Andrews received an M.B.A. from the University of North Carolina at Chapel Hill and a B.S. in business management from the United States Military Academy at West Point.
Eric L. Bernstein has served as Vice President of Sales since April 2001. From March 2000 to April 2001, Mr. Bernstein was Vice President of Sales and Consulting Services for BuildNet, Inc., a solutions provider for the construction materials industry. He has also served in sales and business development for SAP America from 1996 to 2000, EMTEC from 1995 to 1996 and Digital Equipment Corporation from 1978 to 1995. Mr. Bernstein earned his BBA from the University of Miami and completed graduate work at Babson College.
James B. Duke has served as Vice President of Products and Strategy since February 2001. From March 2000 to February 2001, Mr. Duke served as Chief Information Officer of BuildNet, Inc., a solutions provider for the construction materials industry. His prior experiences include roles as Vice President of Sales and Marketing at GE Capital Mortgage in 1999, Group Vice President for technology and alternative channels for First Citizens Bank from 1995 to 1999, and as a Management Consultant with McKinsey & Co. from 1992 to 1995. A graduate of Duke University, Mr. Duke also has a Masters degree from MIT's Sloan School of Management.
Robert M. Fusillo has served as our Chief Information Officer since November 1998. From September 1990 to October 1998, Mr. Fusillo served as Director of Applications Development in the Information Systems Division of Wal-Mart Stores, Inc. Prior to his employment with Wal-Mart, Mr. Fusillo was a senior programmer for the Carrier Access Billing System at Nynex, a telecommunications service company. Mr. Fusillo received a B.S. in computer science from State University of New York at Buffalo.
James J. Scheuer has served as our Chief Financial Officer since September 1998. From March 1996 to March 1998, Mr. Scheuer served as Chief Operating Officer and later Chief Financial Officer for Boise Marketing Services, Inc., a subsidiary of Boise Cascade Office Products Corporation, and its predecessor. From December 1989 to March 1996, Mr. Scheuer served as Senior Vice President--Group Executive/Chief Financial Officer of Hickory Farms, Inc. From 1970 to 1989, Mr. Scheuer was employed by Deloitte Haskins & Sells and was the partner in charge of its Jacksonville, Florida office from 1985 to 1989. Mr. Scheuer is a certified public accountant and received his B.A. in accounting from the University of Wisconsin--Oshkosh.
Bruce J. Boehm has served as a director of SciQuest since October 1997. Since 1992, Mr. Boehm has been active as an originator of and investor in early stage technology companies. Mr. Boehm holds M.B.A. and M.S. degrees from Stanford University and a B.S. from the Massachusetts Institute of Technology.
Noel J. Fenton has served as a director of SciQuest since November 1998. Mr. Fenton has been a General Partner of Trinity Ventures since 1986. From 1964 to 1986, he was a co-founder of three venture capital backed start-up companies, for two of which, Acurex Corporation and Covalent Systems Corporation, he served as CEO. Mr. Fenton received an M.B.A. from Stanford University and a B.S. from Cornell University.
Gautam A. Prakash has served as a director of SciQuest since October 1998. Mr. Prakash was a partner with Bessemer Venture Partners, which he joined in 1993. He is a director of a number of privately held electronic commerce and healthcare companies. Prior to joining Bessemer, Mr. Prakash worked for McKinsey & Co. Mr. Prakash graduated from Yale University with a B.S. in molecular biophysics and biochemistry and a B.A. in economics.
Lloyd M. Segal has served as a director of SciQuest since May 2000. Mr. Segal has been President & CEO of Caprion Pharmaceuticals Inc. since November 1998. Mr. Segal was previously President & CEO of Advanced Bioconcept Ltd. from 1996 to 1998. Mr. Segal was a management consultant with McKinsey & Co. from 1992 to 1996, focusing on North America financial institutions and industrial clients. Mr. Segal is a member of the Board of Overseers of the School of Science, Brandeis University. Mr. Segal earned a BA in Politics from Brandeis University, and an MBA from Harvard University.
There are no family relationships between any of our directors or executive officers.
Item 2.
Item 2. Properties
Our headquarters are located in Morrisville, North Carolina, where we currently lease and sublease approximately 93,000 square feet of office space. This lease expires in August 2005. We expect these facilities to be sufficient for the foreseeable future.
We maintain an office in Newtown Square, Pennsylvania. The lease for approximately 39,000 square feet of space expires in March 2010. We expect this space will be sufficient for the foreseeable future.
We are seeking to sublet any excess office space at these locations.
Item 3.
Item 3. Legal Proceedings
On September 10, 2001 SciQuest was named as a defendant in a purported class action lawsuit filed in the United States District Court, Southern District of New York. The lawsuit is captioned Patricia Figuerido and Robert Wallace v. Sciquest.com, Inc., et al. No. 01 CV 8467. The case has been consolidated for pretrial purposes with over 100 other lawsuits filed against other issuers, their officers, and underwriters of their initial public offerings under the caption In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The case includes claims against SciQuest, three of its officers, and seven investment banking firms who either served as underwriters, or are the successors in interest to underwriters, of the Company's initial public offering. The complaint alleges that the prospectus used in our initial public offering contained material misstatements or omissions regarding the underwriters' activities in connection with the initial public offering. The court has adjourned defendants' time to answer or respond to all complaints in the consolidated proceedings until further order of the court.
It is too early in this matter to reasonably predict the probability of the outcome or to estimate a range of possible losses. Adverse judgments in this matter could have a material adverse effect on the Company's consolidated financial position, liquidity or consolidated results of operations.
Item 4.
Item 4. Submission Of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
SciQuest's common stock is traded on The Nasdaq National Market under the symbol "SQST". The price per share reflected in the table below represents the range of low and high closing sale prices for the Company's common stock for the years ended December 31, 2000 and 2001 as reported by The Nasdaq Stock Market for the quarters indicated:
The closing sale price of the Company's common stock as reported by The Nasdaq Stock Market on March 12, 2002 was $1.56.
The number of shareholders of record of the Company's common stock as of February 28, 2002, was approximately 719.
We have never declared or paid cash dividends on our capital stock and we do not anticipate declaring or paying any cash dividends for the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business.
Recent Sales of Unregistered Securities
Except as described below, there have been no securities sold by us within the last year that were not registered under the Securities Act.
(a) Issuances of Securities
During May and November of 2001, we issued 124,726 total shares of our common stock under our Employee Stock Purchase Plan. Total proceeds were $169,391.
(b) The shares of common stock, described in paragraph (a) of this Item 5 were issued in reliance on the exemption provided by Section 4(2) and/or Rule 506 of Regulation D promulgated pursuant to the Securities Act.
Item 6.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
Our selected financial data set forth below should be read in conjunction with our financial statements and accompanying notes appearing elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The historical statements of operations data for the years ended December 31, 1999, 2000 and 2001, and the historical balance sheet data as of December 31, 2000 and 2001 are derived from, and are qualified by reference to, our financial statements which are included herein, which have been audited by PricewaterhouseCoopers LLP. The historical statement of operations data for the years ended December 31, 1997 and 1998 and the balance sheet data as of December 31, 1997, 1998 and 1999 are derived from our audited financial statements not included in this report. Historical results are not necessarily indicative of results to be expected in the future.
- -------- (a) The Company began recording revenues from e-commerce transactions on a net basis (i.e., as an agent) as of May 1, 2001. See Revenue Recognition in Note 2 to our financial statements. (b) In June 2001, the Company announced a restructuring that would eliminate certain unprofitable business lines and approximately one-half of its employees located in the U.S. (see Note 18).
(c) Item 7.
Item 8. Financial Statements and Supplementary Data
The financial statements of SciQuest are filed together with this Report. See the Index to Consolidated Financial Statements on page for a list of the financial statements filed herewith.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information concerning our directors and executive officers can be found in Part I, Item 1, of this Form 10-K under the caption "Directors and Executive Officers" in accordance with Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K. Additional information regarding our directors is presented under the caption "Election of Directors" in our definitive proxy statement for the annual meeting of stockholders to be held on May 1, 2002, which will be filed with the Securities and Exchange Commission on or about March 26, 2002, and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information in answer to Item 11 is presented under the caption "Compensation of Executive Officers and Other Information" excluding the information under the captions "Report of the Officer Compensation Committee on Executive Compensation" and "Stockholder Return Performance Graph" in our definitive proxy statement for the annual meeting of stockholders to be held on May 1, 2002, which will be filed with the Securities and Exchange Commission on or about March 26, 2002, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in answer to Item 12 is presented under the caption "Stock Ownership" in our definitive proxy statement for the annual meeting of stockholders to be held on May 1, 2002, which will be filed with the Securities and Exchange Commission on or about March 26, 2002, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information in answer to Item 13 is presented under the captions "Related Party Transactions" in our definitive proxy statement for the annual meeting of stockholders to be held on May 1, 2002, which will be filed with the Securities and Exchange Commission on or about March 26, 2002, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
See the Index to Consolidated Financial Statements on page for a list of the financial statements filed herewith.
2. Financial Statement Schedules.
Not applicable.
3. List of Exhibits.
- -------- * Incorporated by reference to SciQuest's Registration Statement on Form S-1 (Reg. No. 333-87433). ** Incorporated by reference to SciQuest's Registration Statement on Form S-1 (Reg. No. 333-32582). *** Incorporated by reference to SciQuest's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. **** Incorporated by reference to SciQuest's Annual Report on Form 10-K for the year ended December 31, 2000. ***** Incorporated by reference to SciQuest's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(b) Reports on Form 8-K.
None.
Item 8 - -Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SciQuest, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of SciQuest, Inc. and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
January 25, 2002 Raleigh, North Carolina
SciQuest, Inc.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Nature of Operations
SciQuest, Inc. (''SciQuest'' or the ''Company''), which began operations in 1995, is a technology and solutions company that provides integrated e-commerce and research asset management solutions for research enterprises and their supply chain partners worldwide. SciQuest develops and sells software that improves the efficiency of research scientists in pharmaceutical, biotechnology and chemical companies. SciQuest software helps scientists and their support staff find, acquire and manage scientific supplies, such as chemicals, testing materials and proprietary compounds. SciQuest generates revenues from scientific organizations by charging license, subscription and maintenance fees for the use of its technology. SciQuest also offers professional services related to these solutions, for activities such as project implementation and training. In addition, SciQuest receives revenue from scientific supply manufacturers for converting their paper catalogs into an electronic format, enhancing or enriching the data and distributing the information as directed by the suppliers.
Historically, the Company has earned revenues from e-commerce transactions generated by purchases made through the SciQuest web sites. Effective May 1, 2001, the Company ceased taking title to products sold through our e-commerce solution (see Note 2). In addition, SciQuest, Inc. has historically earned revenue for advertising on its web sites and advertising in the printed catalogue of scientific products (the ''Source Book''), which is prepared and distributed by the Company's subsidiary, BioSupplyNet, Inc. (''BioSupplyNet'') and on commissions received for the auction of used scientific equipment by the Company's subsidiary, Internet Auctioneers International, Inc. (''IAI''). In October 2000, it was determined that the BioSupplyNet and IAI operations would be eliminated. Following the decision to eliminate BioSupplyNet operations, the Company determined it would continue to print the Source Book annually. Accordingly, the Company anticipates it will continue to earn advertising revenue from the Source Book, primarily all of which has historically been recognized, and is expected to continue to be recognized, in the second quarter of each fiscal year. The Company also recognizes revenues from its subsidiary, EMAX Solution Partners, Inc. (''EMAX''), which provides customized electronic research solutions designed to integrate chemical information systems to improve productivity and compliance for pharmaceutical, scientific and research companies.
Liquidity
The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company had an accumulated deficit of $205,818,000 at December 31, 2001, incurred a net loss of $82,837,000 for the year then ended and expects to incur substantial additional losses in 2002. Over the last 24 months the Company has incurred cumulative losses from operations of $177.1 million and has used $76.6 million of net cash in operating activities.
The Company has funded its operations primarily through private placements of preferred stock during 1998 and 1999 and its 1999 initial public offering. As of December 31, 2001, the Company had total cash and investments of $45.6 million, which is comprised of cash and cash equivalents of $25.4 million, short-term investments of $8.5 million and long-term investments of $11.7 million.
The Company has recently restructured and is transitioning from an e-commerce transaction company to a software and related service provider. As a result, there is only limited operating history under the current business model with which to estimate future performance. The Company's cash flow is dependent on its ability to control expenses and achieve revenue growth which is dependent on the Company's ability to sell software licenses and related services as well as development of new products and service offerings. Additionally, 46% of the Company's revenue for 2001 was generated by three customers and the Company expects that large individual transactions with major customers may represent an increasing percentage of revenues.
There are significant uncertainties, based on recent economic conditions and the Company's limited operating experience as a software and related services provider, as to whether debt or equity financing will be available if the Company is required to seek additional funds. If the Company is able to secure funds in the debt or equity markets, it may
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
not be able to do so on terms that are favorable or acceptable to the Company. Additional equity financing would likely result in substantial dilution to existing stockholders. If the Company is unable to raise additional capital to continue to support operations, it may be required to scale back, delay or discontinue one or more product offerings, which could have a material adverse affect on the Company's business. Reduction or discontinuation of any one of the Company's business components or product offerings could result in additional charges, which would be reflected in the period of the reduction or discontinuation.
Based on average quarterly operating expenses (excluding non-cash expenses) incurred in the two quarters after the June 2001 restructuring and budgeted expenditures for 2002, the Company believes cash and investments at December 31, 2001 will be sufficient to satisfy requirements for more than the next year. However, lower than expected cash flows as a result of lower revenues or increased expenses could require the Company to raise additional capital in order to maintain its operations. There is no assurance that the Company will be able to raise such funds on favorable terms, or at all.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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 from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of SciQuest, Inc. and its wholly-owned subsidiaries, BioSupplyNet, Inc., Internet Auctioneers International, Inc., Intralogix, Inc., SciCentral, Inc., EMAX Solution Partners, Inc., and SciQuest Europe Limited. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Investments
The Company considers all investments that are not considered cash equivalents and with a maturity of less than one year from the balance sheet date to be short-term investments. The Company considers all investments with a maturity of greater than one year to be long-term investments. All investments are considered as held-to-maturity and are carried at amortized cost, as the Company has both the positive intent and ability to hold them to maturity. Interest income includes interest, amortization of investment purchase premiums and discounts, and realized gains and losses on sales of securities. Realized gains and losses on sales of investment securities are determined based on the specific identification method.
Restricted Cash
At December 31, 2001, restricted cash of $1,645,833, $380,000 and $1,159,041 included in cash and cash equivalents, short-term investments and long-term investments, respectively, is comprised of certificates of deposit and money market accounts which serve as collateral for the Company's lease commitments, officer loans guaranteed by the Company and other debt.
Accounts Receivable
The Company bears all risk of loss on credit sales of scientific products in e-commerce transactions. Accounts receivable are presented net of an allowance for doubtful accounts of approximately $788,000 and $1,124,000 at
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 2001, respectively. Following is a schedule of the allowance for doubtful accounts for each year of the three years ended December 31, 2001:
Property and Equipment
Property and equipment is primarily comprised of furniture and computer equipment which are recorded at cost and depreciated using the straight-line method over their estimated useful lives which are usually seven years and three to five years for furniture and computer software and equipment, respectively. Property and equipment includes certain equipment under capital leases. These items are depreciated over the shorter of the lease period or the estimated useful life of the equipment.
Expenses for repairs and maintenance are charged to operations 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.
Development Costs
Development costs include expenses incurred by the Company to develop, enhance, manage, monitor and operate the Company's web sites and costs of managing and integrating data on the Company's web sites and developing software to be licensed. The Company accounts for the software development component of internal use software development costs in accordance with SOP No. 98-1 which requires certain costs associated with the development of the Company's web sites and internal applications to be capitalized and amortized to development expense over the useful life of the related applications, which generally range from three months to one year. Capitalized development costs are amortized over the estimated life of the related application.
Capitalized Software Costs
Software development costs related to software products sold to customers are required to be capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Capitalized software costs result from the acquisitions of EMAX and BioSupplyNet (see Note 3) as determined by valuations prepared by management and from developing standardized versions of software products for sale. Capitalized software costs are typically amortized to cost of sales over a period of two to three years.
Intangible Assets
Intangible assets consist of goodwill and certain other intangible assets acquired in the Company's various acquisitions. Goodwill is amortized over three to five years. All other intangible assets are amortized over a period of three years.
The Company evaluates the recovery of goodwill and other intangible assets in a manner similar to other long-lived assets. An impairment is recognized whenever the net book value of the intangible assets exceeds the estimated future undiscounted cash flows attributable to the group of assets to which they relate.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchased In-Process Research and Development
The acquisition cost of in-process technology that at the date of purchase has not achieved technological feasibility and has no alternative future use is charged to operations in the period such technology is acquired. Purchased in-process research and development costs for the year ended December 31, 2000 relate to the acquisition of EMAX (see Note 3), and were determined by a valuation prepared by management.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and accounts receivable at December 31, 2000 and 2001 approximated their fair value due to the short-term nature of these items. The Company considers its short-term and long-term investments to be held-to-maturity, and therefore these investments are carried at amortized cost. The fair value of the Company's short-term and long-term investments at December 31, 2000 and 2001, based on market quotes, is presented in Note 4.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and intangible assets in accordance with Statement of Financial Accounting Standards No. 121, ''Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of'' (''SFAS No. 121''). SFAS No. 121 requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds the future undiscounted cash flows attributable to such asset or the business to which such asset relates. No impairments were required to be recognized during the year ended December 31, 1999. As part of the restructuring plan during the year ended December 31, 2001, an impairment of approximately $6.7 million of long-lived assets was recognized related to the elimination of unprofitable business lines. In addition, as part of the restructuring plan during the year ended December 31, 2000, an impairment of approximately $768,000 of long-lived assets was recognized related to the elimination of unprofitable business lines (see Note 18).
If the Company's market capitalization is consistently lower than the carrying value of recorded net assets, an impairment analysis may be required.
Revenue Recognition
SciQuest generates revenues from scientific organizations by charging license, subscription and maintenance fees for the use of its technology. SciQuest also offers professional services related to these solutions, for activities such as project implementation and training. In addition, SciQuest receives revenue from scientific supply manufacturers for converting their paper catalogs into an electronic format, enhancing or enriching the data and distributing the information as directed by the suppliers. Until the third quarter of 2001, the Company earned much of its revenues from the sale of scientific products (and scientific equipment beginning in June 2000) through its e-commerce web sites. The Company is no longer offering order-processing services and expects no substantial transaction revenues in the future. Prior to April 1999, the Company's revenues were primarily derived from advertising on its web sites. With the acquisition of EMAX in March 2000, the Company began deriving revenues from custom software development and implementation services, from sales of software licenses, and from support and maintenance contracts.
Prior to May 1, 2001, the Company took legal title to the products that were purchased from its suppliers and that, in turn, were sold to its customers in e-commerce transactions. Therefore, through April 2001, revenues received from the sale of scientific products in e-commerce transactions and from the sale of scientific equipment were recorded as product revenues on a gross basis and were recognized by the Company upon delivery to the customer. As of May 1, 2001, the Company no longer took legal title to these products. Instead, the Company acted as an agent on behalf of the customer, and title passed directly from the supplier to the customer.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since the Company has acted as an agent for the customer and not as the primary obligor in the transaction for orders on or after May 1, 2001, the Company no longer records sales of scientific products and scientific equipment in e-commerce transactions on a gross basis. For each sale, the Company recognizes revenue in the amount of the net commission that it earns for processing the transaction and/or payment for services. As a result of this change in the way the Company does business, much lower revenues from e-commerce transactions are being recorded; however, the calculation of gross profit dollars from e-commerce transactions remains the same, although the gross margin as a percentage of related net revenue increases.
As a result, revenues of $16,230,000 for 2001 were comprised of orders taken prior to May 1, 2001, totaling $15,690,000, which were recorded on a gross basis and $540,000 representing the commissions earned on transactions processed on or after May 1, 2001. The total value of the underlying scientific products sold in transactions processed during 2001 was $25.7 million. This is compared to $34.2 million of sales of scientific products and $11.2 million of scientific equipment during 2000. There were no sales of scientific equipment in 2001.
During the second half 2001, the Company phased out order processing services provided to customers. This significantly reduced the level of e-commerce transaction volume during such periods.
Advertising revenues are recognized ratably over the period in which the advertisement is displayed, provided that the Company has no significant remaining obligations to the advertiser and that collection of the resulting receivable is probable. Revenues from advertising included in the Source Book are recognized at the date the Source Book is published and distributed to the purchasers of scientific products as the Company has met all of its obligations to the advertisers at that date. Source Book revenue is included in license fees and other professional services.
During 2001, the Company began generating revenues by charging license, subscription and maintenance fees for the use of its technology and by charging scientific supply manufacturers for data conversion and maintenance services. The related revenues for access to the technology and supplier data conversion and maintenance services are recognized ratably over the period of the agreements.
With the acquisition of EMAX in March 2000, revenues from the sale of software licenses and custom development and implementation services under fixed-fee contracts are recognized using the percentage-of-completion method over the term of the development and implementation services. Revenues from the sale of standardized versions of the EMAX software are recognized upon customer acceptance in accordance with Statement of Position 97-2, ''Software Revenue Recognition.'' Revenues from implementation services are recognized concurrently with the effort and costs incurred by the Company, at billable rates specified in the terms of the contract. Losses expected to be incurred on custom development and implementation services contracts in process, for which the fee is fixed, are charged to income in the period in which the estimated losses are initially identified. The Company sells maintenance contracts to provide updates and standard enhancements to its software products. Maintenance fee revenue is recognized ratably over the term of the arrangements, generally one year.
Cost of Revenues
Cost of e-commerce revenues represents the purchase price to the Company of the scientific products sold through its e-commerce web sites and of scientific equipment, shipping and handling fees and the cost of maintaining such web sites. Prior to May 1, 2001, the Company generally took legal title to the scientific products and equipment purchased at the date of shipment and relinquished title to its customers upon delivery. Effective May 1, 2001, the Company discontinued taking legal title to these products and began recording revenue on a net basis, as a commission, resulting in negligible costs being recorded for e-commerce revenues.
In addition, the Company bears all credit risk for its sales of scientific products to its customers.
The cost of software licensing, implementation and maintenance revenues consists primarily of personnel costs for employees who work directly on the development and implementation of customized electronic research solutions and who
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provide maintenance to customers, and also consists of the amortization of capitalized software development costs. Cost of advertising and subscription revenue includes the cost of preparing the advertisements for display on the Company's web sites and the cost of publishing and distributing the Source Book. Advertising production costs are recorded as cost of revenues the first time an advertisement appears on the Company's web sites.
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 and certain indirect costs and amortization of deferred customer acquisition costs (see Note 16). All costs of advertising the services and products offered by the Company are expensed as incurred. Advertising expense totaled approximately $1,900,000, $3,975,000, and $112,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
Deferred Customer Acquisition Costs and Incentive Warrants
Deferred customer acquisition costs relate to common stock warrants given to several key suppliers and buyers of scientific products. The amount of deferred customer acquisition costs is and will be adjusted in each reporting period based on changes in the fair value of the underlying common stock until such date as the warrants are fully vested and non-forfeitable. Deferred customer acquisition costs will be amortized as a non-cash charge to sales and marketing expense over the term of the related contractual relationship using a cumulative catch-up method. The terms of the contractual relationships range from three to five years. In addition, the Company has agreed to issue to certain major enterprise buyers additional incentive warrants, the number of which will be based on each buyer's volume of purchases during the years 2000, 2001 and 2002. The value of these warrants will be determined using the Black-Scholes Model at the issuance date, adjusted periodically using the cumulative catch-up approach (see Note 16). Deferred customer acquisition costs are presented net of accumulated amortization.
Income Taxes
The Company accounts for income taxes using the liability method which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax bases of the Company's assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Stock Based Compensation
The Company accounts for non-cash stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25"), and its related interpretations, which states that no compensation expense is recognized for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company's common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair market value of the Company's common stock at the grant date, the difference between the fair market value of the Company's common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense over the vesting period of the related stock option. The Company recognized $323,676, $4,440,603, and $1,076,052 in non-cash compensation expense related to amortization of deferred compensation during the years ended December 31, 1999, 2000 and 2001, respectively.
The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which requires certain pro forma disclosures as if compensation expense was determined based on the fair value of the options granted at the date of the grant.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, accounts receivable and investments. Cash and cash equivalents are deposited with high credit quality financial institutions which invest primarily in U.S. Government securities, highly rated commercial paper and certificates of deposit guaranteed by banks which are members of the FDIC. The counterparties to the agreements relating to the Company's investments consist primarily of the U.S. Government and various major corporations with high credit standings.
During 1999, two customers comprised 14% and 34%, respectively, of the Company's revenue. During 2000, two customers comprised 10% and 13%, respectively, of the Company's revenue. During 2001, three customers comprised 21%, 13% and 12%, respectively, of the Company's revenue with only the 12% customer being reportable in the segment for license fees and other professional services. Concentrations of credit risk with respect to accounts receivable are typically limited due to the large number of customers comprising the Company's customer base and because all customers are located in the United States. At December 31, 1999, two customers comprised 21% and 27%, respectively, of the accounts receivable balance. At December 31, 2000, two customers comprised 16% and 32%, respectively, of the current and long-term accounts receivable balance. At December 31, 2001, two customers comprised 16% and 72%, respectively, of the current and long- term accounts receivable balance with only the 16% customer being reportable in the segment for license fees and other professional services. The customer representing 72% of receivables at December 31, 2001 is within the final 14 months of a multi-year equipment financing arrangement with the Company that began during the year ended December 31, 2000. Substantially all of the Company's revenues are from sales transactions originating in the United States.
Cash Flows
The Company made cash payments for interest of approximately $28,000, $155,000 and $386,000 during the years ended December 31, 1999, 2000 and 2001, respectively.
The Company acquired property and equipment through the assumption of capital lease obligations amounting to $1,688,000, $1,523,000 and $211,000 during the years ended December 31, 1999, 2000 and 2001, respectively.
During 2001, the Company bought out approximately $2.3 million of capital leases. The Company borrowed $2.3 million at prime rate, from a bank to facilitate the buy out of the leases. The loan is guaranteed by approximately $2.3 million of company funds invested in money market funds.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"). Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company had no items of other comprehensive income for the year ended December 31, 1999. The Company's only item of other comprehensive income during the years ended December 31, 2000 and 2001 was foreign currency translation.
Segment Reporting
As a result of the acquisition of EMAX (see Note 3), the Company has determined that it has separately reportable operating segments, as defined by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see Note 19).
Net Income (Loss) Per Common Share
Basic net income (loss) per common share ("Basic EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common share ("Diluted EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants and shares issuable upon conversion of Class B common stock and convertible preferred stock. The calculation of the net loss per share available to common stockholders for the years ended December 31, 1999, 2000 and 2001 does not include potential shares of common stock equivalents of 6,662,854, 9,747,287 and 4,166,830, respectively, as their impact would be anti-dilutive.
In September 2001, the Board of Directors authorized a stock repurchase program. The program authorizes the Company to purchase up to $5 million of common stock over the next twelve months from time to time in the open market or in privately negotiated transactions depending on market conditions. As of December 31, 2001, the Company had purchased and placed in treasury, at cost, 304,000 shares of its common stock.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, ''Business Combinations,'' (''SFAS No. 141''). SFAS No. 141 supersedes APB Opinion No. 16, ''Business Combinations,'' and FASB Statement No. 38, ''Accounting for Preacquisition Contingencies of Purchased Enterprises.'' SFAS No. 141 requires: 1) that all business combinations be accounted for by the purchase method, thereby eliminating the pooling method, 2) that assets (including intangible assets) be recognized and valued apart from goodwill, and 3) that additional disclosures be made regarding business combinations and the resulting allocation of purchase price. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001 and to all purchase method acquisitions dated on or after July 1, 2001. The Company's adoption of SFAS No. 141 will not have a material impact on the consolidated financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, ''Goodwill and Other Intangible Assets,'' (''SFAS No. 142''). SFAS No. 142 supersedes APB Opinion No. 17, ''Intangible Assets'' and primarily addresses accounting for goodwill and other intangible assets subsequent to their acquisition. The major provisions include: 1) the ceasing of amortization of goodwill and indefinite lived intangible assets, 2) the testing for impairment of goodwill and indefinite lived intangible assets at least annually, and 3) the removal of the restriction that the maximum amortization period of intangible assets with finite lives be limited to 40 years. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001 (with the exception that any goodwill or intangible assets acquired after June 30, 2001 will be subject immediately to the statement's provisions) with application being required at the beginning of an entity's fiscal year. Any impairment losses from the initial application are to be reported as a cumulative effect of a change in accounting principle in accordance with APB 20, ''Accounting Changes.'' The Company is currently in the process of determining the impact of the initial adoption of SFAS No. 142 on the consolidated financial position of the Company. Due to the Company's historically significant amounts of amortization expense related to goodwill and intangible assets (approximately $10 million per quarter) and the different methodology for testing impairment of goodwill, the adoption of SFAS No. 142 may have a material impact on the subsequently reported consolidated results of operations. The Company has $38.3 million of goodwill that is subject to the new impairment methodology. A portion or all of this goodwill may be written-off upon performing SFAS No. 142's transitional impairment test.
In October 2001, the Financial Accounting Standards Based Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("SFAS No. 121") and APB 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," ("APB No. 30"). SFAS No. 144, while retaining the fundamental recognition and measurement provision of SFAS No. 121, establishes a "primary-asset" approach to determining the cash flow estimation period for a group of assets and liabilities. Similarly, SFAS No. 144 retains the basic provisions of APB No. 30, but broadens the presentation to include a component of an entity. In addition,
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discontinued operations are no longer measured on a net realizable value basis and future operating losses are no longer recognized before they occur. Rather, discontinued operations are carried at the lower of carrying amount or fair value less cost to sell. Application of the provisions of SFAS No. 144 is required for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have any impact on the Company's financial statements or results of operations.
Employee Stock Purchase Plan
During 2000, the Board of Directors reserved 1,100,000 shares of the Company's common stock for issuance under the Employee Stock Purchase Plan (the "ESPP"). The ESPP has two 24-month offering periods (each an "Offering Period") annually, beginning May 1 and November 1, respectively. The first Offering Period under the ESPP ended on November 1, 2000. Eligible employees can elect to make deductions from 1% to 20% of their compensation during each payroll period of an Offering Period. Special limitations apply to eligible employees who own 5% or more of the outstanding common stock of the Company. None of the contributions made by eligible employees to purchase the Company's common stock under the ESPP are tax deductible to the employees. Upon April 30 and October 31 (the "Purchase Date") of each year, the total payroll deductions by an eligible employee for that six-month period will be used to purchase common stock of the Company at a price equal to 85% of the lesser of (a) the reported closing price of the Company's common stock on the enrollment date of the Offering Period, or (b) the reported closing price of the common stock on the Purchase Date.
3. Acquisitions
Internet Auctioneers International
On July 30, 1999, the Company purchased all of the outstanding common stock of Internet Auctioneers International, Inc. ("IAI") in exchange for the issuance of 114,995 shares of the Company's Series E convertible preferred stock. In connection with the purchase of IAI, a former shareholder and officer of IAI entered into a two-year employment agreement with the Company. In the event that this individual voluntarily terminates his employment prior to the end of the two year period, this individual would be required to pay an amount equal to $400,000, reduced by $50,000 upon completion of each 90 day period of continuous employment, payable either in cash or by surrendering a number of Series E preferred shares of an equivalent value, as determined in the individual's employment agreement. The Company also entered into a three-year non-compete agreement with this individual.
The purchase price of $1,416,000 consisted of the 114,995 shares of the Company's Series E preferred, with an estimated fair value of $11.32 per share, based on the per share price of the Company's Series D preferred that was sold in May and September 1999, and the assumption of $160,000 of net liabilities of IAI. The excess of the purchase price over the fair value of assets acquired less liabilities assumed was allocated to goodwill. Of the total purchase price, $22,000 was allocated to the tangible assets of IAI, which were comprised of cash and accounts receivable. In addition, $400,000 was allocated to an employment agreement with a former shareholder and recorded as deferred compensation to be amortized to stock-based employee compensation expense over a period of three years, and $994,000 was allocated to goodwill. Goodwill related to this acquisition was being amortized over a period of five years.
In November 2000, the Company made the decision to discontinue the auction site. As a result, goodwill and other intangible assets of approximately $768,000 were written off as part of the restructuring charge (see Note 18).
Intralogix
On January 14, 2000, the Company purchased all of the outstanding stock of Intralogix, Inc. ("Intralogix") in exchange for the issuance of 26,930 shares of the Company's common stock with a value of approximately $1,828,000 at the closing date of the acquisition, cash payments in the amount of $295,000 (including $61,000 for acquisition-related expenses) and the assumption of $71,500 in net liabilities of Intralogix. This acquisition was accounted for using the purchase method of accounting.
Of the total purchase price of Intralogix, $600,000 was allocated to the web site developed and operated by Intralogix and approximately $1,589,000 was allocated to goodwill, which represents the excess of the purchase price over the fair
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value of assets acquired less liabilities assumed. Goodwill related to this acquisition was amortized over a period of three years. An immaterial amount of purchase price was allocated to the tangible assets of Intralogix.
SciCentral
On February 2, 2000, the Company purchased all of the outstanding stock of SciCentral, Inc. ("SciCentral") in exchange for the issuance of 40,000 shares of the Company's common stock with a value of $2,534,000 at the closing date of the acquisition, cash payments of $112,000 for acquisition-related expenses and the assumption of approximately $15,000 in net liabilities of SciCentral. This acquisition was accounted for using the purchase method of accounting.
Of the total purchase price of SciCentral, approximately $2,372,000 was allocated to goodwill, which represents the excess of purchase price over the fair value of the assets acquired less the liabilities assumed. Goodwill related to this acquisition is being amortized over a period of three years. In connection with the purchase of SciCentral, a former shareholder and employee of SciCentral entered into a two-year employment agreement with the Company. In the event that this individual voluntarily terminates his employment prior to the end of the two year period, this individual would be required to pay to the Company an amount equal to $286,000, reduced by approximately $36,000 upon completion of each 90 day period of continuous employment. The Company also entered into a three-year non-compete agreement with this individual. The $286,000 has been recorded as deferred compensation and is being amortized to stock-based compensation expense over a period of two years. An immaterial amount of purchase price was allocated to the tangible assets of SciCentral.
EMAX
On March 22, 2000, the Company purchased all of the outstanding common and preferred stock of EMAX Solution Partners, Inc. ("EMAX") in exchange for the issuance of 1,584,010 shares of the Company's common stock with a total fair value of $96,910,000, which is based on the average closing price of the common stock of $61.175 for the two-day period immediately preceding and following the date of the announcement of the acquisition of EMAX. In addition, the Company assumed approximately $3,539,000 in net liabilities and incurred costs of approximately $2,441,000 related to this acquisition. The Company also assumed EMAX's obligations under its qualified employee incentive stock option plan for EMAX employees. As a result of this, 374,152 shares of common stock have been reserved by the Company as replacement options with an average exercise price of $15.73 per share. The fair value of these options, which was estimated to be $20,392,000 using the Black-Scholes option pricing model, is included as a component of the total purchase price related to this acquisition. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the total purchase price of approximately $123.3 million was allocated to the assets acquired and liabilities assumed based on estimated fair values. The fair value assigned to intangible assets acquired was based on a valuation prepared by management of the Company.
Of the total purchase price, $2,398,000 was allocated to the tangible assets of EMAX, which were comprised of cash, accounts receivable, property and equipment and prepaid and other assets. In addition, $6,000,000 was allocated to developed software costs, $22,000,000 was allocated to the EMAX registered trademark and $700,000 was allocated to purchased in-process research and development ("IPR&D"). The remaining purchase price of approximately $94,119,000 has been allocated to goodwill. The trademark, goodwill and developed software costs are all being amortized over a period of three years.
The $700,000 of IPR&D was based on a valuation prepared by management and relates to software development projects that had not yet reached technological feasibility and had no alternative future use at the date of the acquisition of EMAX. At the date of the acquisition, these software products being developed by EMAX were approximately 15% complete. The Company estimated at the acquisition date that it would incur a total of approximately $3.0 million to complete the development of these software products over the next 12 months.
In addition, the Company granted to EMAX employees a total of 113,980 SciQuest, Inc. stock options, pursuant to the SciQuest, Inc. 1999 Stock Incentive Plan. These options were granted at an exercise price that was less than the fair value of the Company's stock on the date of grant. In connection with the grant of these options, the Company recorded $5,180,000 of deferred compensation which is being amortized in accordance with the vesting schedule of the related options.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investments
The aggregate fair values of investment securities at December 31, 2000 and 2001 along with unrealized gains and losses determined on an individual investment security basis are as follows:
5. Property and Equipment
Property and equipment consist of the following:
Depreciation expense, including amortization of capitalized leases, for the years ended December 31, 1999, 2000 and 2001 was approximately $394,000, $2,762,000 and $3,478,000, respectively. The Company leases certain equipment under capital lease agreements. The cost of equipment under capital leases at December 31, 2000 and 2001 was approximately $3,980,000 and $459,000, respectively, with accumulated amortization of approximately $1,527,000 and $193,000, respectively.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Capitalized Software and Web Site Development Costs
Capitalized software and web site development costs represent the cost of developing software products for sale and the cost of developing the applications for the Company's e-commerce web sites, (i.e., internal use development costs). During 2000 and 2001, the Company capitalized development costs of $3,654,362 and $3,867,199, respectively, related to software products for sale. There was no such costs or related amortization expense incurred during 1999. The capitalized costs related to software products for sale was $9,654,362 (including $6.0 million resulting from the acquisition of EMAX) and $13,521,561 at December 31, 2000 and 2001, respectively, with accumulated amortization of $1,611,303 and $4,266,056, respectively. Related amortization expense, included in the cost of revenue, was approximately $1,611,000 and $2,655,000 for the years ended December 31, 2000 and 2001, respectively.
The Company capitalized internal use development costs, based on the provisions outlined in SOP No. 98-1, of $1,498,234, $4,345,363, and $2,289,447 during the years ended December 31, 1999, 2000 and 2001, respectively. Capitalized internal use development costs are $4,678,940 and $6,378,724 at December 31, 2000 and 2001, respectively, with accumulated amortization of $2,913,374 and $5,886,951 at December 31, 2000 and 2001, respectively. Related amortization expense was approximately $106,000, $2,905,000 and $2,974,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
7. Other Assets
Other assets are comprised of the following:
8. Accrued Liabilities
Accrued liabilities are comprised of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The components of the Company's income tax benefit for the years ended December 31, 1999, 2000 and 2001 consist of the following:
The Company recognized a deferred tax benefit of $218,780, $66,225, and $0 for the years ended December 31, 1999, 2000 and 2001, respectively, resulting primarily from the reduction of the difference between the book and tax basis of the assets and liabilities recorded in conjunction with the acquisitions of BioSupplyNet and IAI.
Significant components of the Company's deferred tax assets and liabilities at December 31, 2000 and 2001:
The Company has provided a valuation allowance against the balance of its deferred tax assets since realization of these benefits cannot be reasonably assured. The change in valuation allowance was an increase of $12,712,814, $13,150,619 and $19,687,793 for the years ended December 31, 1999, 2000 and 2001, respectively. The change primarily relates to additional operating losses in those years. The 2000 deferred tax assets have been adjusted to reflect the net operating loss carryforwards of EMAX Solution Partners. The increase in valuation allowance primarily resulted from the generation of net operating loss carryforwards.
As of December 31, 2001, the Company had federal and state net operating loss carryforwards of approximately $125,750,000. These net operating loss carryforwards begin to expire in 2012. The utilization of the federal net operating loss carryforwards may be subject to limitation under the rules regarding a change in stock ownership as determined by the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Internal Revenue Code. If the Company's utilization of its net operating loss carryforwards is limited and the Company has taxable income which exceeds the permissible yearly net operating loss utilization, the Company would incur a Federal income tax liability even though its net operating loss carryforwards exceed its taxable income.
Taxes computed at the statutory federal income tax rate of 34% are reconciled to the provision (benefit) for income taxes as follows:
10. Notes Payable
In November 2001, the Company entered into a term loan with a commercial bank for $2,300,000. The proceeds were used to buyout various leases with interest rates of up to 32%. The interest rate on the term loan is at the lender's prime rate. The loan is fully collateralized by a money market investment account held with the lender. Accrued interest and principal payments are due monthly through the final maturity date of January 1, 2004. Future maturities include $1,145,833 and $1,154,167 for the years ended December 31, 2002 and 2003, respectively.
11. Capital Stock
On October 22, 1999, the Board of Directors approved a 1.516643-for-1 Class A common stock split which was declared effective on November 12, 1999. The Company's Class A common stock was also reclassified as common stock with a par value of $0.001 per share. All share and per share information in the accompanying financial statements has been retroactively restated to reflect the effect of this stock split and the reclassification of the Company's Class A common stock to common stock.
Prior to 1999, authorized shares had been grouped into several designations including convertible preferred Series A, Series B and Series C stock, as well as no-par common stock Class A and Class B.
In March 1999, the Company reincorporated under the laws of the State of Delaware and amended and restated its Certificate of Incorporation to assign a par value of $0.001 to all classes of capital stock. In June 1999, the Company's Certificate of Incorporation was amended whereby 3,312,720 shares of preferred stock were designated as Series D convertible preferred stock (the "Series D preferred"), which are mandatorily redeemable, and the number of undesignated preferred shares were decreased to 1,382,869. In July 1999, the Company filed a Certificate of Designation whereby 126,500 shares of preferred stock were designated as Series E convertible preferred stock (the "Series E preferred"), and which decreased the number of undesignated preferred shares to 1,256,369. Upon the effectiveness of the Company's initial public offering on November 12, 1999, the number of authorized shares of the Company's common stock was increased to 90,000,000 shares and 10,000,000 shares of preferred stock were authorized. At all times, the Company shall reserve a number of shares of unissued common stock for the purpose of effecting the conversion of its issued and outstanding shares of all outstanding warrants and options to purchase the Company's common stock.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company sold 89,408 shares of Series C convertible preferred stock to an officer of the Company at $2.80 per share, which shares are subject to vesting over a two-year period.
In November 1999, the Company's initial public offering was consummated. All 8,625,000 registered shares were sold at $16 per share resulting in proceeds, net of expenses, of $126.9 million.
In 2000 and 2001, the Company sold 100,662 and 124,726 shares, respectively, of common stock pursuant to the employee stock purchase plan resulting in proceeds of $382,365 and $169,391, respectively.
Conversion
Each share of Series A, Series B, Series C, Series D, and Series E preferred and Class B common stock, at the option of the holder, is convertible into shares of common stock of the Company at 1.516643-for-1 conversion ratio, subject to certain adjustments as defined. All outstanding shares of Series A, Series B, Series C, Series D, and Series E preferred stock and Class B common stock converted into 13,438,185 shares of the Company's common stock upon the closing of the Company's initial public offering in November 1999.
12. Mandatorily Redeemable Convertible Preferred Stock
In July 1998, the Company sold 1,442,500 shares of Series B preferred in a private placement transaction for $2.80 per share which resulted in net proceeds of $4,033,503 and issued 187,394 shares of Series B preferred in exchange for the cancellation of notes payable in the aggregate principal amount of $515,000. The notes payable were issued between March and June 1998 and bore interest at 6% per annum. Attached to the notes were warrants to be issued upon repayment or conversion of such notes. The number of warrants was determined based on a formula as set forth in the agreements. When the notes payable were converted to Series B preferred, the Company issued 57,545 warrants to purchase shares of Series B preferred with exercise prices of $2.80 per share. The Company recorded a debt discount of $12,084 for the value of these warrants as determined using the Black-Scholes option pricing model. In October and November of 1998, the Company sold 2,147,732 shares of Series B preferred in private placement transactions in exchange for proceeds of $6,005,476.
Upon any request by any holder of Series B preferred shares at any time after July 30, 2003, the Company was required to redeem the Series B preferred in three equal annual installments. The redemption price was to be equal to the greater of the appraised value of the Series B preferred shares at the date of the redemption request or an amount equal to the invested amount plus interest at a rate of 10% per annum, less the aggregate amount of all dividends actually paid since the issuance date.
As the redemption price of the Series B preferred stock was variable in amount, its carrying value was required to be adjusted to the estimated redemption amount at each balance sheet date. The Company recorded charges to stockholders' equity of $45,215,043 for the period from January 1, 1999 to November 22, 1999, the effective date of the Company's initial public offering, to reflect the Series B preferred at its estimated fair value at that date based on the price of the most recent sales of the Company's preferred stock and the projected initial public offering price, respectively.
In May and June, 1999, the Company sold 3,312,720 shares of Series D preferred in a private placement transaction for $11.32 per share which resulted in proceeds of $35,860,975, net of issuance costs of $1,639,025. In addition, the Company issued 1,004,829 warrants to purchase the Company's common stock at an exercise price of $7.46 per share and 41,733 warrants to purchase the Company's common stock at an exercise price of $9.33 per share. The estimated fair value of the warrants of $726,137 according to the Black-Scholes pricing model using an estimated fair value of $3.30 per common share for the Company's common stock was recorded as a reduction in the carrying value of the Series D preferred and an increase to additional paid in capital. The Company recorded a charge to stockholders' equity of $34,073,979 for the period from issuance to November 22, 1999 to record the accretion on the Series D preferred. Accretion of all mandatorily redeemable preferred stock ceased upon the effectiveness of the Company's initial public offering on November 22, 1999.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Upon any request by any holder of Series D preferred shares at any time after the initial redemption exercise date, the Company was required to redeem the Series D preferred at the amount invested per share plus a per annum interest charge for the period the share has been outstanding of 10% compounded annually and prorated for any partial year less the aggregate amount of all dividends actually paid since the issuance date.
13. Stock Options and Warrants
Stock Options
In 1997, the Company adopted the SciQuest, Inc. Stock Option Plan (the "Plan") which currently provides for the grant of up to 2,056,060 employee stock options. Stock options granted under the Plan are for periods not to exceed ten years. In December 1999, the Company adopted the SciQuest, Inc. 1999 Stock Option Plan which provides, as adjusted by the shareholders in 2001, for the grant of up to 7,854,998 employee stock options. Options granted under the plans during the years ended December 31, 1999, 2000 and 2001 generally vest in periods between three and five years as determined by the board of directors, although certain grants have been vested immediately upon the grant of the option.
The Company continues to apply APB No. 25 and related interpretations in accounting for the stock option plans. The Company recognized $323,676, $4,440,603 and $1,076,052 in non-cash compensation expense related to amortization of deferred compensation during the years ended December 31, 1999, 2000 and 2001, respectively. Had compensation expense for the plans been determined based on the fair value at the grant dates for awards under the plans consistent with the methods of SFAS No. 123, the Company's net loss for the years ended December 31, 1999, 2000 and 2001 would have been increased to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended December 31, 1999, 2000 and 2001: risk free interest of 6.1%, 6.2% and 4.6%, respectively; expected lives of five years; dividend yields of 0%; and volatility factors of 0%, 148% and 139%, respectively. The weighted average fair value of options granted during the years ended December 31, 1999, 2000 and 2001 according to the Black-Scholes pricing model was $3.42, $9.75 and $1.11, respectively.
A summary of the status of the Plans as of December 31, 1999, 2000 and 2001 and changes during the years then ended is presented below:
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All incentive stock options granted during the years ended December 31, 1999, 2000 and 2001 were granted with an exercise price equal to the fair value of the underlying common stock on the grant date, as determined by the board of directors. The Company recorded $12,199,827 and $5,180,163 of deferred compensation related to stock option grants during the years ended December 31, 1999 and 2000, respectively, with an exercise price below the fair market value of the Company's common stock at the date of the grant. There were no stock options granted below the fair market value during 2001.
On December 13, 2000, the Board of Directors approved a repricing of approximately 1,173,000 non-officer employee stock options to the closing price of $2.125. Accordingly, the Company recognizes adjustments to the related deferred compensation for changes in the intrinsic value of the repriced options at each balance sheet date. In 2000 and 2001, the repricing resulted in no additional deferred compensation or amortization of expense due to the December 31, 2000 and 2001 closing prices being below the revised exercise price.
The following table summarizes information about the Company's outstanding stock options at December 31, 2001:
Warrants
At December 31, 2000 and 2001, the Company had 4,755,168 and 4,338,111, respectively, of warrants outstanding, with 2,537,352 warrants exercisable at December 31, 2001, to purchase the Company's common stock at prices ranging from $0.01 to $16.00, which includes the warrants issued to strategic partners discussed in Note 16. These warrants expire at various dates between 2000 and 2004.
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Commitments and Contingencies
The Company leases certain equipment under various capital leases and leases its office space and certain equipment under noncancellable operating leases. Future minimum lease payments required under the leases at December 31, 2001 are as follows:
- -------- * Future minimum operating lease payments have not been reduced by future minimum sublease rentals of $759,000.
Rent expense recognized under operating leases totaled approximately $439,000, $1,444,000 and $1,685,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
During 1999, the Company entered into a lease agreement for additional office space for its home office providing a total of 93,000 square feet into the year 2005. During 2001, the Company entered into a lease for 39,000 square feet of office space for its EMAX subsidiary. The lease, which is for a period of 10 years, commenced in March 2001.
During the year ended December 31, 1999, the Company entered into a leasing agreement with a leasing company. The Company obtained a total commitment amount of $2,500,000 from the leasing company, which expired in August 2000. The Company borrowed $2,500,000 and purchased furniture and equipment with monthly payments due over a three and a half year term. As part of this agreement, the Company was entitled to enter into a sale and leaseback transaction of approximately $700,000 for its existing furniture and equipment located at the facility in North Carolina. No gain or loss was recognized on this transaction. For accounting purposes, the Company has treated the transaction as a financing agreement and has recognized the resulting liability for future lease payments as a capital lease obligation. Prior to the end of the lease term, the Company has the option to either purchase the equipment or renew the lease at a price not to exceed fifteen percent of the equipment cost. During 2001, the Company exercised the option to buy out the lease and purchase the equipment.
15. Legal Proceedings
On September 10, 2001 SciQuest was named as a defendant in a purported class action lawsuit filed in the United States District Court, Southern District of New York. The lawsuit is captioned Patricia Figuerido and Robert Wallace v. Sciquest.com, Inc., et al. No. 01 CV 8467. The case has been consolidated for pretrial purposes with over 100 other lawsuits filed against other issuers, their officers, and underwriters of their initial public offerings under the caption In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The case includes claims against SciQuest, three of its officers, and seven investment banking firms who either served as underwriters, or are the successors in interest to underwriters, of the Company's initial public offering. The complaint alleges that the prospectus used in our initial public offering contained material misstatements or omissions regarding the underwriters' activities in connection with the initial public offering. The court has adjourned defendants' time to answer or respond to all complaints in the consolidated proceedings until further order of the court. The Company intends to vigorously defend the action.
During 2001, a customer filed an action seeking a declaratory judgment that its license entitled it to permit non-customer employees to use the Company's licensed software. In addition, the complaint alleges breach by the Company of an
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement pursuant to which the Company was to upgrade the software to a newer version. The complaint seeks damages alleged to exceed $1,000,000. The litigation arises out of the Company's discovery that the customer had permitted non-customer employees to use the software. After attempts proved unsuccessful to amicably resolve the dispute, the Company suspended work on the upgrade and the customer failed to pay for the work performed. The Company intends to vigorously defend the action and has asserted its counterclaims seeking damages in excess of $2,000,000 for copyright infringement and breach of contract and to recover the amounts due for work previously billed, but unpaid.
It is too early in each matter to reasonably predict the probability of the outcome or to estimate a range of possible losses. Future losses may have a material adverse effect on the Company's consolidated financial position, liquidity or consolidated results of operations.
16. Strategic Relationships
In October, November, and December 1999, the Company entered into strategic relationships with a number of key suppliers and buyers of scientific products. As a part of these arrangements, the Company issued to these companies 5,035,180 warrants to purchase the Company's common stock at an exercise price of $0.01 per share of which 3,544,434 warrants are issued and outstanding at December 31, 2001. At December 31, 2000 and 2001, the Company has deferred customer acquisition costs of $6,583,286 and $7,733,082, respectively, with accumulated amortization of $1,734,051 and $3,634,176, respectively, related to these warrants. In the event that the Company commits to issue additional warrants to purchase its common stock as more strategic relationships are formed, the Company will be required to record additional deferred customer acquisition costs equal to the fair value of the warrants on the date of issuance. The amount of deferred customer acquisition costs will be adjusted in future reporting periods based on changes in the fair value of the warrants until such date as the warrants are fully vested and non-forfeitable. Deferred customer acquisition costs will be amortized to operating expense over the term of the related contractual relationship, which in the case of the buyer agreements is three years and in the case of the supplier agreements is four or five years, using a cumulative catch-up method. The Company recognized $9,107,753, $(6,973,706), and $2,100,123 in stock based non-cash customer acquisition expense (benefit) during the fourth quarter of 1999 and the years ended December 31, 2000 and 2001, respectively, related to the amortization of deferred customer acquisition costs. These amounts include approximately $400,000 and $200,000 of amortization of prepaid customer acquisition fees for the years ended December 31, 2000 and 2001, respectively.
These strategic relationships include agreements to be the exclusive third party provider of electronic marketplace services in the United States for a period of five years for eight key suppliers. Under the terms of these agreements, these suppliers are not required to sell a minimum amount of products through the Company's electronic marketplace. The warrants to purchase the Company's common stock that were issued in connection with these agreements will vest over a four or five year period regardless of the level of sales by the suppliers through the Company's electronic marketplace.
These strategic relationships also include agreements with several major enterprise buyers to be their third party electronic aggregator for purchases of scientific products in North America for a period of three years. Although these enterprise buyers have agreed to use reasonable efforts to purchase at least $5 million of scientific products annually through the Company's marketplace, there are no minimum purchase commitments. The warrants issued in connection with these relationships vest over a period of three years regardless of their level of purchases through the Company's electronic marketplace.
In addition, the Company has agreed to issue to certain major enterprise buyers additional incentive warrants, the number of which will be based on each purchaser's volume of purchases through the Company's market place during the years 2000, 2001 and 2002. These incentive warrants will be issued on February 15, 2001, 2002 and 2003, at an exercise price equal to the price per share of common stock in the Company's initial public offering of $16 per share, and will be exercisable upon issuance.
Based on purchasing volume during the year ended December 31, 2000, incentive warrants to purchase approximately 58,000 shares of common stock were issued on February 15, 2001, resulting in a non-cash charge to revenue and the recognition of additional paid-in capital of approximately $52,000 representing the estimated fair value of the warrants determined by using the Black-Scholes valuation model at the issuance date. Until such date as they are non-forfeitable, the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value of these incentive warrants will be adjusted to their estimated fair value at each balance sheet date with the adjustment being charged to operating expense. For the year ended December 31, 2001, this adjustment resulted in a benefit of approximately $45,000.
Beginning January 1, 2001, the Company began accounting for incentive warrants pursuant to EITF Issue 00-22, "Accounting for "Points" and Other Time- or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." Under the consensus in Issue 00-22, the Company estimates the number of customers that will ultimately earn incentive warrants, factoring in returns, if it can be reasonably estimated. Each revenue transaction with customers that earn incentive warrants is reduced by an applicable incentive cost rate. Changes to estimates of the ultimate incentive cost are recognized by using a cumulative catch-up adjustment at each balance sheet date and by reducing future revenues, on a non-cash basis, based on a revised incentive cost rate.
The estimated non-cash value of the incentive warrants related to the year ended December 31, 2001 is insignificant. Due to the change in the Company's business model, the Company does not anticipate any significant warrants being earned and granted in the future.
17. Related Party Transactions
In March 1999, we sold 89,408 shares of Series C convertible preferred stock to an executive officer for $250,000, or $2.80 per share. These shares were converted to common stock upon the effectiveness of our initial public offering on November 19, 1999. In November 2000, 50,000 shares of restricted common stock (previously sold to an executive officer at par value of $0.001) were declared fully vested. This accelerated vesting resulted in a non-cash compensation expense of $385,900 during the year ended December 31, 2000.
18. Restructuring
In November 2000, the Company announced a restructuring of its e-commerce business. The restructuring included the elimination of certain unprofitable business lines and a resultant reduction in its workforce of approximately 10 percent of the employees located in the United States. The total restructuring charge was $2.2 million and included a write-off of approximately $0.8 million of assets relating to the unprofitable business lines to be eliminated. The majority of the write-down of net assets related to IAI, Inc. and BioSupplyNet, Inc. and consisted of impairment of intangibles. The restructuring liability was fully utilized during the year ended December 31, 2001.
In June 2001, the Company announced a restructuring of the business to essentially eliminate outsourced procurement services. The restructuring includes the elimination of certain unprofitable business lines and a resultant reduction in workforce of approximately one-half of the employees located in the United States. The total restructuring charge was $10.7 million and included approximately $1.6 million for employee separation benefits, $6.7 million of assets and approximately $2.4 million of other costs and lease obligations relating to the unprofitable business lines to be eliminated. During the fourth quarter of 2001, approximately $430,000 of the original restructuring amount relating to the net asset impairment was reversed and established for the other costs and lease obligations.
Per SEC Staff Accounting Bulletin 100 and Emerging Issues Task Force Issue No. 94-3, the following table summarizes information about the Company's restructuring plan of June 2001:
SciQuest, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Business Segment Data
During 2000 and 2001, as a result of the acquisition of EMAX, the Company operated in two business segments--e-commerce transactions and license fees and other professional services. The Company operated as a single segment during 1999. Substantially all operations are in the United States.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SciQuest, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCIQUEST, INC. (Registrant)
/s/ STEPHEN J. WIEHE By: _______________________________ Stephen J. Wiehe Chief Executive Officer
Date: March 15, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.