<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-30581
SEQUOIA SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1956677
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5457 TWIN KNOLLS ROAD, COLUMBIA, MARYLAND 21045
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (410) 715-0206
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of November 8, 2000, 30,782,064 shares of Common Stock of the Registrant
were outstanding.
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SEQUOIA SOFTWARE CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)......................... 3
Consolidated balance sheets -- September 30, 2000 and
December 31, 1999 3
Consolidated statements of operations -- Three
Months ended September 30, 2000 and 1999 and nine months 5
Ended September 30, 2000 and 1999.....................
Consolidated statements of cash flows -- Nine
Months ended September 30, 2000 and 1999.............. 6
Notes to consolidated financial
Statements -- September 30, 2000...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 15
Item 2. Changes In Securities and Use of Proceeds................ 15
Item 3. Defaults upon Senior Securities.......................... 16
Item 4. Submission of Matters to a Vote of Security Holders...... 16
Item 5. Other Information........................................ 16
Item 6. Exhibits and Reports on Form 8-K......................... 16
Signatures....................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEQUOIA SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 32,196,513 $ 10,902,585
Accounts receivable, less allowance for doubtful accounts of
$726,334 in 2000 and $184,864 in 1999 ..................................... 9,210,036 4,135,698
Inventory ................................................................... 48,000 10,000
Prepaid expenses and other current assets ................................... 1,248,173 475,533
------------- -------------
Total current assets ........................................................... 42,702,722 15,523,816
Property and equipment:
Computer and office equipment ................................................ 3,333,258 1,272,017
Furniture and fixtures ....................................................... 263,276 252,914
------------- -------------
3,596,534 1,524,931
Accumulated depreciation and amortization .................................... (1,041,732) (522,238)
------------- -------------
2,554,802 1,002,693
Software development costs, net of accumulated
amortization of $502,913 in 2000 and $254,530 in 1999 ....................... 734,074 349,602
Intangible assets:
Goodwill .................................................................... 3,128,133 3,128,133
Covenants not to compete .................................................... 2,280,400 2,280,400
------------- -------------
5,408,533 5,408,533
Accumulated amortization .................................................. (1,589,683) (635,872)
------------- -------------
3,818,850 4,772,661
Other assets ................................................................... 2,146,700 634,000
------------- -------------
Total assets ................................................................... $ 51,957,148 $ 22,282,772
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ........................................ $ 1,526,980 $ 1,971,649
Accrued compensation and related costs ....................................... 208,150 384,050
Deferred revenue ............................................................. 1,030,995 1,196,970
Borrowings under revolving promissory note ................................... 1,000,000 1,000,000
Current portion of long-term debt ............................................ 548,090 316,802
------------- -------------
Total current liabilities ...................................................... 4,314,215 4,869,471
Long-term debt, less current portion ........................................... 844,896 473,592
------------- -------------
Total liabilities .............................................................. 5,159,111 5,343,063
Commitments and contingencies .................................................. -- --
Series A redeemable convertible preferred stock,
$.001 par value; 8,064,877 shares authorized in 1999; 3,024,333
shares issued and outstanding in1999;
aggregate liquidation preference of $2,511,123 in 1999; no shares -- 8,065,000
authorized, issued and outstanding at September 30, 2000 .......................
Series B redeemable convertible preferred stock,
$.001 par value; 9,647,920 shares authorized in 1999; 3,617,978
shares issued and outstanding in 1999;
aggregate liquidation preference of $7,228,438 in 1999; no shares -- 9,647,920
authorized, issued and outstanding at September 30, 2000 .......................
Series C redeemable convertible preferred stock,
$.001 par value, 26,092,770 shares authorized in 1999; 9,315,395
shares issued and outstanding in 1999;
aggregate liquidation preference of $25,765,854 in 1999; no -- 25,765,854
shares authorized, issued and outstanding at September 30, 2000 ................
Series D redeemable convertible preferred stock,
$.001 par value, 6,817,239 shares authorized in 1999; no
shares issued and outstanding in 1999; no shares authorized, -- --
issued and outstanding at September 30, 2000 ...................................
Stockholders' equity (deficit):
Common stock, $.001 par value; 150,000,000 shares
authorized; 30,745,597 and 5,940,800 shares
issued and outstanding in 2000 and 1999,
respectively .............................................................. 30,746 5,941
Additional paid-in capital ................................................... 183,439,776 --
Accumulated deficit .......................................................... (136,677,138) (26,559,262)
Accumulated other comprehensive income ....................................... 4,653 14,256
------------- -------------
Total stockholders' equity (deficit) ........................................... 46,798,037 (26,539,065)
------------- -------------
Total liabilities and stockholders' equity (deficit) ........................... $ 51,957,148 $ 22,282,772
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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SEQUOIA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Licenses..................................................... $ 4,487,652 $ 1,495,596 $ 10,817,258 $ 2,450,308
Services and maintenance..................................... 751,900 1,308,394 2,602,851 2,311,013
Hardware..................................................... 40,821 115,394 231,370 253,246
--------------- -------------- --------------- -------------
5,280,373 2,919,384 13,651,479 5,014,567
Cost of revenues:
Cost of licenses............................................. 185,458 752,668 1,039,411 836,446
Cost of services and maintenance............................. 400,987 1,084,977 1,974,524 1,838,575
Cost of hardware............................................. 35,077 372,528 194,055 504,234
--------------- -------------- --------------- -------------
621,522 2,210,173 3,207,990 3,179,255
--------------- -------------- --------------- -------------
Gross profit................................................... 4,658,851 709,211 10,443,489 1,835,312
Operating expenses:
Research and development..................................... 2,163,156 986,872 5,554,736 2,017,432
Sales and marketing.......................................... 5,097,786 2,051,951 14,055,666 4,207,994
General and administrative................................... 1,821,384 1,064,090 4,396,825 1,640,473
Bad debt expense............................................. 296,524 1,873 872,858 31,958
--------------- -------------- --------------- -------------
9,378,850 4,104,786 24,880,085 7,897,857
--------------- -------------- --------------- -------------
Loss from operations........................................... (4,719,999) (3,395,575) (14,436,596) (6,062,545)
Other income (expense):
Interest expense............................................. (47,923) (238,768) (158,772) (290,899)
Other income, net............................................ 570,802 3,758 909,518 12,788
--------------- -------------- --------------- -------------
Net loss....................................................... (4,197,120) (3,630,585) (13,685,850) (6,340,656)
Accretion of Series A redeemable convertible preferred stock
to estimated mandatory redemption value...................... -- -- (16,129,664) --
Accretion of Series B redeemable convertible preferred stock
to estimated mandatory redemption value...................... -- (130,498) (19,295,904) (391,494)
Accretion of Series C redeemable convertible preferred stock
to estimated mandatory redemption value...................... -- -- (48,829,933) --
Accretion of Series D redeemable convertible preferred stock
to estimated mandatory redemption value..................... -- -- (12,790,838) --
--------------- -------------- ---------------- -------------
Net loss attributable to common stockholders................... $ (4,197,120) $ (3,761,083) $ (110,732,189) $ (6,732,150)
=============== ============== =============== =============
Basic and diluted loss per common share attributable to
Common stockholders.......................................... $ (0.14) $ (0.63) $ (5.81) $ (1.48)
=============== ============== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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SEQUOIA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .................................................. $ (13,685,850) $ (6,340,656)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ............................................ 519,494 189,613
Amortization of software development costs .............. 248,383 99,798
Amortization of intangible assets ....................... 953,811 334,134
Non-cash compensation expense ........................... 1,042,307 60,966
Non-cash interest expense -- 89,444
Non-cash sales of software licenses and services ........ (1,707,700) (545,000)
Impairment of long-term investments ..................... 195,000 --
Changes in operating assets and liabilities:
Accounts receivable .................................. (5,074,338) (1,107,779)
Unbilled revenue ..................................... -- 1,113,876
Inventory ............................................ (38,000) (10,000)
Prepaid expenses and other current assets ............ (772,640) (10,146)
Accounts payable and accrued expenses ................ (444,669) 598,973
Accrued compensation and related costs ............... (175,900) (15,579)
Deferred revenue ..................................... (165,975) 369,796
-------------- --------------
Net cash used in operating activities ..................... (19,106,077) (5,172,560)
INVESTING ACTIVITIES
Capitalized software development costs .................... (632,855) --
Cash acquired upon acquisition of Radian Systems, Inc. .... -- 203,336
Purchases of property and equipment ....................... (2,001,264) (549,073)
-------------- --------------
Net cash used in investing activities ..................... (2,634,119) (345,737)
FINANCING ACTIVITIES
Proceeds from borrowings under long-term debt
arrangements ............................................ 802,423 4,138,000
Proceeds from borrowing under revolving promissory
note .................................................... -- 1,000,000
Payments under long-term debt arrangements ................ (270,170) (127,811)
Proceeds from issuance of Series B preferred stock, net of
offering expenses .................................... -- (15,492)
Proceeds from exercise of warrants to purchase
Series C preferred stock ............................... 37,885 --
Proceeds from exercise of warrants to purchase
Series D preferred stock ................................ 7,660,898 --
Proceeds from issuance of common stock, net
of offering expenses
33,670,570 --
Proceeds from exercise of common stock options and warrants 1,142,121 469
-------------- --------------
Net cash provided by financing activities ................. 43,043,727 4,995,166
Effect of exchange rate changes on cash ................... (9,603) 18,609
-------------- --------------
Net change in cash and cash equivalents ................... 21,293,928 (504,522)
Cash and cash equivalents at beginning of period .......... 10,902,585 1,873,193
-------------- --------------
Cash and cash equivalents at end of period ................ $ 32,196,513 $ 1,368,671
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SEQUOIA SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
2000, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000.
For further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1999 included in the Company's
registration statement on Form S-1, as amended, effective as of May 12, 2000.
2. USE OF ESTIMATES
Accounts receivable at September 30, 2000 includes $1.0 million due from
one customer under a subcontract arrangement. The Company performed software
modification, customization and related services under their subcontract in
1997, 1998 and 1999. At September 30, 2000, the amount owed to the Company is
past due as a result of a dispute between the general contractor and the general
contractor's customer that has not currently allowed the general contractor to
collect certain fees billed. The Company is not a party to the dispute. On July
13, 2000, the Company filed a Complaint for Damages against the general
contractor seeking a judgment in the amount of $1.0 million. Management believes
that the Company will prevail in this action and expects that it will collect
the amount owed. However, due to uncertainties surrounding the resolution of the
dispute and the resultant effect on the general contractor's ability to meet its
obligations, it is reasonably possible that management's estimate of the
recoverability of this account receivable may change in the near term.
Management is unable at the current time to make an estimate of the range of the
possible loss that may be incurred when this receivable is ultimately settled.
In August 2000, the general contractor filed a counterclaim seeking judgment
against the Company in the amount of $2.9 million. Management believes that the
likelihood of a loss incurred as a result of this counterclaim is remote.
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss................................................. $ (4,197,120) $ (3,630,585) $ (13,685,850) $ (6,340,656)
Accretion of Series A redeemable convertible preferred
stock to fair value................................... -- -- (16,129,664) --
Accretion of Series B redeemable convertible preferred
stock to fair value................................... -- (130,498) (19,295,904) (391,494)
Accretion of Series C redeemable convertible preferred
stock to fair value................................... -- -- (48,829,933) --
Accretion of Series D redeemable convertible preferred
stock to fair value................................... -- -- (12,790,838) --
------------ ------------ -------------- ------------
$ (4,197,120) $ (3,761,083) $ (110,732,189) $ (6,732,150)
============ ============ ============== ============
Denominator:
Weighted-average number of shares of common stock
Outstanding........................................... 30,719,835 5,944,543 19,060,653 4,544,467
------------ ------------ -------------- ------------
Basic and diluted loss per common share.................... $ (0.14) $ (0.63) $ (5.81) $ (1.48)
============ ============ ============== ============
</TABLE>
Basic loss per share is based upon the average number of shares of common
stock outstanding during the period. Diluted loss per common share is equal to
basic loss per common share because if potentially dilutive securities were
included in the computation, the result would be anti-dilutive. These
potentially dilutive securities consist of stock options, warrants and the
effect of convertible preferred stocks prior to their conversion to common
stock.
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4. OTHER ASSETS
During the period from January 1, 2000 through September 30, 2000, the
Company sold software licenses and services to three customers totaling $1.7
million in return for non-marketable equity securities with an estimated fair
value equal to the fair value of the licenses and services provided. The Company
has classified these non-marketable equity securities as other assets at
September 30, 2000.
5. DEFERRED REVENUE
The components of deferred revenue consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Software licenses..... $ 78,723 $ 81,953
Maintenance........... 952,272 1,115,017
-------------- --------------
$ 1,030,995 $ 1,196,970
============== ==============
</TABLE>
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
The activity in the Series A redeemable convertible preferred stock ("Series
A"), Series B redeemable convertible preferred stock ("Series B"), Series C
redeemable convertible preferred stock ("Series C"), and Series D redeemable
convertible preferred stock ("Series D") for the nine months ended September 30,
2000 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 3,024 $ 8,065 3,618 $ 9,648
Exercise of warrants to purchase
Series C
Exercise of warrants to purchase
Series D - - - -
Accretion to estimated mandatory
redemption value - 16,130 - 19,296
Conversion of redeemable convertible
preferred stock to common stock (3,024) (24,195) (3,618) (28,944)
----------------------------- -----------------------------
Balance at September 30, 2000 - $ - - $ -
============================= =============================
<CAPTION>
SERIES C SERIES D
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 9,315 $ 25,766 - $ -
Exercise of warrants to purchase
Series C 14 38
Exercise of warrants to purchase
Series D - - 2,557 7,661
Accretion to estimated mandatory
redemption value - 48,830 - 12,791
Conversion of redeemable convertible
preferred stock to common stock (9,329) (74,634) (2,557) (20,452)
----------------------------- -----------------------------
Balance at September 30, 2000 - $ - $ -
============================= =============================
</TABLE>
7. STOCKHOLDERS' EQUITY (DEFICIT)
The activity in stockholders' equity (deficit) for the nine months ended
September 30, 2000 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ACCUMULATED
ADDITIONAL OTHER
NUMBER PAID-IN ACCUMULATED COMPREHENSIVE
OF SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------------ ----------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 2000 .................. 5,941 $ 6 $ -- $ (26,559) $ 14 $ (26,539)
Issuance of common stock for cash
upon exercise of stock
options and warrants ...................... 1,447 1 1,140 -- -- 1,141
Stock compensation from stock
option grants ............................. -- -- 1,042 -- -- 1,042
Accretion of Series A redeemable
convertible preferred stock to
estimated mandatory redemption
value ..................................... -- -- (614) (15,516) -- (16,130)
Accretion of Series B redeemable
convertible preferred stock to
estimated mandatory redemption
value ..................................... -- -- -- (19,296) -- (19,296)
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accretion of Series C redeemable
convertible preferred stock to
estimated mandatory redemption
value ..................................... -- -- -- (48,830) -- (48,830)
Accretion of Series D redeemable
convertible preferred stock to estimated
mandatory redemption value -- -- -- (12,791) -- (12,791)
Issuance of common stock in
initial public offering, net of issuance
costs of $4,969,431 ....................... 4,830 5 33,666 -- -- 33,671
Conversion of redeemable convertible
preferred stock to common stock ........... 18,528 19 148,206 -- -- 148,225
Net loss for the nine months
ended September 30, 2000 .................. -- -- -- (13,686) -- (13,686)
Other comprehensive income
(loss) -- foreign currency
translation adjustment .................... -- -- -- -- (9) (9)
---------
Comprehensive loss .......................... -- -- -- -- -- (13,695)
--------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 2000 ............... 30,746 $ 31 $ 183,440 $(136,678) $ 5 $ 46,798
========= ========= ========= ========= ========= =========
</TABLE>
8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the three and nine month periods ended September 30, 2000, two
customers accounted for 19% and 25% of revenue, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of XML-based Internet infrastructure software for
creating interactive e-business portals. Interactive portals are a new
generation of e-business solutions that are designed to tap into today's vast
corporate and Internet information reservoirs in order to bring the right
information to the right people at the right time. This new type of XML-based
information portal is distinctively capable of intelligently aggregating data
and content from disparate sources, personalizing that information based upon a
user's profile, and enabling the user to interact with the original information
source. These capabilities meet a growing need for software products that can
sift through the increasing volumes of corporate and Internet-based information
to identify and facilitate new e-business opportunities. From corporate
intranets and extranets to Internet-based content and commerce providers, our
products address a growing demand for a new breed of dynamic, flexible and
standards-based e-business software that brings information and people together.
Sequoia Software was founded in March 1992. During the period from our
inception to 1996, we generated revenues primarily from developing custom
software products that provided information management functionality to our
customers. Beginning in early 1996, we saw potential for a new generation of
software, based on Internet standards and designed to bring the right
information to the right people at the right time. By early 1998, we had
transitioned our business model from custom information technology products and
services to pre-packaged, XML-based software licensing, professional services
and maintenance. This transition is reflected in our financial results and
should be considered when performing historical comparisons. We commercially
released our first XML-based software product in November 1998, and we released
XPS in March 1999. We released subsequent versions of XPS in December 1999 and
June 2000. We have grown from 142 employees as of December 31, 1999 to 209
employees as of September 30, 2000.
On July 1, 1999, we acquired Radian Systems for an aggregate purchase price
of approximately $5.0 million in cash and stock. We accounted for the
acquisition using the purchase method of accounting. As such, the results of
operations of Radian Systems have been included in our results of operations
beginning July 1, 1999, and the acquired net assets were recorded at their
estimated fair value on July 1, 1999. We recorded approximately $5.4 million of
goodwill and other identifiable intangible assets in connection with this
acquisition, which are being amortized over a three, four or five-year period.
We derive our revenues from software licenses, maintenance and services. In
addition, we have previously sold hardware purchased from third parties for the
convenience of our customers. Licenses for our software often contain multiple
elements, including the product license, maintenance and other services. We
allocate the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables determined based on specific objective
evidence.
License revenues include fees from licensing our XPS software as well as
third-party software. We license some of the software
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<PAGE> 9
that we have developed to our customers under contractual arrangements which
require significant modification and customization of the software. We account
for these contractual arrangements using the percentage of completion method,
and we measure progress to completion based on labor costs incurred.
We recognize license revenues when persuasive evidence of an arrangement
exists, delivery has occurred and the fee is fixed or determinable and probable
of collection. We include software license fees billed but not recognized as
revenue as deferred revenue.
The services we provide include installation, basic consulting, as well as
software customization and modification to meet specific customer needs. We
recognize service fees provided under long-term contracts to install and
customize our software or third-party software using the percentage of
completion method. We measure progress to completion by comparing costs incurred
to estimated total costs or contract milestones.
The maintenance we provide includes telephone support, bug fixes, and
rights to upgrades on a when and if available basis associated with software
licenses. We collect these maintenance fees in advance and recognize them
ratably over the maintenance period. We include maintenance fees collected but
not recognized as revenue as deferred revenue.
We occasionally sell hardware purchased from third parties as a convenience
to our customers. We recognize revenues from these sales when the hardware is
shipped. We do not expect the sale of hardware to continue to be a material part
of our operations as we transition our business model from custom information
technology products and services to pre-packaged software licensing, services
and maintenance.
Our cost of license revenues includes manufacturing, packaging and
distribution expenses, amortization of capitalized software development costs
and, after June 30, 1999, the cost of purchased third-party licenses sold to our
customers. Our cost of services and maintenance includes salaries and related
expenses for our expert product services organization, costs of third-party
consultants, and an allocation for overhead and recruitment.
Research and development expenses include new software development and the
salaries and other costs associated with our in-house development staff and
contract software developers. We include costs of developing new software
products and substantial enhancements to existing software products in research
and development expenses until we establish technological feasibility, at which
time we capitalize all further development costs until we make the product
available for general release. We define technological feasibility as the
completion of a working model of the software product that has passed tests
showing it to be consistent with the product design specifications.
Sales and marketing expenses include salaries and related costs, as well as
direct marketing costs, including trade shows, public relations, advertising,
marketing materials and market research. We currently generate revenues
primarily through our direct sales force. We also focus on working with our
indirect channel partners, as well as identifying new indirect channel partners.
We expense these costs as we incur them.
General and administrative expenses include our personnel and other costs
associated with management, finance, human resources and information services
activities. We are currently expanding our business and significantly increasing
the number of employees. We anticipate that we will continue this expansion in
the future, which will continue to place significant demands on our management
and operational resources. To manage our rapid growth and increased demand, we
must invest in and implement scalable operating systems, procedures and
controls. We expect future expansion to continue to challenge our ability to
hire, train, manage and retain qualified employees. We expense these costs as we
incur them.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our research and
development, sales and marketing and professional services departments and to
establish an administrative infrastructure. As a result, as of September 30,
2000, we had an accumulated deficit of $136.7 million, which includes cumulative
accretion of our redeemable convertible preferred stock of $106.4 million. We
believe our success depends on rapidly increasing our customer base, further
developing XPS and introducing new product enhancements into the marketplace. We
intend to continue to invest heavily in research and development and sales and
marketing. We therefore expect to continue to incur substantial operating losses
for the foreseeable future.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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License revenues increased 200% to $4.5 million in the three months ended
September 30, 2000 from $1.5 million in the three months ended September 30,
1999. For the nine months ended September 30, 2000, license revenues increased
341% to $10.8 million as compared to $2.5 million for nine months ended
September 30, 1999. License revenues from XPS were $4.5 million in the three
months ended September 30, 2000, compared to $224,000 in the three months ended
September 30, 1999. Licenses of third party software did not generate any
revenue during the three months ended September 30, 2000 and we expect that
trend to continue as we move from custom software development to licensing
pre-packaged software. We attribute the increase in license revenues to the
growth of market acceptance of XPS. We licensed XPS to 29 customers in the three
months ended September 30, 2000 compared to 3 customers in the three months
ended September 30, 1999. For the nine months ended September 30, 2000 we
licensed XPS to 65 customers as compared to 14 customers for the nine months
ended September 30, 1999.
Services and maintenance revenues decreased 43% to $752,000 in the three
months ended September 30, 2000 from $1.3 million in the three months ended
September 30, 1999. For the nine months ended September 30, 2000, services and
maintenance revenues increased 13% to $2.6 million as compared to $2.3 million
for the nine months ended September 30, 1999. Although our XPS customer base for
which we are providing maintenance services has increased in 2000, overall
services and maintenance revenues have decreased or remained flat while license
revenues have increased due to our shift from custom software development to
licensing pre-packaged software.
Hardware revenues decreased 65% to $41,000 in the three months ended
September 30, 2000 from $115,000 in the three months ended September 30, 1999.
For the nine months ended September 30, 2000, hardware revenues decreased 9% to
$231,000 as compared to $253,000 for the nine months ended September 30, 1999.
We sell hardware for the convenience of our customers in connection with certain
contracts to provide services that we no longer emphasize and we expect that
hardware sales will continue to decline significantly as a percentage of our
total revenues.
Cost of Revenues. Cost of license revenues decreased 75% to $185,000 in the
three months ended September 30, 2000 from $753,000 in the three months ended
September 30, 1999. For the nine months ended September 30, 2000, costs of
license revenues increased 24% to $1.0 million as compared to $836,000 for the
nine months ended September 30, 1999. These costs as a percentage of license
revenues decreased to 4% in the three months ended September 30, 2000 from 50%
in the three months ended September 30, 1999 and to 10% for the nine month
period ended September 30, 2000 from 34% for the nine months ended September 30,
1999. We attribute these decreases to our shift from custom software development
to licensing pre-packaged software.
Cost of services and maintenance revenues decreased 63% to $401,000 in the
three months ended September 30, 2000 from $1.1 million in the three months
ended September 30, 1999. For the nine months ended September 30, 2000, costs of
services and maintenance revenues increased 7% to $2.0 million as compared to
$1.8 million for the nine months ended September 30, 1999. These costs as a
percentage of services and maintenance revenue decreased to 53% in the three
months ended September 30, 2000 from 83% in the three months ended September 30,
1999 and to 76% for the nine month period ended September 30, 2000 from 80% for
the nine months ended September 30, 1999. Our services and maintenance revenue
came mainly from maintenance in the third quarter of 2000 and mainly from
services in the third quarter of 1999. Our cost of maintenance revenues is lower
than our cost of service revenues. While the trend towards higher margin
maintenance revenue versus lower margin services revenue, beginning in the first
quarter of 2000, caused a significant decrease in these costs in dollars, the
percentage decrease for the nine month periods remained flat due principally to
one, now complete, lower margin contract in the first quarter of 2000. We
acquired this contract as part of the Radian Systems acquisition.
Cost of hardware revenues decreased 91% to $35,000 in the three months
ended September 30, 2000 from $373,000 in the three months ended September 30,
1999. For the nine months ended September 30, 2000, costs of hardware revenues
decreased 62% to $194,000 as compared to $504,000 for the nine months ended
September 30, 1999. These costs as a percentage of services and maintenance
revenue decreased to 86% in the three months ended September 30, 2000 from 323%
in the three months ended September 30, 1999 and to 84% for the nine month
period ended September 30, 2000 from 199% for the nine months ended September
30, 1999.
Operating Expenses
Research and Development. Research and development expenses increased 119%
to $2.2 million in the three months ended September 30, 2000 from $987,000 in
the three months ended September 30, 1999. For the nine months ended September
30, 2000, research and development expenses increased 175% to $5.6 million as
compared to $2.0 million for the nine months ended September 30, 1999. Research
and development expenses as a percentage of total revenues increased to 41% in
the three months ended
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<PAGE> 11
September 30, 2000 from 34% in the three months ended September 30, 1999 due to
the increase in our development staff. Research and development expenses as
percentage of total revenues for the nine months ending September 30, 2000 and
September 30, 1999 have remained comparable. The increase in research and
development expenses stems from adding 43 personnel to our research and
development department and increasing our use of contract software developers.
We are using these additional personal and outside contractors to continue
development of our XPS product.
We expect an increase in research and development expenses resulting from
rising salaries and recruiting costs in the highly competitive market for
software engineers. We also anticipate that further increases in the number of
research and development personnel will be necessary to continue to enhance our
XPS product, develop new products and support our growing customer base.
Sales and Marketing. Sales and marketing expenses increased 148% to $5.1
million in the three months ended September 30, 2000 from $2.1 million in the
three months ended September 30, 1999. For the nine months ended September 30,
2000, sales and marketing expenses increased 234% to $14.1 million as compared
to $4.2 million for the comparable period during 1999. Sales and marketing
expenses as a percentage of total revenues increased to 97% in the three months
ended September 30, 2000 from 70% in the three months ended September 30, 1999,
and increased to 103% for the nine months ending September 30, 2000 from 84% for
the nine months ended September 30, 1999. The increase in sales and marketing
expenses stems from adding 61 sales and marketing personnel, as well as
additional sales and marketing costs associated with XPS. We intend to continue
to increase staff in our direct sales force and expect sales and marketing
expenses will continue to increase substantially in the foreseeable future.
General and Administrative. General and administrative expenses increased
71% to $1.8 million the three months ended September 30, 2000 from $1.1 million
in the three months ended September 30, 1999. For the nine months ended
September 30, 2000, general and administrative expenses increased 168% to $4.4
million as compared to $1.6 million for the nine months ended September 30,
1999. For the nine months ended September 30, 2000, our amortization of
intangible assets was $954,000 as compared to $334,000 for the comparable period
during 1999. General and administrative expenses as a percentage of total
revenues remained comparable. The increase in general and administrative
expenses stems from adding 18 administrative personnel, additional legal and
accounting fees, and an increase in intangible asset amortization related to the
July 1, 1999 acquisition of Radian Systems.
Bad Debt Expense. We incurred $576,000 of bad debt expense in the first
quarter of 2000 as a result of a contract dispute with a customer for which we
performed software customization and modification services in 1999. This
contract was acquired as part of the Radian Systems acquisition. In the third
quarter of 2000 we added $297,000 to our reserve for uncollectible accounts. Our
bad debt expense for the three and nine month periods ended September 30, 1999
was insignificant.
Interest expense. Interest expense decreased $191,000 to $48,000 in the
three months ended September 30, 2000 from $239,000 in the three months ended
September 30, 1999. For the nine months ended September 30, 2000, interest
expense decreased $132,000 to $159,000 from $291,000 for the nine months ended
September 30, 1999. Interest expense in the three and nine month periods ending
September 30, 1999 includes interest expense from convertible demand promissory
notes and interest on debt related to the Radian Systems acquisition.
Other Income, Net. Other income, net, increased $567,000 to $571,000 in the
three months ended September 30, 2000 from $4,000 in the three months ended
September 30, 1999. For the nine months ended September 30, 2000, other income,
net increased $897,000 to $910,000 from $13,000 for the nine months ended
September 30, 1999. These increases are due primarily to interest income earned
on the proceeds of our initial public offering.
INCOME TAXES
We have incurred operating losses in all periods presented and therefore
have not recorded income tax expense. We have recorded a valuation allowance for
the full amount of our net deferred tax assets since we cannot currently predict
the realization of these assets. Under the provisions of the Internal Revenue
Code, certain substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be used to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 we had cash and cash equivalents of $32.2 million and
working capital of $38.4 million.
Our net cash used in operating activities was $19.1 million for the nine
months ended September 30, 2000 and $5.2 million for the nine months ended
September 30, 1999. The increase in cash used in operating activities was due
primarily to an increase in our net
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<PAGE> 12
loss excluding non-cash items of $6.3 million and an increase in our working
capital investments of $7.6 million. Our working capital investments consist
principally of accounts receivable, prepaid expenses and reductions in accounts
payable. Our accounts receivable at the end of any period have significantly
fluctuated due to the significant dollar amount of our individual software
licensing arrangements and other software services and the timing of the revenue
recognition of these arrangements.
For the nine months ended September 30, 2000, we sold $1.7 million of XPS
licenses to customers in exchange for non-marketable securities. These
securities were valued by independent appraisals of the customers issuing the
securities. These securities are illiquid and we may not be able to sell them in
the near term to provide needed cash for operations. We have classified these
securities at September 30, 2000 as other assets.
At September 30, 2000, $1.0 million of our accounts receivable was due from
one customer acting as a general contractor to which we were engaged under a
subcontractor arrangement, which required delivery and significant modification
and customization of software. The amount owed to us by this customer is past
due as a result of a dispute that has not allowed the customer to collect fees
that will allow for the payment of our subcontract services. We are not a party
to the dispute. On July 13, 2000, we filed a Complaint for Damages against the
general contractor seeking a judgment in the amount of $1.0 million. We expect
to collect the amount owed. However, due to uncertainties surrounding the
resolution of the dispute and the resultant effect on the general contractor's
ability to meet its obligations, it is reasonably possible that our estimate of
the recoverability of this account receivable may change in the near term. We
are currently unable to estimate the range of the possible loss we may incur
when this receivable is ultimately settled. In August 2000, the general
contractor filed a counterclaim seeking judgment against us in the amount of
$2.9 million. We believe that the likelihood of a loss incurred as a result of
this counterclaim is remote.
We used net cash in investing activities of $2.7 million for the nine
months ended September 30, 2000 and $346,000 for the nine months ended September
30, 1999. We used the net cash used in investing activities for the nine months
ended September 30, 2000 for capital expenditures and capitalized software
development costs. We used the net cash used in investing activities for the
nine months ended September 30, 1999 for capital expenditures, including cash
acquired upon our acquisition of Radian Systems. Our capital expenditures were
purchases of assets to manage our operations, including computer hardware and
software, office furniture and equipment and leasehold improvements. We expect
that our capital expenditures will continue to increase in the foreseeable
future. In the second quarter of 2000, we capitalized $633,000 of software
development costs related to XPS 3.0. We released XPS 3.0 commercially on June
19, 2000.
Our net cash provided by financing activities was $43.1 million for the
nine months ended September 30, 2000 and $5.0 million for the nine months ended
September 30, 1999. In May 2000, we completed an initial public offering of
4,200,000 shares of our common stock, which generated net proceeds of
approximately $29.0 million. Also in May 2000, warrants to purchase Series D
Redeemable Convertible Preferred Stock were exercised by their holders, which
generated aggregate proceeds of approximately $7.7 million. In June 2000, we
issued and sold 630,000 shares of common stock for net proceeds of approximately
of $4.7 million upon the exercise of an over-allotment option by our
underwriters. For the nine months ended September 30, 2000, we also generated
$1.2 million of cash from the exercise of stock options and warrants, and drew
$802,000 from our two equipment lines of credit with Silicon Valley Bank. For
the nine months ended September 30, 1999 we generated approximately $4.1 million
from issuing convertible debt and $1.0 million from a draw on our line of credit
with Silicon Valley Bank. In November 1999, the convertible debt was converted
to Series C Redeemable Convertible Preferred Stock.
In June 2000, we amended our existing loan agreement with Silicon Valley
Bank, which provided a revolving line of credit in an aggregate principal amount
of up to $3.5 million and an equipment line of credit in an aggregate principal
amount of $750,000. Our new arrangement with Silicon Valley Bank increases the
revolving line of credit to an aggregate principal amount of up to $5.0 million
and provides a second equipment line of credit in an aggregate principal amount
of $2.0 million.
We use the revolving line of credit for working capital purposes and
matures on May 25, 2001. Interest on the revolving line of credit is payable
monthly and accrues at the prime rate as announced by Silicon Valley Bank plus
0.75% per annum.
The second equipment line of credit is available under three separate term
notes each with principal limitations, and is subject to a borrowing base
limitation as defined by the loan agreement. Each note includes interest payable
monthly at the prime rate as announced by Silicon Valley Bank plus 1.25% per
annum. The unpaid principal for each of the three notes is payable in equal
consecutive monthly installments over a 36-month term beginning on September 5,
2000, March 5, 2001, and June 5, 2001, respectively. The second equipment line
of credit is to be used only to finance or refinance the purchase of equipment.
As of September 30, 2000, we had $1.0 million outstanding under the
revolving line of credit, $604,000 outstanding under the first
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<PAGE> 13
equipment line of credit and $677,000 outstanding under the second equipment
line of credit. Principal payments on the outstanding balance of the first
equipment line of credit are due in monthly installments of $20,833 with
interest payable monthly at the prime rate as announced by Silicon Valley Bank
plus 1.25% per annum. Principal payments on the outstanding balance of the
second equipment line of credit are due in monthly installments of $18,817 with
interest payable monthly at the prime rate as announced by Silicon Valley Bank
plus 1.25% per annum.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions of complementary businesses,
technologies, or product lines. Further, we do not expect to generate positive
cash flows from operating activities until the third quarter of 2002.
We believe that our cash and cash equivalents and available borrowings
under our loan agreement will be sufficient to meet our cash requirements for at
least the next 24 months, including working capital requirements and planned
capital expenditures. We may require additional funds for other purposes, and
there can be no assurance that additional financing sources will be available or
that, if available, the financing will be attainable on terms favorable to us.
IMPACT OF THE YEAR 2000 ISSUE
We did not experience any problems on January 1, 2000 and to date, we have
not experienced, nor are we aware of, any material Year 2000 issues with any of
our internal systems or our services, and we do not anticipate experiencing such
issues in the future. Further, we are unaware of any issues with our vendors,
suppliers or customers that will materially affect us.
Our total cost to proactively address our Year 2000 issues was
approximately $30,000. The cost of addressing Year 2000 issues was reported as a
general and administrative expense. We believe we have identified and resolved
all Year 2000 issues that could materially and adversely affect our business
operations.
We have developed contingency plans to be implemented if our efforts to
identify and correct Year 2000 issues affecting our internal systems were
ineffective. We have adopted the Year 2000 contingency plans as our standard
operational contingency plans. Our contingency plans are designed to minimize
disruptions or other adverse effects. Our plans include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct on an accelerated schedule any Year
2000 issues that arise or to provide manual workarounds for information
systems.
FORWARD-LOOKING INFORMATION
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," and "project"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition, and other unanticipated events and
conditions. It is not possible to foresee or identify all such factors. The
Company makes no commitment to update any forward-looking statement or to
disclose any facts, events, or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
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<PAGE> 14
We are exposed to market risk from changes in interest rates that could
affect our future results of operations and financial condition. We manage our
exposure to these risks through our regular operating and financing activities.
The fair value of our cash and cash equivalents would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
to the short-term nature of our portfolio.
Our revolving credit facility and equipment term loans bear interest at
variable rates, and the fair values of these instruments are not significantly
affected by changes in market interest rates. A hypothetical 100 basis point
increase in interest rates for one year would increase interest expense by an
immaterial amount.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
<TABLE>
<S> <C>
(a) -- (c) None.
(d) The Company filed a registration statement under the Securities
Act effective May 11, 2000, File No. 333-96421. From the
effective date of the registration statement to September 30,
2000, the Company's use of net proceeds from the offering of
securities covered thereby was as follows:
NET OFFERING PROCEEDS TO ISSUER $33,671,000
USE OF PROCEEDS:
Sales and marketing expenses $ 766,000
Research and development 324,000
General and administrative expenses 280,000
Capital expenditures 104,000
Temporary investments:
Cash and cash equivalents $32,197,000
-----------
Total $33,671,000
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
---------------- -----------------------------------------------------------
+3.1 Second Articles of Amendment and Restatement, dated as of
May 17, 2000
+3.2 Amended and Restated By-laws, dated as of May 17, 2000
+10.1 Lease Agreement dated August 18, 1995, by and between
Principal Mutual Life Insurance Company and Sequoia
+10.1.1 First Amendment to Lease dated October 24, 1997, by and
between Principal Mutual Life Insurance Company and Sequoia
+10.1.2 Second Amendment to Lease dated November 9, 1998, by and
between Principal Mutual Life Insurance Company and Sequoia
+10.1.3 Third Amendment to Lease dated June 8, 1999, by and between
Principal Mutual Life Insurance Company and Sequoia
+10.2 Lease Agreement between Lernout & Hauspie (Ireland) Limited
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<PAGE> 16
and Redwood Software Europe Limited (d/b/a Sequoia Software
Europe)
+10.3 Employment Agreement between Sequoia and Richard C. Faint,
Jr., dated January 1, 2000
+10.4 Employment Agreement between Sequoia and Mark A. Wesker,
dated January 1, 2000
+10.5 Employment Agreement between Sequoia and Anil Sethi, dated
January 1, 2000
+10.6 Employment Agreement between Sequoia and Marc E. Rubin,
dated January 1, 2000
+10.7 Employment Agreement between Sequoia and Kenneth E. Tighe,
dated January 1, 2000
+10.8 Employment Agreement between Sequoia and Gregory G. Heard,
dated January 24, 2000
+10.9 Sequoia Software Corporation 2000 Stock Incentive Plan
+10.10 Series B Redeemable Convertible Preferred Stock Purchase
Agreement dated July 28, 1998, by and among Sequoia and the
investors named therein
+10.11 Amendment No. 1 to Series B Redeemable Convertible Preferred
Stock Purchase Agreement dated September 28, 1998, by and
among Sequoia and the investors named therein
+10.12 Convertible Promissory Note and Warrant Purchase Agreement
dated as of May 10, 1999, by and among Sequoia and the
purchasers named therein
+10.13 Amendment to Convertible Promissory Note and Warrant
Purchase Agreement and Preferred Stock Purchase Warrant
dated March 1, 2000, by and among Sequoia and the purchasers
named therein
+10.14 Stock Purchase Agreement dated July 1, 1999, by and among
Sequoia, Radian Systems, Inc., Radian, Inc., Timothy B.
Fleischer and Kenneth E. Tighe
+10.15 Series C Redeemable Convertible Preferred Stock and Warrant
Purchase Agreement dated November 23, 1999, by and among
Sequoia, Baker Communications Fund, L.P. and divine
interVentures, inc.
+10.16 Lease Agreement dated March 17, 2000, between Merritt -- CCP
V, LLC and Sequoia
+10.17 Amended and Restated Registration Rights Agreement dated
November 23, 1999 by and among Sequoia and the individuals
listed on the schedules thereto, as amended.
*27.1 Financial Data Schedule
----------
* Filed herewith
+ Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-96421
+ Incorporated herein by reference to the Company's Registration Statement on
Form S-8, No. 333-37096
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUOIA SOFTWARE CORPORATION
(Registrant)
/s/ GREGORY G. HEARD
-------------------------------------------
Gregory G. Heard
Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer)
Date: November __, 2000
17
