Item 1. Business
Overview
SciQuest is a technology and solutions company providing integrated e- commerce and asset management solutions for research enterprises and their supplier partners worldwide. Our unbiased position, domain expertise and proven technology enable SciQuest to make e-solutions work for science through advanced technologies, content management, supply chain solutions and professional services. The Company's platform and solutions can be utilized independently or integrated with leading software vendors and supplier systems to unite science, information and technology. We believe that our solutions enhance innovation, reduce costs, and improve operational effectiveness for scientific organizations worldwide.
Our technology and solutions benefits three distinct customers: scientists, purchasing professionals and suppliers. Our solutions reduce the time scientists require to find, compare, purchase, track and manage critical laboratory items, thus allowing them to spend more time on research and testing. Our solutions allow purchasing professionals to reduce procurement costs by automating order processing, providing more control and information to support enterprise purchasing policies, and optimizing asset management of research substances. Our solutions provide an efficient e-commerce platform and related solutions that allows suppliers to expand their market reach, reduce customer acquisition costs, and minimize order processing costs.
Since our founding in 1995, we have provided databases and tools in the form of product directories used by scientists and purchasing professionals to locate supplies and products. In April 1999, we introduced our e-commerce marketplace to this growing community of online scientific product buyers and suppliers. In March 2000, we expanded beyond e-commerce transactions into asset management solutions with the acquisition of EMAX Solutions. We expanded our content solutions further in 2000 with the acquisition of IntralogixTM and SciCentral(R) to provide greater information and services to our customers. We expanded our Global Professional Services offering in 2000 to complement our technology offerings.
Recent Events
In February 2001, we announced the appointment of Stephen J. Wiehe to the position of Chief Executive Officer and his election to the Company's Board of Directors. Former CEO and Co-Founder M. Scott Andrews will continue to serve as Chairman of the Board of Directors and our Chief Strategy Officer.
In March 2001, we launched the Chromatogram Library a comprehensive, web- based research application to assist research organizations in the drug discovery process. The Chromatogram Library allows scientists to perform a search by entering a chromatogram title/keyword or compound name to retrieve all available chromatograms including peak identification and separation conditions matching the query. The Chromatogram Library works in conjunction with the SciQuest Column Resource.
In March 2001, we announced an expanded contract to accelerate deployment of the Merck Marketplace, an internal Merck & Co., Inc. laboratory-supply, e- commerce initiative. Merck began its relationship with SciQuest in 1999 and has been an early innovator in leveraging the power of electronic commerce within its industry. Under the terms of this contract, deployment of SciQuest enabled solutions to the desktops of Merck's scientists will be accelerated in 2001.
In March 2001, we announced SmartStore(TM), a SciQuest-hosted supplier e- commerce solution that allows suppliers of scientific products to transact business directly with customers through their web sites using SciQuest's technology platform. Leveraging SciQuest's content, search, procurement and integration platform, SmartStore(TM) allows suppliers to rapidly and cost effectively build their own Web storefront to capture sales revenue beyond the SciQuest private e-marketplaces for buyers.
Industry Background
The Market for Technology and Services
There are substantial market opportunities in providing e-solutions to research enterprises and their suppliers. In this fragmented industry, there are over 20,000 research enterprises worldwide, representing more than 500,000 scientists who deal with over 5,000 suppliers. We anticipate generating revenues from buyers and suppliers purchasing technology solutions and related services and by earning transaction fees from scientific product procurement.
The Scientific Products Market
Based upon data from the Laboratory Products Association, a trade association for laboratory product businesses, and Strategic Directions International, an international management consulting firm specializing in analytical instruments, we estimate that the market for scientific products in 1999 was approximately $12 billion in North America and $36 billion worldwide. These expenditures are driven, to a large extent, by increases in scientific research and development investments. Every year, approximately 200,000 laboratories around the world purchase scientific products from thousands of different suppliers to facilitate research and testing activities. As the demand for scientific products grows, the need for efficient procurement processes becomes more critical.
The current scientific products market is characterized by:
. complex, information-intensive products;
. a highly fragmented supply chain; and
. a heavy concentration of manual purchasing processes consisting of printed catalogs, paper requisitions and telephone and fax orders.
There are, generally, three types of scientific products: (1) highly technical specialty items used for specific research and testing applications, (2) commodity products that are used in a broad range of scientific applications, and (3) highly technical instruments and other capital equipment. Suppliers typically sell specialty scientific products and instruments directly to customers, whereas commodity products are typically sold through distributors.
Advances in the Field of Research and Development Impact Asset Management
High throughput research paradigms consisting of advanced production and test technologies, including combinatorial chemistry and high throughput screening, are reliant on the availability of the appropriate research reagents. Customers are reexamining existing processes for reagent sourcing, ordering, tracking and disposing. Inefficiencies that result from these processes include scientists wasting valuable time, purchasing departments procuring new materials that may already be in their possession, and health and safety officers investing extra time and money in handling, monitoring and disposing materials. Due to the unique nature of these substances, we believe that specialized asset management solutions for the research industry represent market opportunities.
Limitations of the Traditional Supply Chain
We believe the traditional supply chain in the scientific products industry does not adequately address the needs of scientists, purchasing professionals or suppliers.
Scientists. Because scientists are continually developing applications and testing new theories, they are typically unable to forecast their need for many of the chemicals, supplies and equipment to conduct their research and testing. For this reason scientists often:
. have immediate needs for critical items that are highly technical and have exacting criteria;
. need new products that they have not purchased before; and
. must purchase these items from new and different suppliers.
As a result, it is difficult and time-consuming for scientists to identify, compare and purchase the scientific products required to meet their needs using traditional methods. In fact, we estimate that a typical laboratory spends up to four hours weekly searching through paper catalogs and product literature and requesting technical data from various suppliers.
Purchasing Professionals. The product ordering process traditionally has been a paper-based process that requires manual preparation of purchase orders and order tracking. Traditionally, scientists requisition supplies through purchasing professionals within their organizations, who place orders with multiple suppliers by telephone, fax and e-mail. This multi-step manual process is highly susceptible to errors. Additionally, the traditional process makes it difficult for purchasing professionals to enforce purchasing policies among scientists who specify and request products. Buying organizations in a variety of industries that were surveyed by the Aberdeen Group, a computer and communications research and consulting organization, reported that it typically costs $107 per requisition for orders processed manually, compared with $30 on average to process an order through an Internet automated procurement system.
Suppliers. Traditionally, suppliers have used two sales channels: traditional distributors and direct sales. While traditional distributors can give a supplier access to a broad market, distributors separate suppliers from the ultimate customer and may lack the ability to provide the technical assistance required to sell specialty scientific products and instruments. As a result, traditional distributors normally focus on selling commodity products. Conversely, direct sales provide suppliers with greater control and contact with their customers, enabling them to provide the technical assistance necessary for the sale of specialty scientific products. However, direct sales are often expensive and inefficient. Many suppliers have Web sites that are essentially online versions of their catalogs, but these sites do not address the primary cause of inefficiency for buyers--the inability to find products and consolidate orders from different suppliers quickly and easily through a single service.
The SciQuest Solutions
The SciQuest solutions are designed to address the current limitations of the scientific products supply chain by streamlining the process of buying and selling scientific products, reducing associated transaction costs, and effectively managing assets. Our primary focus on a single industry allows us to create a uniquely tailored suite of solutions that we believe is more attractive to both buyers and suppliers than more generic technology solutions.
Our solutions serve three primary and distinct customers:
Scientists. Our solutions offer scientists online 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:
. search our extensive database, using our taxonomies, to compare products, attributes and technical data across multiple suppliers;
. locate a specific chemical, equipment or supply item;
. consolidate, purchase and track orders from multiple suppliers through the convenience of a single Web site, 24 hours a day, seven days a week;
. receive and track chemicals in their containers after they are received from suppliers;
. query internal inventory and suppliers' databases via chemical structure or substructure; and
. access a significant body of articles and information sources through our SciCentral offering.
Purchasing Professionals. Our solutions allow purchasing professionals to automate order processing, consolidate purchase orders and payments and obtain purchasing information. This provides purchasing professionals with greater access to purchasing information 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 one 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.
In addition, many of our solutions are designed to be compatible with leading enterprise software systems without requiring organizations to install additional enterprise software systems. This compatibility allows organizations to avoid the expense, time and training typically required to install and support new enterprise software.
Suppliers. Our solutions offer suppliers a more efficient content management and commerce solution that cost-effectively provides many of the benefits of both direct sales and distribution. As a result, by participating in our marketplace suppliers can expand their market reach and reduce customer acquisition and order processing costs. Our solutions enable suppliers to:
. market and sell products more cost-effectively through 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 contact with their customers.
Strategy
Our objective is to be the leading technology and solutions company providing integrated e-commerce and asset management solutions for research enterprises and their supplier partners worldwide. We intend to achieve this objective through the following strategies:
Expand Our Service Offerings. We intend to expand our service offerings to our customers by providing a growing portfolio of services to address their needs for integrated commerce and asset management solutions. We will work with existing and prospective customers to identify services that should be offered or expanded. These professional services may include solutions design consulting, implementation and consulting services, and adoption support services. We believe that offering an expanded range of services will help improve customer satisfaction and expand our potential revenue streams.
Expand Our Technology Solutions. We intend to leverage our current e- commerce and asset management solutions infrastructure to expand the range of customer needs that our products and services address. For example, we intend to provide services and products that streamline our current customers' research and
development processes such as effective procurement and management of proprietary chemicals and substances. We also intend to apply our acquired business-to-business knowledge, market making capabilities, and e-infrastructure across new market segments where there are synergies with our existing customer and supplier base. For example, we intend to leverage our existing e-commerce infrastructure in providing commerce enabling solutions for suppliers. Other technology solutions that we may develop include commerce platforms, data maintenance tools, search tools, scientific resources, configurable workflow systems, integration methodologies, substance management applications, and compound manager solutions.
Leverage Our Brand Equity and Enhance Customer Loyalty. We intend to leverage our strong brand identity to continue to grow our base of qualified scientific buyers and participating suppliers. We will continue to invest heavily in the SciQuest brand as well as in the delivery of a high level of customer service. We believe that our strong brand identity coupled with superior customer service will allow us to enhance customer loyalty and facilitate repeat purchases by our customers.
Deepen Our Customer Relationships. We intend to continue to broaden our scientific product and service offerings that provide a comprehensive and efficient solution to the various supply chain and research needs of the scientific community. We believe that the continued extension of our products and services will enhance loyalty and accelerate adoption by scientists. We intend to develop these additional services and functionalities internally as well as explore acquisitions of complementary service offerings.
Leverage Our Strategic Relationships with Suppliers. We intend to leverage our strategic relationships with key suppliers to continue to grow our base of scientific buyers in North America and internationally. These relationships allow us to provide thousands of significant non-commodity laboratory products and services to our customers, which we expect will significantly contribute to the growth and loyalty of our customer base. We currently have strategic relationship agreements with the following key suppliers: Alltech Associates, Inc.; Amersham Pharmacia Biotech, Inc.; Ambion, Inc.; BioWhittaker, a Cambrex Company; Endogen, Inc. and Pierce Chemical, Inc. (Perbio Science Companies); KPL; PerkinElmer, Inc. (including the recent acquisition of NEN Life Sciences); QIAGEN N.V.; Schleicher & Schuell; and Shimadzu Scientific Instruments, Inc. We intend to continue to enter into similar agreements with additional key suppliers. These strategic suppliers benefit from our growing base of large buyers of scientific products, from our value added e-commerce service, from our strong brand, and from the efficiency that results from having only one provider of electronic marketplace services.
Expand Internationally. We believe that the global reach of the Internet and worldwide demand for scientific products presents a significant opportunity for us to expand internationally. As we continue to expand our product offerings, we believe that we will attract a larger base of users globally. We intend to leverage our strategic relationships with key suppliers and buyers as we expand in international markets. In addition, we intend to invest resources and capital to expand our sales and marketing efforts internationally in order to better address the needs of our customers worldwide.
Products and Services
SciQuest is a technology and solutions company that serves the needs of scientists, purchasing professionals, and suppliers by providing a comprehensive portfolio of e-commerce and asset management solutions. Leveraging our existing customer base and extensive industry knowledge, we have built a market-driven portfolio of products and service offerings. In addition to our e-commerce offerings for research enterprises, we offer asset management solutions for reagents and proprietary compounds. We also provide professional services to suppliers in the areas of integration, content management, and order management. Our technologies 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 service offering provides our customers with a unique suite of solutions that can be configured to their specific needs.
Procurement Solutions
SciQuest provides an integrated suite of procurement applications and solutions for buyers to create and manage their private marketplaces including:
Custom Catalogs that include specific suppliers, products, and prices as requested by the customer. This allows research organizations to access detailed technical product data within the context of the business practices and preferences of the organization. SciQuest has extensive content from suppliers that is organized in a proprietary taxonomy and delivered in a way that is configurable by the customer.
Search Tools for advanced ways to help scientists and purchasing professionals find the products they need with fast and intuitive searching tools. A powerful, scalable, probabilistic search engine powers searches for keywords, categories, suppliers and accounts for spelling errors, phonetic spelling, and derivative words that may be used in product descriptions.
Order Placement Tools that allow users to add items to their shopping cart, assign appropriate accounting codes, select payment method, and combine purchases for products from multiple suppliers within one interface. The process starts with adding items to the shopping cart and ends with the checkout process.
Checkout via SciQuest procurement solutions is configurable to conform to most organization's purchasing business practices. Depending on customers' desired configuration, users may be required to enter information such as payment method, shipping information including addresses for ship to and bill to, shipping method, and accounting reconciliation information. By setting up the checkout parameters in My Profile in advance, users can reduce the time it takes to checkout.
Administrative Tools allow both end users and administrators to define key parameters to allow them to quickly navigate through the purchasing processes of their organization. This includes shipping and billing information as well as accounting reconciliation codes. At the time of registration approval, the administrator has the option to setup key parameters like type of user, ship to addresses assigned to an RSO, and spending and approval limits for financial workflow. The administrator can also deny access or shut access off to a user who has already been approved. Administrators can also access user's profiles to verify the correct shipping, billing, and accounting information has been entered.
Asset Management Applications
In March 2000, SciQuest acquired EMAX Solution Partners, Inc. to expand its offering of technology and services to include the area of asset management within research enterprises. Among these specialized asset management solutions are the following:
EMAX Reagent Manager optimizes the management of reagents from sourcing through disposal, uniting procurement and asset management with logistical processes. EMAX Reagent Manager is an enterprise solution for scientists, purchasing professionals, receiving, health and safety workers.
EMAX Reagent Manager Foundation is the front-end for scientists and the back-end for system administrators:
. Research Desktop allows scientists to search, requisition, order, receive and track reagents. Container tracking is available for splitting, replicating, transferring and disposing of containers;
. Administration System enables system administrators to establish conventions and protocols for user access levels, and safety/handling procedures; and
. Advanced Container Tracking audits the movement of chemicals and managing waste disposal and basic receiving and inventory reconciliation functionality.
EMAX Reagent Manager Health & Safety Modules provide for reagent clearance monitoring and waste management:
. Clearance Monitor Module verifies workers and functions are authorized to order, receive, transfer and dispose of materials and assures regulatory compliance; and
. Waste Manager Module assists compliance with EPA, government regulations and employee safety via access to hazardous reagent information and also enables tracking of waste disposal cost, waste pickup requests, and improved reporting capabilities.
EMAX Reagent Manager Stockroom Manager Module offers complete inventory management of on-site scientific stockrooms. The system suggests replenishment orders, tracks backorders, maintains on-hand inventory levels and processes physical inventory as needed. It also enables you to maintain information on suppliers, costs, shelf locations, other laboratory supplies, and electronically orders required materials from suppliers based on automated reorder points.
EMAX Substance Manager(TM) is the industry-leading substance and plate management software solution for research enterprises. EMAX Substance Manager automates processes for receiving samples, preparing plates, tracking substances and submitting requests for screening. This robust set of product capabilities is developed to interact with informatics and automation systems and is scalable to support usage by organizations of variable sizes.
Research Resources and Solutions
To address the needs of scientists, we have developed unique resources that reduce research costs while enhancing productivity. These applications are targeted at various scientific disciplines such as analytical chemistry, separation sciences, life sciences, and technical scientific information and relevant news. We offer a unique combination of research resources:
Chromatography Column Resource allows separation science experts to quickly source and order chromatography columns from the world's leading suppliers. Its features include:
. the largest chromatography column database available from one access point allowing researchers to choose from more than 90,000 chromatography columns, 3,600 product trade names and 100 different suppliers;
. search engines that allow users to search for part number, trade name, and product specifications, such as chemical phase, pore size and more;
. side-by-side product comparisons are enabled by physical specifications such as chemical phase, base material, carbon load, and surface area; and
. automatic cross-reference technology that allows users to cross- reference products by supplier based on the manufacturer's part number.
The Chromatogram Library offers a non-biased application database containing thousands of chromatograms. Because the Chromatogram Library is integrated with the Chromatography Column Resource, once the scientist has identified the chromatogram of interest, he can locate the columns needed to perform a desired separation and order them through the column resource. The library is a growing database of thousands of chromatograms, all indexed in a standardized, easy-to-search database. It has an intuitive search engine that allows users to compare chromatograms/methods by chromatogram title or keyword (e.g., steroid), compound name (e.g., codeine), compound(s), column type/discipline used, supplier or specific column trade name.
The Antibody Resource offers a comprehensive and intuitive application that allows the life scientist to source and order antibodies from an extensive, content rich database. This application offers an extensive database with over 140,000 primary and secondary antibody products. The powerful search engine allows users to search multiple attributes simultaneously by: name, antigen, clone, conjugate type, supplier, host, species
reactivity, monoclonal vs. polyclonal. Search results are presented as a comparative table based on common attributes.
The Chemical Resource provides scientists with the capability to search for reagents and chemical compounds by characteristic or by structure/substructure from over 400,000 chemical products representing many of the world's largest research chemical suppliers. Users are able to view the following information: chemical structure, CAS number, systematic chemical name, common chemical name, abbreviations and synonyms, chemical and physical properties, structure and substructure searching.
SciCentral delivers current, discipline-specific scientific news direct to the researcher's desktop including:
. Breaking Research News separated by discipline and updated daily with data from over 200 professional sources;
. Locators that enable the scientist to quickly pinpoint literature, conferences and databases;
. Directory of Specialized Resources organized by discipline with specialized site directories, databases and special reports;
. Fully Customized Weekly Newsletter service that enables the scientist to create a personalized profile and monitor research breakthroughs and new online resources in his/her specific areas of interest; and
. Special Features are dedicated to specific topics such as Science Policy & Ethics, K-12 Science, Women and Minorities in Science, etc.
Supplier Solutions
SmartStore(TM) is a SciQuest-hosted supplier e-commerce solution that allows suppliers of scientific products to transact business directly with customers through their web sites using SciQuest's technology platform. Leveraging SciQuest's proven content, search, procurement and integration platform, SmartStore(TM) allows suppliers to rapidly and cost effectively build their own Web storefront to capture sales revenue beyond the SciQuest private e- marketplaces for buyers.
SciQuest's SmartStore(TM) offering provides suppliers the opportunity to:
. leverage a proven technology platform;
. accelerate time to market;
. reduce risk of implementation;
. save deployment and maintenance costs; and
. integrate with customers' procurement applications and systems.
We also offer suppliers content management solutions as well as platform integration services. Additional content and connectivity solutions are currently in development.
Content Management Services
Suppliers may contract with us to modify, enrich, and publish their product content in a secure electronic catalog for customers to access. We may convert the data from a diverse range of file and formats into our universal scientific catalog. Suppliers can choose to add access to more detailed content including images, technical papers, protocols, journal articles, and additional product specifications. We also provide content management services that allow suppliers to provide customer specific pricing to buyers.
Sales & Marketing
We market and sell our technology and solutions through direct sales, traditional and internet marketing initiatives and co-marketing relationships. Our sales force concentrates on selling our enterprise compatible
solutions and services to large research organizations and suppliers. We expect to continue to attract and retain scientists, purchasing professionals and suppliers, thereby growing our installed customer base and increasing repeat purchases.
We leverage a variety of marketing channels to build our brand equity as well as promote our solutions to both buyers 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, 2000, we had 71 people in our sales and marketing group.
Strategic Relationships
We believe that a key element to the successful implementation of our business strategy is to establish strategic relationships with prominent buyers and suppliers of scientific products. We believe these relationships will assist us in accelerating our aggregation of content, increasing the transaction volume on the SciQuest marketplace, achieving further brand awareness and building a critical mass of important core customers.
Strategic Relationships--Purchasing
We have entered into agreements with Dow Chemical Company, DuPont Pharmaceuticals Company, Monsanto Company, and Merck & Company, Inc. to establish purchasing relationships. Pursuant to these agreements, we will be the exclusive third-party electronic aggregator for purchases of scientific products in North America for Dow Chemical Company, DuPont Pharmaceuticals Company and Merck & Company, Inc. and an approved third-party electronic aggregator for purchases of scientific products in North America for Monsanto Company. As an exclusive third-party electronic aggregator, we will be the sole electronic means by which Dow Chemical Company, DuPont Pharmaceuticals Company and Merck & Company, Inc. purchase scientific products that are not sold primarily through traditional distributors. As a third-party electronic aggregator, we will be an electronic means by which Monsanto may purchase scientific products that are not sold primarily through traditional distributors. Each of these agreements provides that:
. the purchaser will use its reasonable efforts to purchase at least $5.0 million of scientific products annually through our marketplace but otherwise there are no minimum purchase commitments; and
. the purchaser will participate in case studies of our marketplace and otherwise promote our marketplace within the scientific products industry.
In connection with these relationships, we have issued warrants to purchase an aggregate of 328,914 shares of our common stock at an exercise price of $0.01 per share. These warrants vest in equal annual installments over three years. In addition, we have agreed to issue to each of these purchasers additional incentive warrants, the number of which will be based on that purchaser's volume of purchases through the SciQuest.com marketplace during the years 2000, 2001 and 2002. These incentive warrants will be issued on February 15, 2001, 2002 and 2003, at an exercise price of $16.00, and will be exercisable upon issuance for a period of five years. Based on these purchasers' volume, on February 15, 2001, we issued incentive warrants to purchase approximately 58,000 shares of common stock.
Strategic Relationships--Suppliers
We have entered into agreements to be the exclusive third-party provider of electronic marketplace services in the United States for periods up to five years with key suppliers of scientific products including: Alltech Associates, Inc.; Ambion, Inc.; Amersham Pharmacia Biotech, Inc.; BioWhittaker, a Cambrex Company; Endogen, Inc. and Pierce Chemical (Perbio Science Companies); KPL; PerkinElmer, Inc. (including the recent acquisition of NEN Life Sciences).; QIAGEN N.V.; Schleicher & Schuell; and Shimadzu Scientific Instruments, Inc.
These agreements provide that we will be the exclusive third-party provider of electronic marketplace services in the United States for a period of five years; those suppliers will promote our marketplace, including participating in co-marketing and advertising programs; these suppliers will have the opportunity to elect four of the seven members of our Board of Governors, which will consist of various members of the scientific products industry and will serve as an advisory board for our management by providing suggestions and feedback and reviewing potential new services; these suppliers will utilize our marketplace for their purchases of scientific products; these suppliers may terminate the exclusive nature of the agreement after 18 months, subject to forfeiture of outstanding warrants; and these agreements may be terminated by either party for material breach or upon the occurrence of bankruptcy or similar events.
In connection with certain of these agreements, we issued warrants to purchase up to an aggregate of 3,700,266 shares of our common stock at an exercise price of $0.01 per share. These warrants generally vest in equal installments over four or five years. A supplier's warrants will terminate automatically if that supplier terminates the exclusive nature of our relationship or otherwise terminates the agreement.
Technology
We have integrated a broad array of specialized site management, search and buyer interaction technologies, content management applications, asset management technologies, transaction processes and fulfillment services. We are using our own proprietary technology and, where appropriate, commercially available, licensed technologies.
We have developed our e-commerce solutions utilizing development methodologies and tools that enable rapid development and deployment of customized versions of our solutions. We believe this will allow us to quickly deliver customer specific solutions while minimizing development time and costs. Our database is designed to be scalable to accommodate the expected growth in the number of products offered. We also convert and maintain the product data provided by suppliers for inclusion in our database.
We own all of our front-office and back-office production servers and web site hardware. Our web sites 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 Web sites and all our communications.
Our procurement offering is developed and deployed on a platform of technologies from leading providers. Our solutions are engineered and quality assured in conjunction with our enterprise customers. Our close collaboration with our customers has provided us with requirements, specifications and a validation process that has resulted in the delivery of enterprise solutions. This approach of utilizing commercially available operating systems, data management systems, e-business application services and scalable distributed infrastructure gives us an operating platform that supports reliability, speed to market and rapid transactional growth. We have also engineered a unique methodology that enables us to configure specific solutions within each customer's private marketplace that meets the needs for both enterprise procurement and researcher productivity. In addition to robust technologies and customer driven development processes, we have implemented practices in areas of development, deployment, production control, administration and monitoring. Our application development and deployment practices include:
. version management;
. multiple, segmented development, test, staging and production environments;
. automated regression testing;
. load & stress testing;
. Q&A 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.
We have 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 from Mercury Interactive to track the performance of our production environment.
As of December 31, 2000, we had 106 people in our development and data management groups. Development expenses were $1.2 million in 1998, $9.1 million in 1999, and $17.0 million in 2000.
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 SCIQUEST.COM, LABDEALS.COM and the SciQuest.com logo in the United States and for SCIQUEST in the European Union. SCIQUEST, SCIMAIL and BIOSUPPLYNET 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 on our Web sites 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 sold on our Web sites 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, certain 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. In addition, we must be able to successfully integrate this content in a timely and cost-effective manner to create an effective finished product. If we fail to obtain necessary content on favorable terms, are unable to successfully integrate this content or if we are unable to continue to license our order fulfillment transaction systems on favorable terms, it could have a material adverse effect on our business operations.
Competition
The market for providing technology and solutions for research enterprises and their suppliers is fragmented, rapidly evolving and intensely competitive. Our primary competition includes the following:
Enterprise Commerce Providers. A number of enterprise commerce 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 have developed their own e-commerce enabled Web sites. As the online market for scientific products and services grows, we expect that these and other scientific suppliers will further develop their own online services.
Existing Processes. Many buyers and suppliers have deployed internal resources or may be using existing external technology and service partners to provide for their commerce and asset management solutions. We believe that a significant downturn in the market valuations of companies like SciQuest may increase customers' likelihood of concentrating on existing processes due to increased perceptions of risk. Moreover, the closing in 2000 of our primary direct competitor, Chemdex, a division of the Ventro Corporation, may cause additional concern among our prospective customers.
We believe that companies in this market compete based on: 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; secure services and products from suppliers on more favorable terms; devote greater resources to marketing and promotional campaigns; secure exclusive arrangements with buyers that impede our sales; and devote substantially more resources to Web site and systems development.
Our current and potential competitors' technology and solutions may achieve greater market acceptance than ours. Many of our existing and potential competitors, including large traditional distributors, have longer operating histories in the scientific products market, 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 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.
Government Regulations
We are subject to various laws and regulations relating to our business, which include numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, and nuclear chemical businesses, and environmental spills. Although we take legal title to the products offered through our marketplace, we do not take physical possession of a shipment during any part of the transaction. Legal title generally passes to the buyer at the time of product shipment. As a result, we have historically relied, and will in the future rely to a substantial degree, upon our suppliers to meet all packaging, distribution, labeling, hazard and health information notices to purchasers, record keeping and licensing requirements applicable to transactions conducted through our system. In addition, we rely upon our carriers to comply with regulations regarding the shipment of hazardous materials sold through our system. At times, we may be unable to verify the accuracy of our suppliers' regulatory staff determinations and regulatory compliance. We could be fined or exposed to civil or criminal liability, including monetary fines and injunctions, if the applicable governmental regulatory requirements are not fully met by our suppliers, carriers or by us directly.
Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted or interpreted in the United States and abroad with particular applicability to the Internet. It is also possible that new laws and regulations may be adopted or interpreted by the United States and foreign
governments, to address the sale and distribution of scientific research products utilizing the Internet. In addition, it is possible that governments may enact legislation that may be applicable to us in areas such as content, product distribution, network security, encryption and the use of key escrow, data and privacy protection, electronic authentication or "digital" signatures, illegal and harmful content, access charges and re-transmission activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation, personal privacy, product liability and environmental protection, as well as the necessity for governmental permits, labeling, certifications and the need to supply information to relevant parties, is uncertain. Most of these laws were adopted before the widespread use and commercialization of the Internet and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Any export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase our cost of doing business or increase our legal exposure. Any of these factors could have a negative effect on our business, revenues, results of operations and financial condition.
We collect sales taxes in the jurisdictions where we are required to do so. Our failure to properly collect and pay such taxes in all of such jurisdictions could subject us to penalties that could adversely affect our earnings. Even if we do collect taxes properly for each of the jurisdictions required, the collection and payment of such taxes causes us to incur significant administrative effort and expense.
Employees
As of December 31, 2000, we had 373 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 the first quarter of 2001, we reduced the number of full time employees by approximately 100 to approximately 275 people. These reductions were made in order to reduce our overhead costs in 2001 and future years. These reductions primarily affected the sales and marketing, development, operations, and data management departments.
Directors and Executive Officers
Our directors and executive officers and their ages as of December 31, 2000 were as follows:
M. Scott Andrews co-founded SciQuest.com in November 1995 and serves as our Chief Executive Officer and as a director. From November 1995 to January 2000, Mr. Andrews also served as our President. 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. Mr. Andrews currently serves as a director of the North Carolina BioScience Fund.
Lyle A. Brecht has served as Chief Business Development Officer since August 1999, Vice President of Data Services from December 1998 to August 1999 and Executive Vice President from October 1998 to December 1998. From October 1996 to December 1998, Mr. Brecht served as President and Chief Operating Officer and was co-founder of BioSupplyNet, Inc., a life science resource company that was acquired by SciQuest.com in September 1998. From March 1996 to October 1996, Mr. Brecht served as a consultant for Harris & Harris Group, PC, business development investment firm. From October 1994 to January 1995, Mr. Brecht served as President of Applied Research and Technology, Inc., an Internet commerce company. From July 1991 to December 1994, Mr. Brecht served as President of Blue Heron Group, Inc., a publishing and data analysis company. Mr. Brecht received an M.B.A. from Harvard University, and an M.S. in applied ecology and a B.A. in psychology and mathematics from the University of Minnesota.
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.
Barrett Joyner serves as Executive Vice President of the e-Services Division. In this role, he is responsible for the direction of the company's 1.6 million-item e-catalog and for using SciQuest's vast store of transactional data to help buyer and supplier partners make better strategic business decisions. Prior to joining SciQuest, Barrett held the position of President of SAS North America where he directed services, sales and marketing activities for SAS Institute. Barrett earned a Bachelor of Science degree from the University of North Carolina at Chapel Hill.
Cecil Kost has served as our Executive Vice President since September 1999. From March 1996 to December 1998, Mr. Kost served as President and Chief Operating Officer of Oncor, Inc., a biotechnology company. From June 1976 to October 1995, Mr. Kost served as Senior Vice President of Curtin Matheson Scientific, a distributor of scientific products where he was responsible for their industrial, clinical and international business sectors and clinical diagnostic manufacturing operations. Mr. Kost is a former Chairman of the Laboratory Products Association, a trade association of businesses serving industrial and research laboratories. Mr. Kost received a B.S. in biology from Tulane University.
Donna G. LeGrand has served as Vice President and General Counsel since February 2000. From 1998 to February 2000, Ms. LeGrand served as Division Counsel, Strategic and Global Licensing Division for SAS Institute Inc, a privately held Software Company. From 1994 to 1998, Ms. LeGrand served as Partner with Moore & Van Allen, a general practice law firm, where she specialized in Information Technology Transactions. From 1989 to 1994, Ms. LeGrand served as an Associate (1989-1993) and then a Partner (1993-1994) of Information Systems with Graham & James, a general practice law firm in Raleigh, North Carolina. From 1985 to 1989, Ms. LeGrand served as an Associate Attorney for Thompson & Knight in Dallas, Texas where she specialized in Oil, Gas and Real Estate Financing. From 1984 to 1985, Ms. LeGrand served as Attorney-Advisor to Honorable Henry A. Politz, U.S Court of Appeals, Fifth Circuit. Ms. LeGrand earned her Juris Doctor from Duke University and is a Member of the North Carolina State and Texas State Bar.
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., and the President of Canadian Hickory Farms, Ltd. 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 business administration from the University of Wisconsin--Oshkosh.
Bruce J. Boehm has served as a director of SciQuest.com since October 1997. Mr. Boehm has been active as an originator of and investor in early stage technology companies since 1992. 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.com since November 1998. Mr. Fenton has been a Managing 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.com since October 1998. Mr. Prakash is 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.com since May 2000. Lloyd 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 1992-1996, focusing on North America financial institutions and industrial clients. Mr. Segal is a member of the Board of Directors of Hallmark Technologies and 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.
Timothy T. Weglicki has served as a director of SciQuest.com since May 1999. Since December 1993, he has been principally employed as a Managing Member of ABS Partners, L.P., the General Partner of ABS Capital Partners, L.P., a private equity fund. Prior to that date, he was principally employed as a Managing Director of Alex. Brown & Sons Incorporated where he established and headed its Capital Markets Group. Mr. Weglicki holds an M.B.A. from the Wharton Graduate School of Business and a B.A. from Johns Hopkins University. Mr. Weglicki is a director of ElderTrust, a healthcare real estate investment trust, and a number of privately held companies.
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 where our wholly-owned subsidiary, EMAX Solutions is located. The lease for approximately 20,000 square feet of space expires in March 2001. We have entered into a new lease for 39,000 square feet of space, which lease expires in 2010. We expect this space will be sufficient for the foreseeable future.
We maintain an office in Farmingdale, New York, where our wholly-owned subsidiary, BioSupplyNet, is located.
Item 3.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
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 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 27, 2001 was $1.219.
The number of shareholders of record of the Company's common stock as of February 28, 2001, was approximately 714.
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
In January 2000, we issued 26,930 shares of our common stock, which had a market value of approximately $1,828,000 at the time of issuance, in exchange for all of the outstanding stock of Intralogix, Inc., a provider of tools that enable scientists to search, compare and purchase chromatography products for their research needs.
In February 2000, we issued 40,000 shares of our common stock, which had a market value of $2,534,000 at the time of issuance, in exchange for all of the outstanding stock of SciCentral, Inc., a provider of a gateway to online science and technology resources, news and information.
In March 2000, we issued 1,584,010 shares of our common stock to the former stockholders of EMAX Solution Providers, Inc., a provider of electronic research solutions designed to optimize pharmaceutical drug research operations and expedite drug discovery.
(c) 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, 1998, 1999 and 2000, and the historical balance sheet data as of December 31, 1999 and 2000 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, 1996 and 1997 and the balance sheet data as of December 31, 1996, 1997 and 1998 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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this report.
Some of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report contain forward-looking information. You can identify these statements by forward-looking words such as "expect," "anticipate," "believe," "goal," "plan," "intend," "estimate," "predict," "potential," "continue," "may," "will," and "should" or similar words. They include statements concerning:
. future revenues from e-commerce transactions;
. future revenues from sales of scientific equipment;
. expansion of our product and service offerings;
. future gross profits;
. future development expenses;
. future sales and marketing expenses;
. future general and administrative expenses;
. future stock-based customer acquisition costs;
. the effect of changes in our revenue recognition policies;
. the timing of loading data into our e-commerce marketplace
. our international expansion
. the effects of our restructuring program; and
. the adequacy of our existing liquidity and capital resources
You should be aware that these statements are subject to known and unknown risks, uncertainties and other factors, including those discussed in the section entitled "Factors That May Affect Future Results," that could cause the actual results to differ materially from those suggested by the forward- looking statements.
Overview
SciQuest is a technology and solutions company providing integrated e- commerce and asset management solutions for research enterprises and their supplier partners worldwide. Our unbiased position, domain expertise and proven technology enable SciQuest to make e-solutions work for science through advanced technologies, content management, supply chain solutions and professional services. The Company's platform and solutions can be utilized independently or integrated with leading software vendors and supplier systems to unite science, information and technology. We believe that our solutions enhance innovation, reduce costs, and improve operational effectiveness for scientific organizations worldwide.
We were incorporated in November 1995 and commenced operations in January 1996. During 1996, we focused on developing our business model and the required technology. We did not begin to recognize any revenues until 1997.
In October, November and December 1999, we entered into strategic relationships with a number of key suppliers and buyers of scientific products, whereby we issued to these suppliers and buyers warrants to purchase the Company's common stock at an exercise price of $0.01 per share. These warrants will vest over a period of three to five years and will be exercisable until 2004. We have issued these warrants in connection with these agreements, as we believe that these relationships are an integral component of our business plan. At December 31, 2000, warrants to acquire 4,010,847 shares of common stock were outstanding.
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 ten key suppliers. Under the terms of
these agreements, these suppliers are not required to sell a minimum amount of products through our electronic marketplace. The warrants to purchase our common stock that were issued in connection with these agreements vest over a four or five year period regardless of the level of sales by the suppliers through our electronic marketplace.
These strategic relationships also include agreements for SciQuest with 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 buyers have agreed to use reasonable efforts to purchase at least $5.0 million of scientific products annually through our 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 our electronic marketplace.
We have recorded net deferred customer acquisition costs of approximately $4.9 million at December 31, 2000, related to these outstanding warrants, which is included as a separate component of stockholders' equity. Deferred customer acquisition costs are determined based on the difference between the closing trading price of our common stock and the $0.01 exercise price of the stock warrants, which approximates the value as determined by the Black Scholes option pricing model. The amount of deferred customer acquisition costs recognized for all of the warrants issued to our key suppliers and buyers is adjusted each reporting period 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, using a cumulative catch-up method, over the term of the related contractual relationship. We recorded net expense (benefit) from stock-based customer acquisition costs of $9,141,000 and ($6,974,000) for the years ended December 31, 1999 and 2000, respectively.
We have also agreed to issue to these major enterprise buyers additional incentive warrants to purchase shares of our common stock with an exercise price of $16.00 per share, the number of which will be based on each purchaser's volume of purchases through our marketplace during the years 2000, 2001 and 2002. These incentive warrants will be issued on February 15, 2001, 2002 and 2003, will be fully vested and exercisable upon issuance and will continue to be exercisable for a period of five years after the date of issuance. For incentive warrants related to 2000 purchases, deferred customer acquisition costs will be recognized at the date of issuance of these incentive warrants in an amount equal to the estimated fair value of the warrants at the date of issuance determined using the Black Scholes valuation model and will be amortized, using a cumulative catch-up approach, as a non- cash charge to revenue over the remaining term of the strategic relationship with these key buyers. Based on these purchasers' volume, on February 15, 2001, we issued incentive warrants to purchase approximately 58,000 shares of common stock.
In future periods, the Company expects to account 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 will estimate the number of incentive warrants that will ultimately be earned, factoring in returns, if it can be reasonably estimated. Each revenue transaction with customers that earn incentive warrants will be reduced by an applicable incentive cost rate. Changes to estimates of the ultimate incentive cost will be 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. If, in any period, the non-cash charges related to incentive warrants issued to any customer exceed revenues earned from sales to such customer, the excess charge will be included in sales and marketing expenses.
As part of a comprehensive restructuring program announced in November 2000, we reduced our workforce by approximately 10%. In connection with this reduction, we recorded a one-time charge of approximately $2.2 million in the fourth quarter of 2000 related to separation benefits paid to those affected employees and the write-down of assets related to unprofitable business lines. We expect this restructuring program to reduce our operating expenses and improve our cash flow from operations beginning in 2001 as compared to our previous expectations.
On March 22, 2000, we acquired all of the outstanding capital stock of EMAX Solution Partners, Inc., a provider of electronic research solutions designed to optimize pharmaceutical drug research operations and expedite drug discovery, for the issuance of 1,584,010 shares of our common stock and the assumption of 374,152 outstanding stock options. In addition, we granted to EMAX employees a total of 113,980 SciQuest.com stock options (the "Additional Options"), pursuant to the SciQuest.com 1999 Stock Incentive Plan. These Additional Options were granted at an exercise price that was less than the fair value of our common stock on the date of grant. In connection with the grant of these options, we recorded approximately $5.2 million of deferred compensation which is being amortized in accordance with the vesting schedule of the related options. The acquisition of EMAX was accounted for using the purchase method of accounting. The acquisition of EMAX enables us to provide electronic and Internet-based solutions that are designed to streamline the drug discovery processes of our customers, including large pharmaceutical, biotechnology and life science companies, by integrating their supply chains with critical research processes.
EMAX incurs development costs in the customization of its software products sold to customers. These costs are primarily comprised of salaries and related benefits for EMAX's employees. EMAX typically retains the intellectual property rights to modifications made to its software products for individual customers and is then able to offer these modifications to future customers. EMAX capitalizes its software development costs upon the achievement of technological feasibility and ceases capitalization when the software product is available for general release. Through December 31, 2000, the post- acquisition capitalization of development expenses for software is $3.7 million. EMAX incurred $5.2 and $3.4 million and $4.4 and $41.2 million in development costs and selling, general and administrative expenses, respectively, during the years ended December 31, 1999 and 2000, respectively. 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 it is estimated that such losses will occur.
Assuming the acquisition of EMAX had occurred on January 1, 2000, our pro forma revenues, operating loss and net loss for the year ended December 31, 2000 would have been $52.5 million, $103.5 million and $96.2 million, respectively. This represents an increase of $0.8 million in revenues, $11.9 million in operating loss and $11.9 million in net loss, respectively. Excluding $44.0 million of amortization of goodwill, purchased intangibles and stock-based employee compensation expense, pro forma net loss would have been $52.2 million. Assuming the acquisition of EMAX had occurred on January 1, 1999, our pro forma revenues, operating loss and net loss for the year ended December 31, 1999 would have been $10.9 million, $81.5 million and $79.2 million, respectively. This represents an increase of $7.0 million in revenues, $46.2 million in operating loss and $46.0 million in net loss, respectively. Excluding $44.3 million of amortization of goodwill, purchased intangibles and stock-based employee compensation expense, pro forma net loss would have been $34.9 million. The pro forma results for the year ended December 31, 2000 and 1999 do not include the write-off of purchased in- process research and development. These pro forma operating results are not necessarily indicative of what our results would have been had the acquisition of EMAX occurred on January 1, 2000 or January 1, 1999, nor can our future operating results be predicted from these amounts.
On January 14, 2000, we acquired all of the outstanding capital stock of Intralogix, Inc. for a total purchase price of $2.2 million, which included the issuance of 26,930 shares of our common stock, $295,000 in cash and the assumption of $72,000 in liabilities. Intralogix provides tools that enable scientists to search, compare and purchase chromatography products for their research needs.
On February 2, 2000, we acquired all of the outstanding capital stock of SciCentral, Inc. for a total purchase price of $2.7 million, which included the issuance of 40,000 shares of our common stock, $112,000 in cash and the assumption of approximately $15,000 in liabilities. SciCentral provides users with a gateway to online science and technology resources, news and information.
The Intralogix and SciCentral acquisitions were not financially significant as they related to the purchase price or past results of operations of the acquired entities. Therefore, pro forma financial information has not
been presented for these acquisitions. These acquisitions were accounted for using the purchase method of accounting.
Revenues consist of (1) sales of scientific products in e-commerce transactions originating on our web sites, (2) sales of scientific equipment, (3) sales of software licenses and fees for implementation, customization and maintenance services related to these software licenses, (4) advertising revenues from our web sites, (5) advertising revenues from the Source Book, and (6) commissions received from the auction of used scientific equipment. Prior to the launch of our e-commerce marketplace in April 1999, substantially all of our revenues were derived from advertising on our web sites. Revenues from e-commerce transactions became a significant source of our revenues in the third quarter of 1999 and are expected to continue to increase. Sales of scientific equipment were a significant source of revenues in the second and third quarters of 2000 as we sought to introduce new pharmaceutical, clinical, biotechnology, chemical, industrial and educational organizations to our marketplace. Transactions involving the sale of scientific equipment typically have significantly higher gross sales prices, on a per-transaction basis, and lower gross margins than do transactions for scientific products in e-commerce transactions originating on our web sites.
We offer various web-based solutions where potential buyers can cross-search content from multiple suppliers and build a multiple line item order for products from various suppliers. When a purchaser places an order through our marketplace, we purchase that item from the supplier at either a pre- negotiated price or at a discount from the supplier's list price and arrange for shipment to the purchaser. We take legal title to the products purchased at the date of shipment and relinquish title to our customers upon delivery. After the customer receives the product, we begin the collection process by presenting a consolidated invoice to the customer for the products represented in the order. Payment by the customer to us is then made through a traditional account setup and payment system or, in some cases, by credit card/procurement card. We offer extended payment terms to our customers who purchase scientific equipment as these transactions have higher dollar values. We bear all credit risk on sales that we make and we are obligated to pay the supplier of the products that we purchase regardless of whether we receive payment from the customer for the products. For each transaction, we recognize revenue in the amount of the sales price of the item to the customer and recognize the amount paid to the supplier plus shipping costs as cost of goods sold. The difference between revenues and cost of goods sold is our gross profit.
Revenues from sales of scientific products in e-commerce transactions and from sales of scientific equipment are recorded as product revenues on a gross basis and are recognized upon receipt by our customers. Product shipments are generally made on our designated carriers and we are responsible for shipping costs which are recorded as cost of revenues. We invoice the customer for the shipping costs.
Advertising revenues are recognized ratably over the period in which the advertisement is displayed. Revenues from advertising included in the Source Book are recognized at the date the Source Book is published and distributed. Advertising on our Web sites is sold by Cahners Business Information. Cahners pays us a percentage of the total advertising revenues that it receives.
EMAX recognizes revenue from the sale of licenses to its software products, the implementation and customization of its software products and the sale of maintenance and support contracts. EMAX recognizes revenues from the sale of licenses to its software products and implementation and customization of these software products on a percentage-of-completion basis over the period of the customization and implementation services, which generally ranges from three to nine months. EMAX recognizes revenues from the sale of maintenance and support contracts ratably over the period of the maintenance and support agreements, which is typically twelve months. 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."
EMAX generated revenues from the sale of software licenses and implementation and customization of software products totaled $6.3 and $5.4 million for the years ended December 31, 1999 and 2000 respectively, and revenues from maintenance and support contracts totaled $0.4 and $0.6 million, respectively, for the same periods.
Planned Change in Revenue Recognition
We currently take legal title to the products that we purchase from our suppliers and that are in turn are sold to our customers in e-commerce transactions. Beginning during the second quarter of 2001, we will no longer be taking legal title to these products. We will instead act as an agent on behalf of the customer, and title will pass directly from the supplier to the customer. We expect this change to allow us to reduce or eliminate some of our overhead costs, such as product insurance, regulatory compliance, sales tax filings and other related order processing costs. We will continue to be responsible for the collection of the receivable and to bear the resulting credit risk.
Since we will be acting as an agent for the customer and not as the primary obligor in the transaction, we will no longer record sales of scientific products and scientific equipment in e-commerce transactions on a gross basis. For each sale, we will recognize revenue in the amount of the net commission that we earn for processing the transaction. As a result of this change in revenue recognition policy, we expect to record much lower gross revenues from e-commerce transactions in the future; however, we do not expect our gross margins from e-commerce transactions to be materially affected.
Results of Operations
The following table sets forth certain operating data as a percentage of total revenues for the periods indicated.
Year Ended December 31, 2000 and 1999
Revenues
Revenues for the year ended December 31, 2000 have been derived primarily from the sale of scientific products in e-commerce transactions, from the sale of scientific equipment and from the sale of licenses to our software products and the implementation and customization of our software products.
E-commerce revenues increased to $46.2 million for the year ended December 31, 2000 from $3.9 million for the year ended December 31, 1999. This increase was due primarily to $35.0 million in revenues from the sale of scientific products in e-commerce transactions and $11.2 million from the sale of scientific equipment during the year ended December 31, 2000, as compared to $3.9 million and $0, respectively, for the year ended December 31, 1999 as our e-commerce marketplace was not implemented until April 1999 and as we did not begin selling scientific equipment until the second quarter of 2000. We expect to continue earning revenues from the sale of scientific equipment, although we do not expect these sales to continue to comprise a significant portion of our total revenues in 2001. In addition, primarily as a result of the acquisition of EMAX in March 2000, we recognized $5.5 million in software license, implementation and maintenance revenues for the year ended December 31, 2000. During the year ended December 31, 2000, two customers accounted for 10% and 13%, respectively, of total revenues. There can be no assurance that these customers will continue to purchase at these levels.
Cost of Revenues
Cost of revenues primarily consists of the purchase price of scientific products sold in e-commerce transactions, the purchase price of scientific equipment sold and related shipping costs for these products. Cost of license fees and other professional services primarily consist of personnel costs for employees who work directly on the development and implementation of customized electronic research solutions and who provide maintenance to customers, and also consists of the amortization of capitalized software development costs.
Cost of e-commerce revenues increased to $44.7 million for the year ended December 31, 2000 from $3.4 million for the year ended December 31, 1999. Cost of e-commerce revenues increased primarily due to $33.8 million in costs related to the sale of scientific products in e-commerce transactions and $10.9 million in costs related to the sale of scientific equipment during the year ended December 31, 2000, as compared to $3.4 million and $0, respectively, for the year ended December 31, 1999 as our e-commerce marketplace was not implemented until April 1999 and as we did not begin selling scientific equipment until the second quarter of 2000. In addition, primarily as a result of the acquisition of EMAX in March 2000, cost of revenues for license fees and other professional services for the year ended December 31, 2000 was $3.5 million, of which $1.5 million related to the amortization of capitalized software development costs.
Gross Profit
Gross profit increased to $3.5 million for the year ended December 31, 2000 from $0.5 million for the year ended December 31, 1999. Gross profit has increased as a result of increased product sales resulting from the launch of our e-commerce marketplace in April 1999, the commencement of scientific equipment sales, which began in the second quarter of 2000, and the acquisition of EMAX in March 2000. Gross profit on sales of scientific products and equipment increased to $1.5 million for the year ended December 31, 2000 from $0.5 million for the year ended December 31, 1999. The acquisition of EMAX contributed $2.0 million of gross profit for the year ended December 31, 2000.
Operating Expenses
Development Expenses. Development expenses consist primarily of personnel and related costs to develop, operate and maintain our web sites, aggregate data and the amortization of capitalized development costs.
Development costs increased to $17.0 million for the year ended December 31, 2000 from $9.1 million for the year ended December 31, 1999. This increase resulted from expenses incurred to develop our e-commerce fulfillment system, list suppliers' products on our web sites and from increased amortization of capitalized development costs. This increase also includes $2.3 million of development expenses incurred by EMAX related to the development of electronic research solutions technology. During the year ended December 31, 2000, we capitalized approximately $8.0 million of certain costs related to software and web site development projects.
Included in development cost is the amortization of non-cash stock-based employee compensation expense, which totaled $1.0 million and $0.1 million in 2000 and 1999, respectively. This is primarily due to an increase in the number of stock options that had been issued to employees with exercise prices less than fair value on the date of grant since December 31, 1999. This increase includes the 113,980 Additional Options issued to EMAX employees in connection with the EMAX acquisition. In addition, in July 1999 and in February 2000, we entered into two employment agreements with personnel from acquired subsidiaries that required the recognition of deferred compensation. Deferred compensation recorded due to the issuance of such stock options and employment agreements is charged to stock-based employee compensation expense over the vesting term of the options and the term of the employment agreements, respectively. We expect our development expenses to decrease in the second half of 2001.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, travel expenses, public relations expenses and marketing materials. Sales and marketing expenses increased to $20.1 million for the year ended December 31, 2000 from $19.5 million for the year ended December 31, 1999. This increase also resulted primarily from the hiring of additional sales and marketing personnel to market our products and services and increased expenses to advertise and promote our e-commerce marketplace, and to a lesser extent, sales and marketing expenses related to our EMAX, BioSupplyNet and Internet Auctioneers International subsidiaries. Sales and marketing expenses for 2000 and 1999 include $1.0 million and $0.2 million, respectively, of amortization of non-cash stock based employee compensation. Also included in sales and marketing expenses for the years ended December 31, 2000 and 1999 is the amortization expense (benefit) of non-cash stock based customer acquisition costs of ($7.0) million and $9.1 million, respectively.
Stock-based customer acquisition costs represent the amortization of deferred customer acquisition costs that were initially recorded in November 1999 upon the issuance of common stock warrants to key suppliers and customers. The value of these warrants is adjusted each reporting period based upon the closing trading price of the Company's common stock at each balance sheet date. Decreases in the Company's closing trading price from one reporting period to the next will likely result in a benefit to the Company, and increases in the Company's closing trading price will likely result in charges to expense. Because the amortization of these costs is dependent upon the trading price of our common stock, we cannot predict the future impact of this on our results from operations.
We expect our sales and marketing expenses, apart from the amortization of stock-based customer acquisition costs, to decrease over the first half of 2001. After such time, we expect these expenses to remain at a relatively level dollar amount due to a reduction in the number of personnel in our sales and marketing departments in the fourth quarter of 2000.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related costs for our customer care department and general corporate functions, including finance, accounting, legal, human resources, investor relations, facilities, amortization of goodwill and non-cash stock based employee compensation. General and administrative expenses increased to $55.0 million for the year ended December 31, 2000 from $7.1 million for the year ended December 31, 1999. The increase in general and
administrative expenses is primarily the result of increased amortization of goodwill and other intangible assets, primarily resulting from the acquisition of EMAX in March 2000. Amortization of goodwill and other intangibles increased to $31.8 million in 2000 from $0.2 million in 1999. General and administrative expenses also include a charge of $2.5 million and $0.1 million relating to non-cash stock based employee charges in the years ended December 31, 2000 and 1999, respectively. General and administrative expenses also increased as a result of increased payroll costs due to the increase in the number of general and administrative personnel and an increase in professional fees and facilities costs incurred to support the growth of our business. This increase also includes $2.4 million of general and administrative expenses incurred by EMAX, which was acquired in March 2000. In addition, we have experienced an increase in general and administrative costs as a result of becoming a public company in November 1999, such as investor relations costs, directors and officers' insurance costs and increased legal and audit costs. We expect general and administrative expenses to decrease during the second half of 2001, as we reduce our overhead costs.
Purchased In-process Research and Development. For the year ended December 31, 2000, we recognized an in-process research and development charge of $0.7 million as a result of the acquisition of EMAX. Based on management's valuation of EMAX and its assets, we allocated $0.7 million of the EMAX purchase price of $126 million to software products being developed by EMAX that had not reached technological feasibility and had no alternative 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. We estimated at the acquisition date that we would incur a total of approximately $3.0 million to complete the development of these software products and that the development would be completed by March 2001. As of December 31, 2000, we had incurred approximately $3.7 million in software development costs related to these software products.
Restructuring. As part of a comprehensive program, which was announced in November 2000, we reduced our workforce by approximately 10%. In connection with this reduction, we recorded a one-time charge of approximately $2.2 million in the fourth quarter of 2000 related to separation benefits paid to those affected employees and the write-down of assets related to unprofitable business lines that management decided to eliminate. We expect this restructuring program to reduce our operating expenses and improve our cash flow from operations beginning in 2001 as compared to our previous expectations.
Interest Income (Expense)
Interest income (expense) consists of interest income earned on cash deposited in money market accounts and invested in short and long term U.S. Government obligations partially reduced by interest expense incurred on capital lease obligations. Net interest income increased to $7.2 million for the year ended December 31, 2000 from net interest income of $1.9 million for the year ended December 31, 1999. The increase in net interest income was primarily the result of interest earned on proceeds received from our initial public offering in November 1999.
Income Tax Benefit
Income tax benefit decreased to $0.1 million for the year ended December 31, 2000 from $0.2 million for the year ended December 31, 1999. The decrease in income tax benefit was the result of the reduction in net deferred tax liabilities during the year ended December 31, 2000.
Net Loss Available to Common Stockholders
Net loss available to common stockholders decreased to $84.3 million for the year ended December 31, 2000 from $112.5 million for the year ended December 31, 1999. The decrease in net loss available to common stockholders was due to the increase in our net loss of $51.2 million being more than offset by the decrease from the cessation of accretion of mandatorily redeemable preferred stock upon the effectiveness of the Company's initial public offering on November 22, 1999 compared to $79.3 million for the year ended December 31, 1999.
Year Ended December 31, 1999 and 1998
Revenues
Revenues for the year ended December 31, 1999 were derived primarily from the sale of scientific products in e-commerce transactions, advertising revenues from the Source Book and advertising. Revenues for the year ended December 31, 1998 were derived from advertising.
Revenues increased to $3.9 million for the year ended December 31, 1999 from $0.5 million for the year ended December 31, 1998. This increase was primarily due to $3.0 million in revenues from the sale of scientific products in e- commerce transactions for the year ended December 31, 1999 as compared to zero for the year ended December 31, 1998 as our e-commerce marketplace was not implemented until April 1999. In addition, we had $0.8 million in advertising revenues generated by BioSupplyNet for the year ended December 31, 1999 compared to zero in the year ended December 31, 1998, as we did not acquire BioSupplyNet until September 29, 1998. This has been partially offset by a decline of $0.4 million in revenues from advertisements as the sale of advertisements is no longer a significant part of our business.
Cost of Revenues
Cost of revenues consists of the purchase price of scientific products sold in e-commerce transactions and related shipping costs for these products, publishing and distribution costs related to the Source Book, and our web site advertising development costs.
Total cost of revenues increased to $3.4 million for the year ended December 31, 1999 from $42,000 for the year ended December 31, 1998. Cost of revenues increased primarily due to $3.0 million in costs related to the sale of scientific products in e-commerce transactions and $0.4 million in costs incurred related to BioSupplyNet's advertising revenues during the year ended December 31, 1999.
Gross Profit
Gross profit increased to $0.5 million for the year ended December 31, 1999 from $0.4 million for the year ended December 31, 1998. Gross profit increased by $35,000 as product sales began with the launch of the SciQuest.com marketplace in April 1999.
Operating Expenses
Development Expenses. Development expenses consist primarily of personnel and related costs to develop the data for, operate and maintain our web sites and the amortization of our capitalized development costs related to internal use software. Development costs increased to $9.1 million for the year ended December 31, 1999 from $1.2 million for the year ended December 31, 1998. This increase resulted from additional expenses incurred to develop the e-commerce functionality of our e-commerce marketplace, including an increase in the development staff and the costs of continuing the development of the e- commerce technology acquired with BioSupplyNet. Development expense for 1999 also included a change of $0.1 million related to non-cash stock based employee compensation. We expect that our development expenses will continue to increase as we add products from additional suppliers to our e-commerce marketplace, as we develop customized private Web sites for major customers and as we continue to experience rapid increases in the volume of transactions through our e-commerce marketplace. In addition, our development expenses will continue to increase as we amortize development costs related to the development of additional functionality for our Web sites and the completion of the development of the e-commerce technology acquired with BioSupplyNet which have previously been capitalized.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, travel expenses, public relations expenses and marketing materials. Sales and marketing expenses increased to $19.5 million for the year ended December 31, 1999 from
$1.7 million for the year ended December 31, 1998. Sales and marketing expenses for 1999 and 1998 include $0.2 million and $0, respectively, of amortization of non-cash stock based employee compensation. Also included in sales and marketing expenses for the years ended December 31, 1999 and 1998 is the amortization of non-cash stock based customer acquisition costs of $9.1 million and $0, respectively. This increase also resulted primarily from the hiring of additional sales and marketing personnel to market our products and services and increased expenses to advertise and promote our e-commerce marketplace and to a lesser extent sales and marketing expenses related to BioSupplyNet and Internet Auctioneers International.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, investor relations, facilities and information systems expenses. General and administrative expenses increased to $7.1 million for the year ended December 31, 1999 from $1.1 million for the year ended December 31, 1998. General and administrative expenses increased primarily as a result of increased payroll costs due to the increase in the number of general and administrative personnel, and an increase in professional fees and facilities costs incurred to support the growth of our business. In addition, we have experienced an increase in general and administrative costs as a result of becoming a public company in November 1999, such as investor relations costs and directors and officers insurance costs. General and administrative expenses in 1999 also included a charge of $0.1 million related to non-cash stock based employee compensation. We expect general and administrative expenses to continue to increase in the next 12 months as we add administrative personnel to support the growth of our business.
Interest Income (Expense)
Net interest income (expense) consists of interest income earned on cash deposited in money market accounts and invested in short and long term U.S. Government obligations reduced by interest expense incurred on notes payable and capital lease obligations. Net interest income (expense) increased to net interest income of $1.9 million for the year ended December 31, 1999 from net interest income of $0.1 million for the year ended December 31, 1998. The increase in net interest income was primarily the result of interest earned on funds received from the sale of our series B mandatorily redeemable convertible preferred stock in September 1998, series D mandatorily redeemable convertible preferred stock in May and June 1999 and our initial public offering in November 1999.
Income Tax Benefit
Income tax benefit increased to $0.2 million for the year ended December 31, 1999 from $0.1 million for the year ended December 31, 1998. The increase in income tax benefit was the result of the reduction in net deferred tax liabilities during the year ended December 31, 1999 due to the amortization of the goodwill and other intangible assets recorded with our acquisition of BioSupplyNet in September 1998.
Net Loss Available to Common Stockholders
Net loss available to common stockholders increased to $112.5 million for the year ended December 31, 1999 from $4.5 million for the year ended December 31, 1998. The increase in net loss available to common stockholders was due to the increase in our net loss of $29.0 million and the increase in accretion of mandatorily redeemable preferred stock to $79.3 million for the year ended December 31, 1999 from $0.3 million for the year ended December 31, 1998. Such increase accretion resulted from the accretion of our series B mandatorily redeemable convertible preferred stock to its estimated redemption amount at the effective date of our initial public offering, November 19, 1999, and accretion of our series D mandatorily redeemable convertible preferred stock to its redemption amount over the period from the date of issuance to the first redemption date. Our series B mandatorily redeemable convertible preferred stock had a redemption price that was variable in amount (see note 12 to our financial statements), and its carrying value was required to be adjusted to the estimated redemption amount at each balance sheet date rather than being accreted to the redemption amount over the period from date of issuance to the first redemption date. This resulted in accretion of $77.4 million on the series
B mandatorily redeemable preferred stock being recognized during the period from January 1, 1999 to November 19, 1999, which was recorded as a charge to additional paid-in-capital and an increase to preferred stock. Accretion of mandatorily redeemable preferred stock ceased with the conversion of all of our outstanding mandatorily redeemable preferred stock into shares of our common stock upon the effectiveness of our initial public offering.
Quarterly Results of Operations
The following is a table of our unaudited quarterly statement of operations data for each of the periods indicated. This information is unaudited, but in our opinion, has been prepared substantially on the same basis as our audited financial statements, which are included elsewhere in this report. All necessary adjustments, consisting only of normal recurring adjustments, have been included in these amounts to present fairly the unaudited quarterly results of operations. You should read these quarterly data in conjunction with our audited financial statements. You should not view the results of operations for any period as an indication of the results of operations for any future period.
We have a limited operating history upon which to evaluate our business and to predict revenues and plan operating expenses. We expect our quarterly operating results to vary significantly in the future due to a variety of factors, many of which are outside our control. Our revenues increased significantly in 2000 since the launch of our e-commerce marketplace in April 1999 and the acquisition of EMAX in March 2000.
Liquidity and Capital Resources
We have primarily funded our operations through private placements of our preferred stock and our initial public offering which was consummated in November 1999. As of December 31, 2000, we had cash and cash equivalents of $20.2 million, short term investments of $29.4 million and long term investments of $19.3 million.
Cash used in operating activities during the years ended December 31, 2000, 1999 and 1998 was $61.0 million, $23.5 million and $3.1 million, respectively. Cash used in operating activities was principally for the development of our Web sites, the development of our e-commerce marketplace, the expansion of our sales and marketing force and the expansion of the administrative and operations staff to support our growth.
Cash used in investing activities during the years ended December 31, 2000, 1999 and 1998 was $17.2 million, $48.4 million and $2.2 million, respectively. Cash used in investing activities has primarily been comprised of purchases of investments in US government obligations, commercial paper and corporate bonds, net of maturities, and purchases of computer equipment.
Cash provided by financing activities during the years ended December 31, 2000, 1999 and 1998 was $0.3 million, $164.7 million and $10.4 million, respectively. Between March and June 1998, we received $0.6 million in the form of bridge loans. These bridge loans were converted into 187,394 shares of series B mandatorily redeemable convertible preferred stock in July 1998. Between July and November 1998, we raised an aggregate of $10.0 million through the issuance of 3,590,232 shares of our series B mandatorily redeemable convertible preferred stock at a price of $2.80 per share. Purchasers of the series B mandatorily redeemable convertible preferred stock whose shares were issued pursuant to the conversion of bridge loans also received 57,545 warrants to purchase series B mandatorily redeemable convertible preferred stock at an exercise price of $2.80 per share. In May and June 1999, we raised $35.9 million through the issuance of 3,312,720 shares of our series D mandatorily redeemable convertible preferred stock at a price of $11.32 per share. Purchasers of the series D mandatorily redeemable convertible preferred stock also received 1,004,829 warrants to purchase our common stock at an exercise price of $7.46 per share. In March 1999, we sold 89,408 shares of series C convertible preferred stock to an executive officer for $0.2 million, or $2.80 per share. In November 1999, we received $126.9 million in net proceeds from the sale of 8,625,000 shares of our common stock in our initial public offering. All of our outstanding preferred shares were converted into shares of our common stock upon the completion of our initial public offering. In 2000, we raised $0.9 million from the proceeds of common stock warrants and options and $0.4 million from the proceeds of common stock under the Employee Stock Purchase Plan.
We believe that our existing liquidity and capital resources, including the proceeds resulting from the sale of our common stock in these offerings, will be sufficient to satisfy our cash requirements for the next 24 months. To the extent that such amounts are insufficient, we will be required to raise additional funds through equity or debt financing. There can be no assurance that we will be able to raise such funds on favorable terms, or at all.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Investments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes a number of existing standards. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, as amended, is not expected to have a material impact on our consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which addresses certain criteria for revenue recognition. SAB 101 is required to be adopted no later than the fourth quarter of the fiscal year beginning after December 15, 1999. The adoption of SAB 101 did not have a material impact on our consolidated financial position or results of operations.
As a result of the acquisition of EMAX, 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 requires the Company to disclose certain financial information about operating segments, of which the Company has identified two, e-
commerce and license fees and other professional services. As SFAS No. 131 does not require adoption in interim financial statements in the initial year of its application, the Company has adopted the provisions of SFAS No. 131 in its annual filing on Form 10-K for the year ended December 31, 2000. See Note 18 to the audited financial statement.
Quantitative and Qualitative Disclosures About Market Risk
Most of our cash equivalents, short-term and long-term investments and capital lease obligations are at fixed interest rates, therefore the fair value of these investments is affected by changes in market interest rates. However, because our investment portfolio is primarily comprised of investments in U.S. Government obligations and high-grade commercial paper, an immediate 10% change in market interest rates would not have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.
Factors That May Affect Future Results
Since we have a limited operating history and an evolving business model, forecasting future performance may be difficult.
We launched our public e-commerce marketplace in April 1999. Since that time, our business model has evolved considerably. For instance, we have increasingly focused our efforts on providing private marketplaces and integrated e-commerce and asset management solutions to our customers. As part of this strategy, we acquired EMAX in March 2000 and formed our Global Professional Services division in February 2001. Accordingly, we have only a limited operating history on which to evaluate our current business. As a result of our limited operating history, the emerging nature of the scientific products market and the evolving nature of our business model, we may be unable to accurately forecast our revenues. We incur expenses based predominantly on operating plans and estimates of future revenues. Revenues to be generated from newly developed and evolving activities will be particularly difficult to forecast accurately. Our expenses are to a large extent fixed. We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections will have an immediate and negative impact on profitability. In addition, if our restructuring program adversely affects our revenues and/or fails to adequately reduce our expenses, our future earnings will be negatively impacted. Finally, we cannot be certain that our evolving business model will be successful, particularly in light of our limited operating history.
We have a history of losses and anticipate incurring losses in the future. We may not achieve profitability.
We incurred net losses of $84.3 million for the year ended December 31, 2000. As of December 31, 2000, we had an accumulated deficit of $123.0 million. We expect to incur substantial operating losses and continued negative cash flow from operations for the foreseeable future. In fact, we expect to continue generating losses through at least 2002. We may not be able to increase revenues sufficiently to achieve profitability.
Our future profitability and cash flows are dependent upon our ability to control expenses.
Our operating plan to achieve profitability is based upon estimates of our future expenses. For instance, we have estimated that our development expenses will decrease during the second half of 2001, that our sales and marketing expenses will decrease over the first half of 2001 and that our general and administrative expenses will decrease during the last half of 2001. If our future expenses are greater than anticipated, our ability to achieve profitability when expected may be negatively impacted. In addition, greater than anticipated expenses may negatively impact our cash flows, which could cause us to expend our capital faster than anticipated. While we expect our existing capital to be sufficient for the next two years, if our cash flows are negatively impacted, we may be required to raise additional capital sooner than expected.
We are investing significantly in developing new product and service offerings with no guarantee of success.
Expanding our product and service offerings is an important component of our business strategy. As such, we are expending a significant amount of our resources in this development effort. For instance, we recently introduced SciQuest SmartStore and launched our Global Professional Services unit. Any new offerings that are not favorably received by buyers or suppliers could damage our reputation or brand name. Expansion of our services will require us to devote a significant amount of time and money and may strain our management, financial and operating resources. We cannot assure you that our development efforts will result in commercially viable products or services. In addition, we may bear development costs in current periods that do not generate revenues until future periods or at all. To the extent that we incur expenses that do not result in increased current or future revenues, our earnings may be materially and adversely affected.
Sales to larger customers may increase the length of our sales cycle and decrease our profit margins.
Increasing sales to larger enterprise buyers is an important element of our business strategy. As we sell more sophisticated solutions to larger organizations, we expect the average time from initial contact to final approval to increase. During this sales cycle, we may expend substantial funds and management resources without any corresponding revenue. If approval is delayed or does not occur, our financial condition and operating results for a particular period may be adversely affected. Approvals are subject to delays over which we have little or no control, including the following:
. potential customers' internal approval processes;
. implementation of systems integration solutions;
. customers' concerns about implementing a new strategy and method of doing business; and
. seasonal and other timing effects.
Increased sales to larger accounts may result in lower or negative profit margins as larger customers typically have greater leverage in negotiating the price and other terms of business relationships. We also typically incur costs associated with customization of our systems with a sale to a large account. If we do not generate sufficient transaction volume to offset any lower margins or these increased costs, our operating results may be materially and adversely affected. Also, the time between billing and receipt of revenues is often longer when dealing with larger accounts due to increased administrative overhead.
We have relied, and continue to rely, on a limited number of large customers for a significant portion of our revenues. Losing one or more of these customers may adversely affect our revenues.
We expect that for the foreseeable future we will generate a significant portion of our revenues from a limited number of large customers. During 2000, two customers accounted for 10% and 13%, respectively, of our total revenues. Our large customers are not obligated to use our purchasing solution exclusively or for any minimum number of transactions or dollar amounts. In addition, large individual transactions with these customers may represent an increasing percentage of our revenues. These large transactions are often non- recurring, making it difficult to predict future transactions. The failure of one or more large transactions to occur in any given period may materially and adversely affect our revenues for such period. Our contracts with our customers are for limited terms and our customers may discontinue use of our system at any time upon short notice and without penalty. If we lose any of our large customers or if we are unable to add new large customers, our revenues will not increase as expected. In addition, our reputation and brand name would be harmed.
We are investing significantly in developing new product and service offerings with no guarantee of success.
Expanding our product and service offerings is an important component of our business strategy. As such, we are expending a significant amount of our resources in this development effort. For instance, we recently introduced SciQuest SmartStore and launched our Global Professional Services unit. We cannot assure you that our development efforts will result in commercially viable products or services. In addition, we may bear
development costs in current periods that do not generate revenues until future periods or at all. To the extent that we incur expenses that do not result in increased current or future revenues, our earnings may be materially and adversely affected.
Unless a broad range of purchasers and suppliers of scientific products adopt our products and services, we will not be successful.
Our success will require, among other things, that our solutions gain broad market acceptance by our customers, suppliers, users and strategic partners. For example, purchasers may continue purchasing products through their existing methods and may not adopt a web-based supply-chain solution because of:
. their comfort with current purchasing habits and direct supplier relationships;
. the costs and resources required to switch purchasing methods;
. the need for products not offered through our web site;
. security and privacy concerns; or
. general reticence about technology or the Internet.
If we do not successfully market the SciQuest brand, our business may suffer.
We believe that establishing, maintaining and enhancing the SciQuest brand is critical in expanding our customer base. Some of our competitors already have well-established brands in either online or supply chain services or the scientific products industry. Promotion of our brand will depend largely on continuing our sales and marketing efforts and providing high-quality products and services to our enterprise customers. We reduced our spending on sales and marketing significantly in the fourth quarter of 2000 and expect to continue this reduction from prior levels in the first half of 2001. This reduction in spending could materially and adversely affect our sales and marketing efforts. We cannot be certain that we will be successful in marketing the SciQuest brand. If we are unable to successfully promote our brand, or if we incur substantial expenses in attempting to do so, our revenues and earnings could be materially and adversely affected.
If we are unable to increase our transaction volume, our future revenues may suffer.
We expect that a substantial portion of our revenues will continue to be generated by the products offered by us for sale through our e-commerce marketplace. Accordingly, these revenues will be highly dependent on the dollar volume of transactions conducted through our public and private marketplaces. Our profits depend upon the discount levels we are able to negotiate with our suppliers. To maintain revenue growth, we will need to increase the total dollar value of transactions conducted through our web sites. In order to increase our transaction volume, we will need to:
. increase the number of enterprise customers for whom we develop private marketplaces;
. generate higher and continuously increasing levels of traffic, from both new and repeat visitors, to our public and private marketplaces;
. increase the percentage of visitors to our public and private marketplaces who purchase scientific products; and
. increase the average transaction size and/or number of repeat purchases.
Failure to do one or more of the foregoing could have a material adverse effect on our revenues.
Sales of scientific equipment, which may result in lower gross margins, comprise a significant portion of our revenue during 2000. The failure to replace these revenues with revenues from e-commerce transactions in the long- term could have a material adverse effect on our revenues and earnings.
We expect to continue earning revenues from the sale of scientific equipment although we do not expect such sales to continue to comprise a significant portion of our total revenues in the future. Sales of scientific products often have lower gross margins than our typical e-commerce transactions. Accordingly, if we experience
a disproportionate amount of our revenues from the sale of scientific equipment, our aggregate gross margins could be adversely affected. We do not expect revenues from such transactions to contribute significantly to revenues on a go-forward basis. However, if we are not able to replace these revenues with revenues from e-commerce transactions, our revenues and earnings will be materially and adversely affected.
Unless we negotiate favorable pricing terms with our suppliers, our profit margins will be adversely affected.
Our profits from e-commerce transactions depend upon the prices we are able to negotiate with our suppliers. We anticipate that the prices we negotiate with our suppliers will vary based on a number of factors such as:
. size of supplier;
. product portfolio;
. relationship with key customers;
. degree to which products are critical to our customers;
. extent to which transactions are conducted electronically; and
. extent that costs are shared with us.
Our profit margins may decline in the future, particularly as competition in the scientific products industry increases. A significant decline in profit margins without a corresponding increase in transaction volume would adversely affect our earnings.
If we cannot timely and accurately add supplier product data to our e-commerce database, we may lose sales and customers, which would adversely affect our revenues.
Currently, we are responsible for loading supplier product information into our database and categorizing the information for search purposes. We currently have a backlog of varying amounts of product data from approximately 125 companies to be loaded in our e-commerce marketplace. We anticipate that a majority of these products will be loaded into the e-commerce marketplace by the end of the first quarter of 2001. However, we continuously receive new product data to load. We generally will not derive profit from these products until this data is loaded into our system. Timely loading of these products into our database depends upon a number of factors, including the file formats of the data provided to us by suppliers and our ability to further automate and expand our operations to accurately load this data into our product database, any of which could delay the actual loading of these products beyond the dates we estimate.
In addition, we are generally obligated under our supplier agreements to load updated product data into our database for access through our marketplaces within a reasonable period of time following their delivery from the supplier. Our current supplier data backlog could make it difficult for us to meet these data update obligations to our suppliers. While we intend to further automate the loading and updating of supplier data on our system, we cannot assure you that we will be able to do so in a timely manner.
If we are unable to list a broad range of products on commercially favorable terms, our public and private marketplaces will be less attractive to potential buyers.
A number of factors could significantly reduce the number of products and product sources listed on our Web sites, including the following:
. consolidation among suppliers; and
. exclusive arrangements signed by suppliers with our competitors.
If the number of products and product sources that are available for listing is reduced, the effectiveness of our Web sites and their attractiveness to potential buyers could be materially and adversely affected.
If suppliers terminate their agreements with us, our product offerings may suffer.
Following an initial one-year term, many of our standard supplier agreements may be terminated by either party on 90 days' notice. After expiration of the initial term, such suppliers may terminate or seek to renegotiate their agreements. If a significant number of suppliers terminate their agreements with us, the range of products we can offer would be adversely affected. The ability of suppliers to terminate their agreements may result in negotiating new agreement terms that are less favorable to us, which could have a material adverse effect on our earnings.
If our exclusive suppliers elect to terminate the exclusive nature of their agreements with us, our business could be adversely affected.
Our exclusive supplier agreements have a five-year term, but the exclusive nature of such agreements may be terminated after 18 months following execution of the agreement. This termination right will arise in most cases during 2001. If a significant number of the exclusive suppliers terminate the exclusive nature of such agreements, the volume of our order flow will be reduced significantly. We may also be forced to negotiate new agreements with terms that are less favorable to us.
Since we rely on third-party suppliers and carriers to fulfill orders for our customers, we have limited control over the timing and accuracy of order fulfillment. As a result, we may not be able to guarantee customer satisfaction.
We do not carry inventory or directly supply products. As a result, we rely on our suppliers and carriers for rapid order fulfillment and other customer service functions to ensure buyer satisfaction. If our suppliers do not provide high quality customer service, our business reputation and customer satisfaction could be materially and adversely affected. Most of our supplier arrangements do not guarantee the availability of merchandise, establish guaranteed prices or require continuity of pricing practices. As a result, we have little or no control over the fulfillment of buyers' orders. In order to be successful, we must maintain relationships with suppliers that will produce, stock and deliver high quality products to buyers through our web sites.
We rely on third-party carriers to ensure accurate and timely delivery of products to buyers. Although suppliers are responsible for product shipment, we designate the carrier and are responsible for carrier charges. We cannot be certain that our carriers will consistently provide high quality performance. If our carriers fail to deliver products accurately and on a timely basis, our reputation and business could be materially and adversely affected.
If our web sites and transaction processing systems are not able to adequately service increasing traffic levels, our ability to satisfy our customers and maintain revenue growth may suffer.
Our success depends in large part on the number of buyers who use our web sites to purchase scientific supplies and products. Accordingly, our web sites, transaction-processing systems and network infrastructure must be able to service increasing traffic levels while maintaining adequate buyer service levels. Any system interruptions or delays in our transaction system would reduce the volume of sales and the attractiveness of our service offerings, which could have a material adverse effect on our customer satisfaction and our ability to maintain revenue growth. We have experienced infrequent system interruptions in the past during implementation of system upgrades. These interruptions could continue to occur from time to time and could have a material adverse effect on our service offerings. Substantial increases in the volume of traffic on our web sites or the number of purchases made by buyers will require expansion and upgrades of our technology, transaction-processing systems and network infrastructure. We cannot be certain that our transaction- processing systems and network infrastructure will be able to accommodate traffic in the future.
If we are not able to successfully integrate our systems with the internal systems of our key suppliers and buyers, our operating costs and relationships with our suppliers and buyers will be adversely affected.
A key component of all services is the efficiencies created for suppliers and buyers through our online systems. In order to create these efficiencies, it will often be necessary that our systems integrate with each major
supplier's and buyer's internal systems, such as inventory, customer service, technical service, freight programs and financial systems. In addition, there is little uniformity in the systems used by our suppliers and buyers. The integration with our suppliers' systems also involves the downloading of a significant amount of data, which increases the resources needed to execute the integration. If these systems are not successfully integrated, our operating costs and relationships with our suppliers and buyers would be adversely affected, which could have a material adverse effect on our financial condition and results of operations.
Our computer and telecommunications systems are in a single location, which makes them more vulnerable to damage or interruption.
Substantially all of our computer and telecommunications systems are located in the same geographic area. These systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break- ins and similar events. While we have business interruption insurance, this coverage may not adequately compensate us for lost business. Although we have implemented network security measures, our systems, like all systems, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. These disruptions could lead to interruptions, delays, loss of data or the inability to accept and confirm buyer purchases. Any of these occurrences could have a material adverse effect on our revenues.
We bear the risk of credit sales on our web sites, which could put a significant strain on our liquidity and capital resources.
Our supplier agreements generally require us to pay the supplier for any orders processed through our web sites as we usually take title to these products at the time of shipment. Accordingly, if a buyer fails to pay for the products it purchased, we would be obligated to pay the supplier. Thus, we bear the risk of collection. We also may be required to refund payments to buyers for products returned to the supplier. Slow payment by buyers for products purchased would negatively impact our cash flows. As our transaction volume and average transaction size grow, these risks will increase. In isolated instances, we have agreed to extend payment terms with our customers for large purchases, which increases our credit risk and may negatively impact our cash flows. We generally do not process an order from a buyer without a credit card or other payment confirmation although we do extend credit terms to certain qualified buyers. However, we cannot be certain that our credit confirmation practices will be effective to protect us against these payment obligations. If a significant number of buyers default on their payment obligations, or suppliers fail to refund payments to us for products returned by our buyers, or buyers do not pay their obligations to us on time, we could incur significant and immediate cash payment obligations or suffer significant cash flow constraints. These obligations could put a significant strain on our liquidity and capital resources, which could prevent us from using our working capital to further expand our business or require us to obtain additional financing.
If we are not able to effectively manage our growth, our business may suffer.
We rapidly expanded our operations in 2000, which placed a significant strain on our management, operational and financial resources as well as our ability to achieve profitability. In November 2000, we commenced a restructuring program that resulted in the reduction of our workforce by approximately 10%. We further reduced our workforce in the first quarter of 2001 by approximately 100 people. This staff reduction could adversely affect our ability to manage and continue the growth of our operations. If we are unable to manage the growth of our business effectively, our earnings could be materially and adversely affected.
Many of our employees have only recently joined us. Additionally, several of our key executives have been employed by us for two years or less. If our employees do not work well together or some of our employees do not succeed in their designated roles, our financial condition and results of operations could be materially adversely affected. We cannot be certain that our management, operational and financial resources will be adequate to support our future operations.
If we fail to attract and retain key employees, our business may suffer.
A key factor of our success will be the continued services and performance of our executive officers and other key personnel. If we lose the services of any of our executive officers, our financial condition and results of operations could be materially and adversely affected. We do not have long- term employment agreements with
any of our key personnel. Our success also depends upon our ability to identify, hire and retain other highly skilled technical, managerial, editorial, marketing and customer service professionals. Competition for this personnel is intense. In particular, it is important that we hire additional customer service personnel in order to maintain high quality service and maintain buyer and supplier loyalty. We cannot be certain of our ability to identify, hire and retain sufficiently qualified personnel. For example, we may encounter difficulties in attracting a sufficient number of qualified software developers and operations personnel for our online services and transaction-processing systems. Failure to identify, hire and retain necessary technical, managerial, editorial, merchandising, marketing and buyer service personnel could have a material adverse effect on our financial condition and results of operations.
If we are unable to adapt our services to rapid technological change in online commerce, our revenues and profits could be materially and adversely affected.
The Internet and the online commerce industry undergo rapid changes in technology, products and services, user profiles and operating standards. These changes could render our Web sites and proprietary technology and systems obsolete. We must continually improve the performance, features and reliability of our online services, particularly in response to our competition.
Our success will depend, in part, on our ability to:
. enhance our existing services;
. develop new services and technology that address the increasingly sophisticated and varied needs of our target markets; and
. respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
We cannot be certain of our success in accomplishing the foregoing. If we are unable, for technical, legal, financial or other reasons, to adapt to changing market conditions or buyer requirements, our market share could be materially adversely affected.
We may become exposed to product liability claims, which could result in substantial costs and liability.
The sale of scientific products involves the risk of product liability claims. We face potential liability for claims based on the type and adequacy of the information and data that suppliers publish on our Web sites as well as the nature of the products that are sold through our web sites, including claims for breach of warranty, product liability, misrepresentation, violation of governmental regulations and other commercial claims. Although we maintain general liability insurance and product liability insurance, our insurance may not cover some claims and may not be adequate to fully indemnify us for liabilities that may be imposed. A product liability claim against us, if successful, could result in a significant liability that would have a material adverse effect on our liquidity and capital resources. In addition, even the successful defense of a product liability claim could result in substantial costs and diversion of our management's efforts.
We will be liable for any third party claims that may rise against EMAX including claims related to important proprietary rights regarding EMAX's technology. These claims could adversely affect our business.
In our acquisition of EMAX, we acquired important proprietary rights that are embodied in its software technology. This software technology is not patented and existing copyright laws offer only limited practical protection. By virtue of this acquisition, we will be liable for any valid third-party claims that may arise against EMAX in relation to their proprietary rights or contracts with suppliers and customers. While we have investigated EMAX's proprietary rights and business practices, we cannot be certain that ownership, infringement or other claims will not arise against EMAX. A successful claim by a third-party could result in significant liability on our part and could materially and adversely affect the value of the technology that we are acquiring. As a precaution, a portion of the purchase price for EMAX has been deposited into an escrow fund. If
we become liable for any claims against EMAX, we may be entitled to compensation from this escrow fund. However, this escrow fund will terminate in March 2002 and may not be sufficient to adequately compensate us for any claims that do arise.
The content of our web sites may expose us to various claims, which could result in substantial costs and liabilities.
Our web sites contain information concerning the products offered by suppliers, including product descriptions, specifications and pricing. This information is provided by suppliers and we generally do not independently verify this information. As a result, we could potentially face liability for fraud, negligence, copyright, patent or trademark infringement and other claims based on the information contained on our web sites. A successful claim could subject us to significant liability that would have a material adverse effect on our liquidity and capital resources. In addition, even the successful defense of a claim could result in substantial costs and division of our management's efforts and damage to our brand perception by our customers.
If we are unable to protect our intellectual property rights, our business could be materially and adversely affected.
Our software technology is not patented and existing copyright laws offer only limited practical protection. We cannot guarantee that the legal protections that we rely on will be adequate to prevent misappropriation of our technology. Also, these protections do not prevent independent third-party development of competitive products or services. Failure to protect against the misappropriation of our intellectual property could have a material adverse effect on our business operations.
We are dependent on proprietary technology licensed from third parties, the loss of which could be costly.
We license a portion of the content for our online services from third parties. Additionally, we intend to license a significant portion of our transaction fulfillment systems from third parties. These third-party content licenses may not be available to us on favorable terms, or at all, in the future. In addition, we must be able to successfully integrate this content in a timely and cost-effective manner to create an effective finished product. If we fail to obtain necessary content on favorable terms or are unable to successfully integrate this content or if we are unable to continue to license our order fulfillment transaction systems on favorable terms, it could have a material adverse effect on our business operations.
Our products, trademarks and other proprietary rights may infringe on the proprietary rights of third parties, which may expose us to litigation.
While we believe that our products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties, we cannot provide any guarantees about the third-party products that are sold on our Web sites or guarantee 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 third-party products sold on our Web sites 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.
The failure to integrate successfully businesses that we have acquired or may acquire could adversely affect our business.
We have acquired and intend to continue to acquire complementary businesses. In particular, we acquired BioSupplyNet, Inc. in 1998, and SciCentral, Inc., Intralogix, Inc. and EMAX in 2000. An element of our strategy is to broaden the scope and content of our products and services through the acquisition of existing products, technologies, services and businesses. Acquisitions entail numerous risks, including:
. the integration of new operations, products, services and personnel;
. the diversion of resources from our existing businesses, sites and technologies;
. the inability to generate revenues from new products and services sufficient to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and policies;
. accounting effects that may adversely affect our financial results;
. the impairment of employee and customer relations as a result of any integration of new management personnel;
. dilution to existing stockholders from the issuance of equity securities; and
. liabilities or other problems associated with an acquired business.
We may have difficulty in effectively assimilating and integrating these, or any future joint ventures, acquisitions or alliances, into our operations. Any difficulties in the process could disrupt our ongoing business, distract our management and employees, increase our expenses and otherwise adversely effect our business. Any problems we encounter in connection with our acquisitions could have a material adverse effect on our business.
Our planned international expansion will require significant financial resources and management attention and could have a negative effect on our earnings.
We intend to invest resources and capital to expand internationally, particularly in Europe. This expansion will require significant financial resources and management attention and could have a negative effect on our earnings. We cannot assure you that we will be successful in creating international demand for our e-commerce solutions and services. In addition, our international business may be subject to a variety of risks, including, among other things, increased costs associated with maintaining international marketing efforts, applicable government regulation, fluctuations in foreign currency, difficulties in collecting international accounts receivable and the enforcement of intellectual property rights. We cannot assure you that these factors will not have an adverse effect on future international sales and earnings. In addition, the business customs and regulations in foreign countries may require changes in our business model. For instance, in Europe we will not take title to products that are sold through our marketplace. As a result, we will earn revenue in the form of commissions to be received from our suppliers. This will result in lower gross revenues from these transactions as compared to our domestic transactions, yet will have the same impact on our gross profits. In addition, we are currently contemplating registering our trademarks in other countries. We cannot assure you that we will be able to do so.
We rely on our suppliers and carriers in complying with government regulations regarding the sale and distribution of regulated products, and their failure to so comply could result in substantial civil and criminal liability.
Many of the products offered through our web sites are subject to direct regulation by governmental agencies, which includes numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, nuclear chemical businesses, and environmental spills. Because of our presence in the distribution chain, we may be subject to significant liability for violations of these regulations regardless of our actual involvement in a violation. We could be fined or exposed to civil or criminal liability, including monetary fines and injunctions for any violations. We have historically relied, and will in the future rely, upon our suppliers to meet all packaging, distribution, labeling, hazard and health information notices to purchasers, record keeping and licensing requirements applicable to transactions conducted through our system. In addition, we rely upon our carriers to comply with regulations regarding the shipment of hazardous materials sold through our system. We cannot assure you that our suppliers and carriers will comply with all applicable government regulations.
Significant fluctuation in the market price of our common stock could result in securities class action claims against us.
Significant price and value fluctuations have occurred with respect to the securities of technology companies. Our common stock price has been volatile and is likely to be volatile in the future. In the past, following periods of downward volatility in the market price of a company's securities, class action litigation has often been pursued against such companies. If similar litigation were pursued against us, it could result in substantial costs and a diversion of our management's attention and resources.
Unless web-based purchasing achieves widespread acceptance, we will have difficulty achieving revenue growth.
Use of the Internet to purchase products, particularly in the scientific products market, remains at an early stage of development. Convincing buyers to purchase scientific products online may be particularly difficult as such buyers have traditionally relied on distributors of scientific products and mail order catalogs to purchase their scientific products. If the use of e- commerce services does not grow in the future, our web site traffic and resulting revenue could be materially and adversely affected.
The continued growth of e-commerce services is dependent upon a number of factors that are beyond our control, including the following:
. continued growth in the number of buyers who use e-commerce services;
. continued development of transaction security technology;
. continued development of e-commerce technology;
. continued development and successful implementation of enterprise software solutions;
. emergence of standard and common nomenclature and methodology for e- commerce; and
. development of complementary services and products.
Our future revenue growth would be adversely affected by a reduction in spending in the scientific products industry.
We derive substantially all of our revenue from the scientific products industry. We expect our future growth to depend on spending levels in this industry. Any reduction in spending in the scientific products industry would have a material adverse effect on our revenues.
The on-line scientific products market is highly competitive, which makes achieving market share and profitability more difficult.
The on-line scientific products market is new, rapidly evolving and intensely competitive. Our primary competition includes enterprise commerce providers, traditional distributors, online scientific communities, suppliers' e-commerce initiatives and existing processes. 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;
. secure services and products from suppliers on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
. secure exclusive deals with buyers that impede our sales; and
. devote substantially more resources to web site and systems development.
In addition, new technologies and the expansion of existing technologies may increase competitive pressures. As a result of increased competition, we may experience reduced operating margins, as well as loss of market share and brand recognition. We may not be able to compete successfully against current and future competitors. These competitive pressures could have a material adverse effect on our revenue growth and earnings.
Online commerce and database security concerns could adversely affect traffic on our web sites and our revenues.
The secure transmission of confidential information over public networks is a fundamental requirement for online commerce. Concerns over the security of transactions and commercial online services and other privacy issues may also inhibit the growth of the Internet and the online commerce industry. We license encryption and authentication technology for the transmission of confidential information, such as buyer credit card numbers, through our online system. In addition, we maintain an extensive confidential database of buyer profiles and transaction information. Technological advances, including new discoveries in the field of cryptography, could result in a compromise or breach of our security systems. Security breaches could have a material adverse effect on our reputation, financial condition and results of operations. An intruder who breaches our security measures could misappropriate proprietary information or cause interruptions in our operations. We could be required to spend a significant amount of time and money to protect against security breaches or to alleviate problems caused by such breaches. Security breaches could also expose us to a risk of loss or litigation and possible liability. We cannot be certain that our security measures will prevent security breaches.
Additional regulation of online commerce could adversely affect demand for our products and services.
There are currently few laws and regulations directly applicable to the Internet and e-commerce services. However, we expect that additional regulation may be adopted covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. In addition, the growth and development of e- commerce may prompt calls for more stringent buyer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services. Additional regulation could also increase our cost of doing business.
The application of sales and other taxes to online commerce could adversely affect demand for our products and services and are administratively burdensome.
The application of sales and other taxes by state and local governments to online commerce is uncertain and may take years to resolve. In particular, the federal government and a number of states are currently reviewing the appropriate tax treatment of online commerce, and new federal laws or state tax regulations may subject us and/or the suppliers and buyers that use our web sites to additional state sales and income taxes. The imposition of additional sales taxes on transactions conducted through our web sites could make this service less valuable to buyers and adversely impact transaction volume. The imposition of any such taxes or other regulations could have a material adverse effect on our revenues and earnings. In addition, the collection and payment of such taxes may cause us to incur significant administrative effort and expense. Our failure to properly collect and pay such taxes in any jurisdiction could subject us to penalties that could adversely affect our earnings.
New accounting rules could be proposed that could adversely affect our reported financial results.
Our financial statements are prepared based on generally accepted accounting principles and SEC accounting rules. These principles and rules are subject to change from time to time for various reasons. While we believe we meet all current financial reporting requirements, we cannot predict at this time whether any initiatives will be proposed or adopted that would require us to change our accounting policies. Any change to generally accepted accounting principles or SEC rules could adversely affect our reported financial results.
Items 7a: Quantitative and Qualitative Disclosures About Market Risk
See Item 7.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements of SciQuest are filed together with this Report. See the Index to 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 15, 2001, which will be filed with the Securities and Exchange Commission on or about April 12, 2001, 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 15, 2001, which will be filed with the Securities and Exchange Commission on or about April 12, 2001, 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 15, 2001, which will be filed with the Securities and Exchange Commission on or about April 12, 2001, 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 15, 2001, which will be filed with the Securities and Exchange Commission on or about April 12, 2001, 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 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.com's Registration Statement on Form S-1 (Reg. No. 333-87433). ** Incorporated by reference to SciQuest.com's Registration Statement on Form S-1 (Reg. No. 333-32582). *** Incorporated by reference to SciQuest.com's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
(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.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit), and of cash flows present fairly, in all material respects, the financial position of SciQuest.com, Inc. and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years in the period ended December 31, 2000, 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
February 1, 2001 Raleigh, North Carolina
SciQuest.com, Inc.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
The accompanying notes are an integral part of these financial statements
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
SciQuest.com, Inc. ("SciQuest.com" or the "Company"), which began operations in 1995, is a builder and operator of private marketplaces and supply chain solutions for leading research enterprises and their supplier partners worldwide. The Company earns revenues from e-commerce transactions generated by purchases made through the SciQuest.com web sites. In addition, SciQuest.com 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 the BioSupplyNet and IAI operations would be eliminated (see Note 17). The Company also recognizes revenues from its recently acquired subsidiary, EMAX Solution Partners, Inc., which provides customized electronic research solutions designed to integrate chemical information systems to improve productivity and compliance for pharmaceutical, scientific and research companies.
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.com, 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 purchases 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, 2000, restricted cash of $500,000 and $780,000 included in cash and cash equivalent and long-term investments, respectively, is comprised of certificate of deposits which serve as collateral for the Company's lease commitments and officer loans guaranteed by the Company.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $49,000 and $788,000 at December 31, 1999 and 2000, respectively. Following is a schedule of the allowance for doubtful accounts for each of the years ended December 31, 2000:
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.
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. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statements of Position No. 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," ("SOP No. 98-1") which provides guidance regarding when software developed or obtained for internal use should be capitalized. SOP No. 98-1 is effective for fiscal years beginning after December 15, 1998. With the adoption of SOP No. 98-1, effective January 1, 1999, the Company began accounting 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. The Company capitalized $1,498,000 and $4,345,000 of web site development costs during the years ended 1999 and 2000, respectively (see Note 6). 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.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The capitalized software costs resulting from the acquisition of BioSupplyNet are primarily associated with a search engine with e-commerce capabilities and high level electronic taxonomy and ontological conventions under development by BioSupplyNet at the date of acquisition. These costs are being amortized over a period of 27 months. Capitalized software costs resulting from the acquisition of EMAX are primarily associated with customized electronic research systems being sold by EMAX at the date of the acquisition. These costs are being amortized to cost of sales over a period of 36 months.
Intangible Assets
Intangible assets, which resulted from the acquisition of BioSupplyNet and EMAX, were determined by valuations prepared by management.
The BioSupplyNet intangible assets are associated with the Source Book and contracts with certain web sites (the "Web Site Agreements") to provide a link to the SciQuest.com web site. Because the Source Book is a printed publication, which must be updated on an annual basis, capitalized costs related to the Source Book are being amortized over a period of 15 months. Capitalized costs related to the Web Site Agreements are being amortized over a 12 month period which is the remaining term of such agreements.
Intangible assets recognized from the acquisition of EMAX are primarily associated with a registered trademark that is being amortized over a period of 36 months.
Goodwill represents the excess of the purchase price of BioSupplyNet, IAI, SciCentral, Intralogix and EMAX over the fair value of the assets acquired. Goodwill is being amortized over a period of three to five years.
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 years ended December 31, 1998 and 2000 relate to the acquisitions of BioSupplyNet and EMAX, respectively (see Note 3) and were determined by valuations prepared by management.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and accounts receivable at December 31, 1999 and 2000 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, 1999 and 2000, 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 recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets or the business to which such assets relate. No impairments were required to be recognized during the years ended December 31, 1998 and 1999. 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 17).
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
In April 1999, the Company began earning almost all of its revenues from the sale of scientific products through its e-commerce web sites. In addition, in June 2000, the Company began selling scientific equipment. 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.
Revenues received from the sale of scientific products in e-commerce transactions and from the sale of scientific equipment are recorded as product revenues on a gross basis and are recognized by the Company upon delivery to the customer. A reserve for returns is recognized for estimated product returns.
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.
Revenues received from the auction of used scientific products by the Company's subsidiary, IAI, represents commissions which are determined based on a percentage of the value of the scientific products sold. The Company recognizes these commissions in revenue at the date the related piece of scientific equipment is accepted by the buyer.
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 it is estimated that such losses will occur. 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. The Company generally takes legal title to the scientific products and equipment purchased at the date of shipment and relinquishes title to its customers upon delivery.
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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 15). All costs of advertising the services and products offered by the Company are expensed as incurred. Advertising expense totaled approximately $181,000, $1,900,000 and $3,975,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
Deferred Customer Acquisition Costs
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 15). 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 and $4,440,603 in non-cash compensation expense related to amortization of deferred compensation during the years ended December 31, 1999 and 2000, respectively. The Company did not recognize any non-cash compensation expense related to stock options during the year ended December 31, 1998, as no options were granted with exercise prices below fair value until 1999.
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.
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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.
No single customer accounted for more than 10% of the Company's revenues during the year ended December 31, 1998. 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. Concentrations of credit risk with respect to accounts receivable are 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. Substantially all of the Company's revenues are from sales transactions originating in the United States.
The Company relies on a number of third party suppliers for various services, including e-commerce fulfillment services. While the Company believes it could obtain these services from other qualified suppliers on similar terms and conditions, a disruption in supply of these services by the current suppliers could materially harm the business.
Cash Flows
The Company made cash payments for interest of $19,000, $28,000 and $155,000 during the years ended December 31, 1998, 1999 and 2000, respectively.
The Company acquired property and equipment through the assumption of capital lease obligations amounting to $55,000, $1,688,000 and $1,523,000 during the years ended December 31, 1998, 1999 and 2000, respectively.
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's only item of other comprehensive income during the year ended December 31, 1998 was the unrealized gain on investments in debt securities considered as available-for- sale. 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 year ended December 31, 2000 was the foreign currency translation adjustment.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 "Business Segment Data" note).
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 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 1998, 1999 and 2000 does not include 5,325,054, 6,662,854 and 9,747,287, respectively, potential shares of common stock equivalents, as their impact would be anti- dilutive.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Investments and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes several existing standards. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently does not and does not presently intend in the future to invest in derivative financial instruments, and therefore does not expect that the adoption of SFAS No. 133 will have a material impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which addresses certain criteria for revenue recognition. SAB 101 is required to be adopted no later than the fourth fiscal quarter of the fiscal year beginning after December 15, 1999. The Company's adoption of SAB 101 in 2000 did not have a material impact on the Company's consolidated financial position 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 six-month offering periods (each an "Offering Period") annually, beginning April 1 and October 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. At the end of an Offering Period, the total payroll deductions by an eligible employee for that Offering 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 for the first day of the Offering Period, or (b) the reported closing price of the common stock for the last day of the Offering Period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the employment agreement with the 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 is 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 17).
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 value of assets acquired less liabilities assumed. Goodwill related to this acquisition is being 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and that the development would be completed by March 2001. As of December 31, 2000 approximately $3.7 million of software development costs have been incurred related to these software products.
In addition, the Company granted to EMAX employees a total of 113,980 SciQuest.com stock options, pursuant to the SciQuest.com 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the years ended December 31, 1999 and 2000 as if the acquisition of EMAX has occurred on January 1, 1999 and 2000, respectively, and after giving effect to certain purchase accounting adjustments. These pro forma results are not necessarily indicative of what the Company's operating results would have been had the acquisition actually taken place on January 1, 1999 or 2000, and may not be indicative of future operating results.
4. Investments
The aggregate fair values of investment securities at December 31, 1999 and 2000 along with unrealized gains and losses determined on an individual investment security basis are as follows:
December 31, 1999
December 31, 2000
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property and Equipment
Property and equipment consist of the following:
Depreciation expense for the years ended December 31, 1998, 1999 and 2000 was approximately $37,000, $394,000 and $2,762,000, respectively. The Company leases certain equipment under capital lease agreements. The cost of equipment under capital leases at December 31, 1999 and 2000 was approximately $1,700,000 and $3,980,000, respectively.
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, the Company capitalized development costs of $3,654,362 related to software products for sale. There were no such costs or related amortization expense incurred during 1998 or 1999. The capitalized costs related to software products for sale was $9,654,362 (including $6.0 million resulting from the acquisition of EMAX) at December 31, 2000, with accumulated amortization of $1,611,303. Related amortization expense was $1,611,303 for the year ended December 31, 2000.
The Company capitalized internal use development costs, based on the provisions outlined in SOP No. 98-1, of $1,498,234 and $4,345,363 during the years ended December 31, 1999 and 2000, respectively. Capitalized internal use development costs are $1,498,234 and $4,678,940 at December 31, 1999 and 2000, respectively, with accumulated amortization of $106,149 and $2,913,374 at December 31, 1999 and 2000, respectively. Related amortization expense was approximately $106,000 and $2,905,000 for the years ended December 31, 1999 and 2000, respectively. There was no amortization expense for the year ended December 31, 1998.
7. Other Assets
Other assets are comprised of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Accrued Liabilities
Accrued liabilities are comprised of the following:
9. Income Taxes
The components of the Company's income tax benefit for the years ended December 31, 1998, 1999 and 2000 consist of the following:
The Company recognized a deferred tax benefit of $54,695, $218,780 and $66,225 for the years ended December 31, 1998, 1999 and 2000, 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, 1999 and 2000:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,840,020, $12,712,814 and $13,150,619 in 1998, 1999 and 2000, respectively. The change primarily relates to additional operating losses in those years. The 1999 and 2000 deferred tax assets have been adjusted to reflect the net operating loss carryforwards of BioSupplyNet, Internet Auctioneers International, and EMAX Solution Partners. The increase in valuation allowance primarily resulted from the generation of net operating loss carryforwards.
As of December 31, 2000, the Company had federal and state net operating loss carryforwards of $81,713,000. 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 Internal Revenue Code.
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 connection with the acquisition of IAI (see Note 3), the Company assumed convertible notes payable to stockholders which were due in April 2000. The Company also assumed other notes payable totaling $20,000 with interest rates of 10% per annum, which are due upon demand. These notes were repaid in October 1999.
In connection with the acquisition of Intralogix, Inc. (see Note 3), the Company assumed notes payable to stockholders and a bank of approximately $72,000. These notes were repaid during 2000.
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.
During the year ended December 31, 1998, the Company's Articles of Incorporation were amended to authorize 10,000,000 shares of preferred stock with no par value, of which 769,231 shares were designated as
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series A convertible preferred stock (the "Series A preferred"), 3,835,180 shares were designated as Series B convertible preferred stock (the "Series B preferred") which are mandatorily redeemable, 601,046 shares were designated as Series C convertible preferred stock (the "Series C preferred"), and 4,794,543 shares were undesignated. The Company authorized 30,203,689 shares of common stock with no par value, of which 250,020 shares were designated as Class B common stock and 29,953,669 were designated as Class A common stock. In February 1999, the Company's Articles of Incorporation were amended and restated to increase the number of designated shares of Series C preferred to 700,000 and to decrease the number of undesignated preferred shares SciQuest.com, Inc. to 4,695,589. 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.
In September 1998, the Company issued 546,405 shares of Series C preferred and 192,280 options and 162,718 warrants to purchase the Company's common stock to the former stockholders, option holders and warrant holders of BioSupplyNet in exchange for all of the outstanding common and preferred stock, options and warrants of BioSupplyNet (see Note 3).
In March 1999, the Company sold 89,408 shares of Series C preferred 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 November 2000, the Company sold 100,662 shares of common stocks pursuant to the employee stock purchase plan resulting in proceeds of $382,365.
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 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,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 $328,723 for the year ended December 31, 1998 and $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 each 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.
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 September 1997, the Company adopted the SciQuest, Inc. Stock Option Plan (the "Plan") which provided for the grant of up to 341,245 employee stock options. In September 1998, the Plan was amended to provide for the grant of up to 1,272,299 employee stock options. In February 1999, the Plan was amended to provide for the grant of up to 1,484,820 employee stock options. In August and November 1999, the Plan was further amended to allow 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.com, Inc. 1999 Stock Option Plan which provides for the grant of up to 2,854,998 employee stock options. Options granted under the Plans during the years ended December 31, 1998, 1999 and 2000 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.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company continues to apply APB No. 25 and related interpretations in accounting for the Plans. The Company recognized $323,676 and $4,440,603 in non-cash compensation expense related to amortization of deferred compensation during the years ended December 31, 1999 and 2000, respectively. No deferred compensation or compensation expense was recorded related to stock option grants during the year ended December 31, 1998. 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 and 2000 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, 1998, 1999 and 2000: risk free interest of 6.0%, 6.1% and 6.2%, respectively; expected lives of five years; dividend yields of 0%; and volatility factors of 0%, 0% and 148%, respectively. The weighted average fair value of options granted during the years ended December 31, 1998, 1999 and 2000 according to the Black- Scholes pricing model was $0.02, $3.42 and $9.75, respectively.
A summary of the status of the Plans as of December 31, 1998, 1999 and 2000 and changes during the years then ended is presented below:
All incentive stock options granted during the years ended December 31, 1998, 1999 and 2000 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.
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, the repricing resulted in no additional deferred compensation or amortization of expense due to the December 31, 2000 closing price being below the revised exercise price.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's outstanding stock options at December 31, 2000:
Warrants
At December 31, 1999 and 2000, the Company had 5,889,303 and 4,755,168, respectively, of warrants outstanding, with 899,120 warrants exercisable at December 31, 2000, to purchase the Company's common stock at prices ranging from $0.01 to $9.33, which includes the warrants issued to strategic partners discussed in Note 15. These warrants expire at various dates between 2000 and 2004.
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, 2000 are as follows:
- -------- * Future minimum operating lease payments have not been reduced by future minimum sublease rentals of $480,000.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense recognized under operating leases totaled approximately $34,000, $439,000 and $1,444,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
During 2000, 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, will commence in March 2001.
In February 1999, the Company entered into a lease agreement for additional office space for a period of three years. An extended rental period for this space and additional space within the same building was part of an agreement entered into during 2000 providing a total of 93,000 square feet into the year 2005.
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. To date the Company has borrowed $2,500,000. The Company may purchase furniture and equipment and lease the items over a three and a half year term. Payments are due monthly. 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.
In connection with 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.
The Company is involved in certain legal proceedings as a part of its normal course of business. Management does not believe that the ultimate resolution of these matters will have a material impact on the Company's results of operations or financial position in any quarterly or annual period.
15. 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 4,010,847 warrants are issued and outstanding at December 31, 2000. At December 31, 1999 and 2000, the Company has deferred customer acquisition costs of $400,246,458 and $6,583,286, 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 and $(7,373,613) in stock based non-cash customer acquisition expense (benefit) during the fourth quarter of 1999 and the year ended December 31, 2000, respectively, related to the amortization of deferred customer acquisition costs.
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
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. For incentive warrants related to 2000 purchases, deferred customer acquisition costs will be recognized at the date of issuance of these incentive warrants in an amount equal to the estimated fair value of the warrants at the date of issuance determined using the Black Scholes valuation model and will be amortized, using a cumulative catch-up approach, as a non-cash charge to revenue over the remaining term of the strategic relationship with these key buyers. Based on these purchasers' volume, on February 15, 2001 we will issue incentive warrants to purchase approximately 58,000 shares of common stock.
In future periods, the Company expects to account 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 will estimate 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 will be reduced by an applicable incentive cost rate. Changes to estimates of the ultimate incentive cost will be 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.
If, in any period, the non-cash charges related to incentive warrants issued to any customer exceed revenues earned from sales to such customer, the excess charge will be included in sales and marketing expenses.
16. 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.
17. Restructuring
In November 2000, the Company announced a restructuring of its e-commerce business. The restructuring includes 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.
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
The majority of the write-down of net assets related to IAI, Inc. and BioSupplyNet, Inc. consists of impairment of intangibles.
18. Business Segment Data
During 2000, 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 1998 and 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.com, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SciQuest.com, Inc. (Registrant)
/s/ Stephen J. Wiehe By: _________________________________ Stephen J. Wiehe Chief Executive Officer
Date: March 30, 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.