<PAGE> 1
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 EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
333-71369
Commission File number
SAGENT TECHNOLOGY, INC
(Exact name of registrant as specified in its charter)
DELAWARE 94-3225290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 W. El Camino Real, Suite 300
Mountain View, California 94040
(Address of principal executive offices) (Zip Code)
(650) 815-3100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
The number of shares of the Registrant's Common Stock, $.001 par value per
share, outstanding at October 31, 1999 was 25,478,560.
<PAGE> 2
SAGENT TECHNOLOGY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Condensed Financial Statements:
Consolidated Condensed Statements of Operations
Three and nine months ended September 30, 1999 and 1998 3
Consolidated Condensed Balance Sheets
September 30, 1999 and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Condensed Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues, net:
Licenses $ 7,289 $ 2,932 $ 16,517 $ 6,841
Services 2,746 1,689 7,475 4,456
-------- -------- -------- ---------
Total revenues, net 10,035 4,621 23,992 11,297
-------- -------- -------- ---------
Cost of revenues:
Licenses 217 61 349 122
Services 1,309 1,468 3,504 3,583
-------- -------- -------- ---------
Total cost of revenues 1,526 1,529 3,853 3,705
-------- -------- -------- ---------
Gross profit 8,509 3,092 20,139 7,592
-------- -------- -------- ---------
Operating expenses:
Sales and marketing 5,300 3,188 13,416 8,398
Research and development 1,883 1,649 5,273 4,566
General and administrative 1,085 1,424 3,004 3,944
Acquired in-process technology 2,425
-------- -------- -------- ---------
Total operating expenses 8,268 6,261 21,693 19,333
-------- -------- -------- ---------
Income (loss) from operations 241 (3,169) (1,554) (11,741)
Interest income (expense), net 481 (26) 765 32
-------- -------- -------- ---------
Net income (loss) before
income taxes 722 (3,195) (789) (11,709)
Provision for income taxes (63) (181) (4)
-------- -------- -------- ---------
Net income (loss) $ 659 $ (3,195) $ (970) $ (11,713)
======== ======== ======== =========
Basic net income (loss) per share $ 0.03 $ (0.79) $ (0.05) $ (3.02)
======== ======== ======== =========
Number of shares used in calculation of
basic net income (loss) per share 25,429 4,036 18,293 3,878
Diluted net income (loss) per share $ 0.03 $ (0.86) $ (0.05) $ (3.28)
======== ======== ======== =========
Number of shares used in calculation of
diluted net income (loss) per share 26,116 3,704 18,019 3,575
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,222 $ 3,093
Marketable securities 36,795
Accounts receivable, net 6,924 5,376
Other current assets 4,711 832
-------- --------
Total current assets 53,652 9,301
Property and equipment, net 2,424 3,044
Other assets 3,311 851
-------- --------
Total assets $ 59,387 $ 13,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,160 $ 1,478
Accrued liabilities 4,642 4,216
Deferred revenue 2,048 1,304
Obligations under capital leases 2,358 1,181
-------- --------
Total current liabilities 10,208 8,179
Long-term portions of capital lease obligations 3,346
-------- --------
Total liabilities 10,208 11,525
-------- --------
Commitments and contingencies (see
Part II Item I)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, par value $.001
per share:
Authorized: 5,000 in 1999 and 15,556 in 1998
Issued and outstanding: none in 1999 and
14,544 in 1998 -- 15
Common stock, par value $.001 per share:
Authorized: 70,000 in 1999 and 25,000 in 1998
Issued and outstanding: 25,434 in 1999 and
4,125 shares in 1998 25 4
Additional paid-in capital 81,571 30,699
Notes receivable from stockholders (2,919) (522)
Cumulative translation adjustment 98 101
Accumulated deficit (29,596) (28,626)
-------- --------
Total stockholders' equity 49,179 1,671
-------- --------
Total liabilities and stockholders' equity $ 59,387 $ 13,196
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
SAGENT TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operations:
Net loss $ (970) $ (11,713)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquired in-process technology 2,425
Depreciation and amortization 1,061 1,022
Change in operating assets and liabilities, net of acquisition:
Accounts receivable (1,548) (3,097)
Other current assets (3,879) (1,171)
Other assets (2,460) (845)
Accounts payable (318) (62)
Accrued liabilities 426 2,600
Deferred revenue 744 189
--------- ---------
Net cash used in operating activities (6,944) (10,204)
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (125,691)
Maturities of marketable securities 88,896
Purchases of property and equipment (1,634) (1,187)
Disposals of property and equipment 1,193
Acquisition of Talus Incorporated (2,696)
--------- ---------
Net cash used in investing activities (37,236) (3,883)
--------- ---------
Cash flows from financing activities:
Proceeds from capital lease financing 2,206 1,554
Payment of principal under capital lease obligations (4,375) (384)
Note receivable related to sale of fixed assets
Proceeds from issuance of common stock (net of repurchases) 48,481 269
Proceeds from issuance of preferred stock (net of
issuance costs and repurchases) 11,660
--------- ---------
Net cash provided by financing activities 46,312 13,099
--------- ---------
Effect of exchange rate changes in cash (3) 10
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,129 (978)
Cash and cash equivalents beginning of the period 3,093 3,813
--------- ---------
Cash and cash equivalents end of the period $ 5,222 $ 2,835
--------- ---------
Supplemental disclosure of cash flow information:
Cash payments for interest: 81 19
Supplemental non-cash financing activities:
Issuance of common stock for notes and interest receivable 2,397 522
Liabilities assumed in connection with acquisition of Talus,
Incorporated:
Fair value of assets acquired 3,526
Cash paid (1,170)
Preferred stock issued (1,400)
---------
Liabilities assumed $ 956
=========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 6
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Sagent Technology, Inc., is a leading solution provider of e-business
analytical applications.
Sagent was incorporated under the laws of the State of California in April
1995 under the name of Savant Software, Inc. In June 1995, Sagent changed its
name to Sagent Technology, Inc. Sagent was reincorporated under the laws of the
State of Delaware in September 1998.
Basis of Presentation:
The unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. Certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of Sagent, the financial statements
reflect all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the financial position at September 30,
1999 and December 31, 1998 the operating results for the three months and nine
months ended September 30, 1999 and 1998 and cash flows for the nine months
ended September 30, 1999 and 1998. These financial statements and notes should
be read in conjunction with Sagent's audited financial statements and notes
thereto for the year ended December 31, 1998, included in the Company's Form S-1
filed with the Securities and Exchange Commission in April 1999. The results of
operations for the three months and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Sagent
Technology, Inc., and its wholly-owned subsidiaries, Sagent Technology Japan KK,
Sagent Technology UK, Ltd., and Sagent Technology Canada Inc. collectively
("Sagent" or the "Company"). All significant intercompany accounts and
transactions have been eliminated.
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.
Marketable Securities:
Marketable securities are classified as available-for-sale securities and
are reported at fair value. Unrealized holding gains and losses, if material,
are included as a separate component of stockholders equity until realized.
<PAGE> 7
Revenue Recognition:
Sagent's revenues are derived from two sources, product licenses and
services. License revenues are derived from product sales to end users,
resellers and distributors and enterprise application vendors as well as
royalties from enterprise application vendors. For enterprise application
vendors, Sagent receives quarterly reports from these vendors on sell-through of
Sagent's products to end users. The reports also indicate the amount of royalty
revenue the enterprise application vendor owes to Sagent. License revenues are
based on the number and capacity of servers on which a product is installed, as
well as on a per user basis. Service revenues are derived from providing
consulting and training, maintenance and support services to end users.
Sagent recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition." License revenues from sales to end users are recognized on
shipment of the product, if a signed contract exists, the fee is fixed and
determinable and collection is deemed probable. If an acceptance period is
provided, revenue is recognized upon the earlier of customer acceptance or the
expiration of that period. Sagent recognizes royalties as revenues based upon an
enterprise application vendor's sell-through of Sagent's products. Fees for
services are recognized upon completion of the work to be performed. Revenues
from maintenance and support agreements which includes product updates are
deferred and recognized on a straight-line basis as service revenues over the
term of the related agreement, which is typically one year.
Sagent performs ongoing credit evaluations of its customer's financial
condition and does not require collateral. Sagent maintains allowances for
potential credit losses and the amount of such losses have been within
management's expectations.
Recent Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. There was no difference between Sagent's net loss and its total
comprehensive loss for the quarters ended September 30, 1999 and 1998 and the
nine months periods ended September 30, 1999 and 1998.
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1, "Software for Internal Use, " which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. Statement of Position No. 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of Statement of
Position No. 98-1 has had no material effect on Sagent's business, financial
condition and operating results for the first, second or third quarter of 1999.
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all years beginning after June 15, 1999.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Sagent does not currently engage in hedging
activities and had no holdings of derivative financial or commodity instruments
at September 30, 1999. Sagent does not expect that the adoption of SFAS No. 133
will have a material impact on its financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This standard requires companies to expense
the costs of start-up activities and organization costs as incurred. In general,
Statement of Position 98-5 is effective for fiscal years beginning after
December 15, 1998. Sagent believes the adoption of Statement of Position 98-5
will not have a material impact on its results of operations.
Net Loss Per Share:
Sagent computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Under the provisions of SFAS No. 128 and SAB 98, basic net loss
per share is computed by dividing the net loss available to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing
<PAGE> 8
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
the net loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Options, warrants and
convertible preferred stock were not included in the computation of diluted net
loss per share for the three months ended September 30, 1998 and the nine months
ended September 30, 1999 and 1998 as the effect would be antidilutive.
A reconciliation of shares used in the calculation of historical basic and
diluted net loss per share follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Historical net income(loss) per share, basic and diluted:
Net income(loss) $ 659 $ (3,195) $ (970) $(11,713)
======== ======== ======= ========
Shares used in computing basic net income(loss)
per share 25,429 4,036 18,293 3,878
-------- -------- -------- --------
Net income(loss) per share, basic $ 0.03 $ (0.79) $ (0.05) $ (3.02)
======== ======== ======== ========
Shares used in computing diluted net income(loss)
per share 26,116 3,704 18,019 3,575
-------- -------- -------- --------
Net income(loss) per share, diluted $ 0.03 $ (0.86) $ (0.05) $ (3.28)
======== ======== ======== ========
Antidilutive securities including options, warrants and
preferred stock not included in historical net loss per
share calculations 15,981 16,120 15,981
======== ======== ========
</TABLE>
NOTE 3. MARKETABLE SECURITIES
Maturities of debt securities at market value at September 30, 1999 are all
one year or less and consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Debt securities:
Corporate commercial paper $33,782 33,782
U.S. Government 1,000 1,000
Asset backed securities 2,013 2,013
</TABLE>
Proceeds from sales or maturities of investments during the three months
ended September 30, 1999 were $88,896 and for the three months ended September
30, 1998 were not material. Gross gains and losses realized on sales or
maturities were not material for the three or nine months ended September 30,
1999 and 1998. The cost of investments sold is determined by the specific
identification method.
NOTE 4. INITIAL PUBLIC OFFERING ("IPO")
On April 13, 1999, Sagent issued 5,750,000 shares of its common stock
(including 750,000 shares issued upon the exercise of the underwriter's over
allotment option) at an initial public offering price of $9.00 per share. The
net proceeds to Sagent from the offering, net of offering costs were
approximately $47.2 million. In connection with the IPO, warrants were exercised
to purchase 110,308 shares of common stock at prices ranging from $3.18 to $6.48
per share, resulting in additional capital proceeds to the Company totaling
$656,000. Concurrent with the IPO, each outstanding share of the Company's
<PAGE> 9
Sagent Technology, Inc.
Notes To Unaudited Consolidated Condensed Financial Statements
(In thousands, except per share data)
convertible preferred stock was automatically converted into one share of common
stock and remaining preferred stock warrants for 135,317 shares were
automatically converted into warrants for the purchase of 135,317 shares of
common stock.
NOTE 5. ACQUISITION OF BUSINESS
On June 11, 1999, Sagent acquired all of the stock of Sagent U.K., Ltd.,
its distributor in the United Kingdom, for cash of approximately $1.0 million,
259,000 shares of common stock valued at $1.0 million, stock options valued at
approximately $212,000 and the assumption of certain liabilities for an
aggregate purchase price of $2.4 million. Sagent accounted for the acquisition
under the purchase method and, accordingly, the purchase price was allocated to
the fair value of tangible and intangible assets acquired and liabilities
assumed.
Page 9 of 21
The allocation of Sagent's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition is summarized below:
<TABLE>
<S> <C>
Current assets ............................. $ (672)
Fixed assets ............................... 102
Goodwill ................................... 2,945
Total purchase price................. $ 2,375
</TABLE>
The excess of the purchase price over the fair value of the net tangible
assets acquired has been recorded as goodwill, which is being amortized on a
straight-line basis over a period of five years.
<PAGE> 10
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the
following discussion relative to markets for Sagent's products and trends in
revenues, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, including those set forth in "Factors
Affecting Results of Operations" on page 17 and Sagent's actual results of
operations may differ materially from those contained in the forward-looking
statements.
OVERVIEW
Sagent develops, markets and supports Enterprise Intelligence software
designed to address organizations' rapidly growing E-BUSINESS, information
access, analysis and delivery needs. Sagent also provides design, systems
engineering and education services to facilitate the successful implementation
of its Sagent DMS product suite. Sagent was incorporated in April 1995,
commenced operations in June 1995 and began selling the first products of the
Sagent DMS product suite during the fourth quarter of 1996. Although Sagent's
revenues have grown significantly during these periods, there can be no
assurance that such growth will continue, nor that Sagent can sustain or
increase profitability in the future.
Sagent's revenues are derived from two sources, product licenses and
services. License revenues are derived from product sales to end users,
resellers, distributors and enterprise application vendors as well as royalties
from enterprise application vendors. License revenues are based upon the number
and capacity of servers on which a product is installed, as well as on a per
user basis. Service revenues are derived from providing consulting, training,
maintenance and support services to end-users.
On February 28, 1998, Sagent acquired Talus, Incorporated, a privately held
company that has significant experience in the design and implementation of
Enterprise Intelligence applications. The total purchase price was $3.5 million,
and the acquisition was recorded under the purchase method of accounting. In
connection with the acquisition, Sagent expensed $2.4 million of in-process
technology in the quarter ended March 31, 1998. In addition, Sagent recorded
other intangible assets of $587,000, which are being amortized on a
straight-line basis over periods ranging from six to forty eight months.
Sagent sells its products and services to corporations in North America
primarily through its direct sales and services organization. Sagent has
domestic sales offices in seventeen states. A separate group within Sagent's
direct sales organization targets strategic partnerships with industry-leading
enterprise application vendors such as Siebel Systems, Advent Software, Commerce
One, ADP and Cross Access. These vendors embed all or a portion of Sagent's
products within their own applications and sell the integrated products to their
customers. Sagent also utilizes resellers such as EDS InNet, Unisys Corporation,
USinternetworking, Inc., and Cap Gemini Group, which remarket Sagent's products
to their customer base.
<PAGE> 11
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sagent also sells its products internationally through distributors located
in France, Germany, Spain, Benelux, South Africa and through its wholly-owned
direct sales subsidiaries, Sagent Technology UK, Ltd., Sagent Technology Japan
KK, and Sagent Technology Canada.
On June 11, 1999 Sagent acquired its former distributor in the United
Kingdom, Sagent U.K., Ltd. The total purchase price amounted to $2.4 million and
consisted of cash, Sagent common stock, stock options and the assumption of
certain liabilities. The acquisition was recorded under the purchase method of
accounting and Sagent recorded intangible assets of $2.9 million, which are
being amortized, on a straight-line basis over the five-year period subsequent
to the acquisition.
Revenues from customers outside the United States were $1.8 million and
$421,000 in the three months ended September 30, 1999 and 1998, respectively,
and $4.4 million and $994,000 for the nine months ended September 30, 1999 and
1998, respectively. Historically, as a result of the relatively small amount of
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on Sagent's business, financial condition and operating
results. Sagent has an option to acquire its distributors in Spain and Benelux
and the parent company of its French and German distributors. In the event of a
change of control, Sagent could be required to acquire the German distributor.
Any such acquisition may have the effect of diluting existing stockholders,
reducing Sagent's available cash for working capital and other purposes,
requiring substantial management attention, increasing annual amortization
expense or imposing costs on Sagent associated with integrating the acquired
entity.
Sagent recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 97-2. License revenues
from sales to end users are recognized upon shipment of the product, if a signed
contract exists, the fee is fixed and determinable and collection is deemed
probable. If an acceptance period is provided, revenue is recognized upon the
earlier of customer acceptance or the expiration of that period. Sagent
recognizes royalties as revenues based on an enterprise application vendor's
sell-through of Sagent's products. Fees for services are charged separately from
licenses. Service revenues from consulting and training are recognized upon
completion of the work to be performed. Revenues from maintenance and support
agreements which includes product updates are deferred and recognized on a
straight-line basis as service revenues over the term of the related agreement,
which is typically one year.
Since inception, Sagent has incurred substantial research and development
costs to develop its product suite and has invested heavily in the expansion of
sales, marketing and professional services organizations to support increased
annual revenue. In addition, Sagent has invested significantly in general and
administrative areas to build an infrastructure to support its growth strategy.
The number of full-time employees increased from 137 as of September 30, 1998,
to 205 as of September 30, 1999, representing an increase of 50%. As a result of
these investments, Sagent has incurred a net accumulated deficit of $29.6
million as of September 30, 1999. Sagent expects to continue to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we may experience losses and negative cash
flows or be unable to sustain or increase profitability on a quarterly or annual
basis.
Sagent believes that period-to-period comparisons of its operating results
are not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter in the past, Sagent's future
operating results may not follow any past trends. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets. There can be no
assurance we will be successful in addressing such risks and difficulties.
<PAGE> 12
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
The following table sets forth for the periods indicated certain financial
data, derived from Sagent's unaudited consolidated statements of operations, as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
1999 1998 1999 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Revenues, net:
Licenses 72.6% 63.4% 68.8% 60.6%
Services 27.4 36.6 31.2 39.4
----- ----- ----- ------
Total revenues, net 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses 2.2 1.3 1.5 1.0
Services 13.1 31.8 14.6 31.7
----- ----- ----- ------
Total cost of revenues 15.3 33.1 16.1 32.7
----- ----- ----- ------
Gross margin 84.7 66.9 83.9 67.3
----- ----- ----- ------
Operating expenses:
Sales and marketing 52.8 69.0 55.9 74.3
Research and development 18.7 35.7 22.0 40.4
General and administrative 10.8 30.8 12.5 34.9
----- ----- ----- ------
Total operating expenses 82.3 135.5 90.4 149.6
----- ----- ----- ------
Income (loss) from operations 2.4 (68.6) (6.5) (82.3)
Other income (expense):
Acquired in-process technology -- -- -- (21.5)
Interest income (expense), net 4.8 (0.6) 3.2 .3
----- ----- ----- ------
Net income(loss) before income taxes 7.2 (69.2) (3.3) (103.6)
----- ----- ----- ------
Provision for income taxes 0.6 -- 0.7
----- ----- -----
Net income(loss) 6.6% (69.2)% (4.0)% (103.6)%
===== ===== ===== ======
</TABLE>
REVENUES
Total revenues: Sagent's revenues were derived from software licenses and
related services. Total revenues increased 117% from $4.6 million for the three
months ended September 30, 1998 to $10.0 million for the three months ended
September 30, 1999. Total revenue also increased 112% from $11.3 million for the
nine months ended September 30,1998 to $24.0 million for the nine months ended
September 30, 1999. International revenues were $1.8 million and $421,000 for
the three months ended September 30, 1999 and 1998, respectively, an increase of
328%, and for the nine months ended September 30, 1999 international revenues
increased 343% to $4.4 million from $994,000 for the same period in the prior
year. For the quarter ended September 30, 1999, international revenues were
delivered primarily from Europe and Japan and accounted for 18% of total revenue
for the period, down 7 points from the prior quarter ended June 30, 1999. One
customer accounted for 11% of Sagent's total revenues for the three months ended
September 30, 1999. No single customer accounted for more than 10% of Sagent's
total revenues for the nine months ended September 30, 1999.
License revenues: Sagent's license revenues increased 149% from $2.9
million for the three months ended September 30, 1998 to $7.3 million for the
same three month period in 1999, and represented 73% and 63% of total revenues
for the three months ended September 30, 1999 and 1998, respectively. For the
nine month period ended September 30, 1999 license revenues increased 141% to
$16.5 million, from $6.8 million for the same nine month period in the prior
year. The increase in license revenues from the comparable period in the prior
year was primarily attributed to a substantial increase in sales of the Sagent
DMS product suite reflecting the increased market acceptance of the products.
Approximately $2.8 million of license revenue for the current quarter and $8.1
million of the license revenue for the nine month period in the current year was
from sales to new customers. Sagent anticipates that license revenues, which
have
<PAGE> 13
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
represented a significant portion of Sagent's total revenue to date, will
continue to represent the substantial majority of its revenues for the
foreseeable future.
Service revenues: Sagent's service revenues increased to $2.7 million and
$7.5 million for the three months and nine month periods ended September 30,
1999 and 1998, respectively, representing an increase of 63% and 68%
respectively. The increases were primarily due to growth in training and
consulting services related to the increased sales of licenses. Service revenues
consist primarily of revenues from consulting and implementation service fees,
maintenance and to a lesser extent, training services. Service revenues
represented 27% and 37% of total revenues for the three months ended September
30, 1999 and 1998, respectively and 31% and 39% for the nine months ended
September 30, 1999 and 1998, respectively.
COST OF REVENUES
Cost of License Revenues: Cost of license revenues consists primarily of
product packaging, shipping, media and documentation costs and license fees for
sub-licensing third-party software. Sagent's cost of license revenue increased
to $217,000 or 2% of revenue, for the three months ended September 30, 1999 from
$61,000, or 1% of revenue, for the three months ended September 30, 1998. Cost
of license revenue for the nine months ended September 30, 1999 was $349,000 or
2% of revenue and $122,000, or 1% of revenue for the nine month period ended
September 30, 1998. The increase in costs of license revenues results from
increased fees for sub-licensing third-party software.
Cost of Services: Cost of services consists primarily of personnel costs
associated with providing software maintenance, technical support, training and
consulting services. Sagent's cost of service revenues was $1.3 million and $1.5
million for the three months ended September 30, 1999 and 1998, respectively,
representing a decrease of 11% and for the nine months ended September 30, 1999
and 1998 cost of service revenues was $3.5 million and $3.6 million,
respectively. Cost of service revenues was 48% and 87% of service revenues for
the three months ended September 30, 1999 and 1998, respectively, and 47% and
80% for the nine months ended September 30, 1999 and 1998, respectively. The
improvement in service costs as a percent of service revenues was primarily due
to earning higher revenues on consulting services during the current year.
GROSS MARGIN
Gross margins improved to 85% for the three months ended September 30, 1999
from 67% for the same period in the prior year. For the nine month period ended
September 30, 1999, gross margin improved to 84% from 67% for the same period in
the prior year. The improvement was primarily due to an increase in license
revenues as a percent of total revenue, providing higher margin consulting
services, improved utilization rates and the completion of amortization of
intangible assets recorded in connection with the acquisition of Talus. In the
future, Sagent's total gross margin percentages may be adversely affected by mix
of software license and service revenues and increased competition.
OPERATING EXPENSES
Sales and marketing: Sales and marketing expenses consist primarily of
salaries, benefits, commissions, bonuses, RECRUITING and travel expenses for
sales and marketing personnel as well as marketing programs costs. Sales and
marketing expenses increased 66% to $5.3 million for the three months ended
September 30, 1999 from $3.2 million for the three months ending September 30,
1998. During the nine month period ended September 30, 1999, sales and marketing
expenses increased 60% to $13.4 million from $8.4 million for the same nine
month period in the prior year. This increase reflects the overall increase in
expenses such as those related to new hires, commissions and promotional
activities associated with the increase in revenues. Sales and marketing
expenses represented 53% and 69% of total revenues for the three months ended
September 30, 1999 and 1998, respectively, a decline of 16 points. For the nine
<PAGE> 14
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
month period ended September 30, 1999 sales and marketing expenses declined to
56% from the 74% for the nine month period ended September 30, 1998. This
decrease was attributable to Sagent's increased revenues. Sagent believes that
as it continues to expand its direct sales force, its third party partnering
relationships and its indirect channel sales organization on a worldwide basis,
sales and marketing expenses will continue to increase in absolute dollars,
although such expenses may vary as a percentage of revenue.
Research and development: Research and development expenses consist
primarily of personnel and related costs associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses increased 14% to $1.9
million for the three months ended September 30, 1999 from $1.6 million for the
three months ended September 30, 1998. For the nine month period ended September
30, 1999, research and development expenses increased 15% to $5.3 million from
$4.6 million for the nine month period ended September 30, 1998. Research and
development costs represented 19% and 36% of total revenues for the three months
ended September 30, 1999 and 1998, respectively and 22% and 40% for the nine
months ended September 30, 1999 and 1998 respectively. Sagent anticipates that
it will continue to invest significantly in product research and development for
the foreseeable future, and research and development expenses are likely to
increase in absolute dollars in future periods, although such expenses may vary
as a percentage of total revenues. In the development of Sagent's new products
and enhancements of existing products, the technological feasibility of the
software is not established until substantially all product development is
complete. Historically, Sagent's software development costs eligible for
capitalization have been insignificant, and all costs related to internal
research and development have been expensed as incurred.
General and administrative: General and administrative expenses decreased
24% to $1.1 million for the three months ended September 30, 1999 from $1.4
million for the same period in the prior year. During the nine month period
ended September 30, 1999, general and administrative expenses decreased 24% to
$3.0 million from $3.9 million for the same period in the previous year. The
decrease for the nine months was primarily attributable to lower reserve
requirements for bad debts as a result of improved credit and collection
processes and reduced expenses incurred for various professional services for
which Sagent's need declined as some of the capabilities were added internally
during the period. General and administrative expenses represented 11% and 31%
of total revenues for the three months ended September 30, 1999 and 1998,
respectively and 13% and 35% for the nine months ended September 30, 1999 and
1998, respectively. The decrease was due to the increase in total revenue and
reduced spending. Sagent believes that general and administrative expenses will
increase in the future in absolute dollars as a result of the continued
expansion of administrative staff and expenses associated with being a public
company, including public reporting expenses, investor relations programs and
professional services fees.
ACQUIRED IN PROCESS TECHNOLOGY
In connection with the February 1998 acquisition of Talus, Incorporated, a
privately held company with experience in the design and implementation of
Enterprise Intelligence applications, Sagent acquired certain in-process
technology. This technology under development consisted of analytical software
applications for manufacturing, food service and hospitality, and high
technology industries. After considering such factors as degree of completion,
technological uncertainties, costs incurred and projected costs to complete,
Sagent expensed $2.4 million of in-process technology in February 1998. No such
expense occurred in the first six months of 1999. Acquired in process technology
projects continue to progress consistent with management's original assumptions
used to value the acquired in-process technology.
<PAGE> 15
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTEREST INCOME
Net interest income consists of interest earned on invested cash less
interest expense related to borrowings. Net interest income increased $507,000
to $481,000 for the quarter ended June 30, 1999, from $26,000 net expense
in the quarter ended June 30, 1998. The increase is due to a greater amount
of cash available for investing as a result of the IPO and the pay off of
various capital lease obligations.
INCOME TAXES
Income taxes: As of December 31, 1998 Sagent had available net operating
loss carryforwards for federal and state income tax purposes of approximately
$21 million and $18 million, respectively, which expire from 2003 to 2018. The
Tax Reform Act of 1986 imposes limitations on the use of net operating loss
carryforwards if certain stock ownership changes have occurred or could occur in
the future. For the nine months ended September 30, 1999 a provision for
$181,000 was recorded for withholding taxes payable in connection with payments
from Sagent's customers in Japan.
OBLIGATIONS UNDER CAPITAL LEASES
During the nine months ended September 30, 1999 capital lease obligations
decreased by $2.2 million as a result of principal payments totaling $2.2
million made to pay off certain of the obligations and additional proceeds
totaling $4.4 million to acquire property and equipment. In addition, during the
quarter ended September 30, 1999 Sagent agreed to pay an additional $2.1 million
in principal payments during the quarter ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 Sagent had cash and cash equivalents totaling $42.0
million, an increase of $38.9 million from December 1998. Since inception,
Sagent has funded its operations primarily through the private sales of equity
securities, the use of equipment leases, bank line of credit, and the initial
public offering of common stock not from cash generated by operations.
Net cash used in operating activities was $6.9 million and $5.3 million in
the nine months ended September 30, 1999 and 1998 respectively, representing an
increase of 30%. The increase was primarily the result of prepayments for
certain services and fees for sub licensing software form third parties.
Sagent's investing activities, excluding capital expenditures for property
and equipment leases, consisted of purchases property and equipment totaling
$1.6 million and $1.2 million for the nine months ended September 30, 1999 and
1998, respectively. Sagent anticipates that it will experience an increase in
its capital expenditures. Investing activities associated with the acquisition
of Talus, Inc. on February 28, 1998 amounted to $2.7 million.
Sagent's financing activities provided $46.3 million and $13.1 million in
the nine month period ending September 30, 1999 and 1998, respectively, an
increase of $33.2 million or 253%. Sagent's financing activities have primarily
included the sales of its common and preferred stock and the use of its bank
credit lines. Net proceeds from the sale of common stock in its initial public
offering in April 1999 amounted to $47.2 million, and from the sale of preferred
stock in February 1998, totaled $10.5 million, net of issuance costs.
<PAGE> 16
Sagent Technology, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sagent currently anticipates that for the foreseeable future it will
continue to experience significant growth in its operating expenses related to
expansion of its distribution channels, improving operational and financial
systems, possibly acquiring or investing in complementary businesses, products
or technologies or investing in joint ventures. Such expenditures will be a
material use of our cash resources. Sagent believes that its sources of
liquidity as of September 30, 1999 together with the net proceeds from its
initial public offering, will be sufficient to meet its working capital and
anticipated capital expenditure requirements for at least the next 12 months.
Thereafter, Sagent may require additional funds to support its working capital
requirements or for other purposes, and may seek, even before such time, to
raise additional funds through public or private equity financing or from
strategic relationships, bank debt, financing under leasing arrangements, or
other sources. There can be no assurance that additional financing will be
available at all, or that if available, such financing will be obtainable on
terms acceptable to Sagent or that are not dilutive to its stockholders. If
adequate funds are not available or are not available on acceptable terms,
Sagent may be unable to develop or enhance its products, take advantage of
future opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on its business,
financial condition and operating results.
YEAR 2000 ISSUES
Sagent has completed its assessment of the potential overall impact of the
impending century change on Sagent's business, financial condition and operating
results. Based on Sagent's current assessment, Sagent believes the current
versions of its products are year 2000 ready, that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However
Sagent's products operate in complex network environments and directly or
indirectly interact with a number of other hardware and software systems that
Sagent cannot adequately evaluate for year 2000 compliance. Sagent may face
claims based on year 2000 problems in other companies' products or issues
arising for the integration of multiple products within an overall system.
Sagent has not been a part to any litigation or arbitration proceeding involving
Sagent's products or services related to year 2000 compliance issues.
Sagent has reviewed its internal management information and other critical
business systems to identify any year 2000 problems. Sagent also has
communicated with the external vendors that supply it with material software and
information systems and with significant suppliers to determine their year 2000
readiness. Based on Sagent's vendors' representations, Sagent believes that the
third-party hardware and software Sagent uses is year 2000 ready except for the
applications Sagent uses to track technical support request. The application
vendor is currently undertaking modification of this application for Sagent, and
Sagent estimates that the modification will be complete in the fourth quarter of
1999 and will cost approximately $20,000. Although Sagent does not believe that
the cost of such modifications will materially affect its operating results, if
Sagent is not able to modify the technical support application in a timely and
successful manner Sagent may not be able to process technical support reports
effectively, which may adversely affect Sagent's business. Sagent currently
anticipates conducting additional year 2000 testing in the second half of 1999
when it replaces servers in its internal network.
Sagent did not incur any material costs directly associated with year 2000
readiness in the first nine months of 1999. Sagent does not expect the total
cost of year 2000 problems to be material to its business, financial condition
and operating results. However during the months prior to the century change,
Sagent will continue to evaluate new version of its products, new software and
information systems provided by third parties and any new infrastructure systems
that Sagent acquires, to determine whether they are year 2000 ready. Despite
Sagent' current assessment Sagent may not identify and correct all significant
year 2000 problems on a timely basis. Year 2000 readiness efforts may involve
significant time and expense and unremediated problems could harm Sagent's
business, financial condition and operating results. Sagent currently has no
contingency plans to address the risks associated with unremediated year 2000
problems.
<PAGE> 17
Sagent Technology, Inc.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Factors Affecting Results of Operations
Our future operating results may not follow past trends due to many factors and
any of these could cause our stock price to fall
We may lose existing customers or be unable to attract new customers if we do
not develop new products
Changes in internet technology and operating system standards may impede market
acceptance for our products
The growth of our business depends on the growth of the market for Enterprise
Intelligence software
If our relationships with channel partners are not successful and if we cannot
recruit additional channel partners we may not be able to expand our sales
We need to expand our management systems and controls to support our anticipated
growth
We intend to expand international operations but we may encounter a number of
problems in doing so which could limit our future growth
Our markets are highly competitive and competition could harm our ability to
sell products and services and reduce our market share
Our operating results may vary significantly due to our lengthy sales and
implementation cycles for our products which could cause our stock price to fall
Our executive officers and key personnel are critical to our business and these
officers and key personnel may not remain with us in the future
Our acquisitions could be difficult to integrate, disrupt our business and
dilute stockholder value
Failure of commercial users to accept internet solutions could limit our future
growth
Our proprietary technology may be subjected to infringement claims or may be
infringed upon and Timeline, Inc., has filed an infringement suit against us.
If we lose key licenses we may be required to develop or license alternatives
which may cause delays or reductions in sales
If we discover software defects we may have product-related liabilities which
may lead to loss of revenue or delay in market acceptance for our products
Potential year 2000 problems with our products or internal systems may involve
significant time and expense and may reduce our future sales
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 22, 1999 Timeline, Inc. filed a complaint against Sagent in the
United States District Court for the Western District of Washington at Seattle.
Timeline alleges that the Sagent DMS product suite infringes one or more of the
claims of a Timeline patent. Timeline is seeking relief in the form of an
injunction, damages, punitive damages, attorney's fees, prejudgment and
postjudgment interest and costs. On April 19, 1999 Sagent filed its Answer
Denying Timeline's allegations. The case has been set for trial on July 10,
2000. Sagent believes it has meritorious defenses. Sagent is not currently a
party to any other legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since January 1, 1999 the Registrant has issued and sold unregistered
securities as follows:
(a) Between January 1, 1999 and September 30, 1999, an aggregate of 647,140
shares of Common Stock were issued to employees upon exercise of
options net of repurchases. . The net aggregate consideration received
for such shares was $2,658,591. Included in these exercises were
246,362 shares where the employees took out notes with Sagent for an
aggregate of approximately $1.9 million.
(b) Between January 1, 1999 and September 30, 1999 an aggregate of 22,000
shares were issued to holders of warrants. The aggregate consideration
received for such shares was $118,800.
Sagent's registration statement (Registration No. 333-71369) under the
Securities Act of 1933, as amended, for its initial public offering became
effective April 13, 1999. Sagent issued 5,750,000 shares of its common stock
(including 750,000 shares issued upon the exercise of the underwriter's over
allotment option) at an initial public offering price of $9.00 per share.
Offering proceeds net of aggregate expenses to the Registrant, were
approximately $47.2 million. The principal underwriters were Donaldson, Lufkin &
Jenrette, Hambrecht & Quist and U.S. Bancorp Piper Jaffray. The aggregate
underwriting fees were approximately $3.6 million. The Registrant expects to use
the net offering proceeds for general corporate purposes, including working
capital, capital expenditures and has subsequently repaid $3.4 million in
long-term debt. A portion of the proceeds may also be used to acquire licenses
or in vest in complementary businesses or products, although there are no
current plans, negotiations, or discussions relating to any such transactions.
In connection with the IPO warrants were exercised to purchase 110,308 shares of
common stock at prices ranging from $3.18 to $6.48 per share, resulting in
additional capital proceeds to the Company totaling $656,000. Concurrent with
the IPO, each outstanding share of the Company's redeemable convertible
preferred stock was automatically converted into one share of common stock and
remaining preferred stock warrants for 135,317 shares were automatically
converted into warrants for the purchase of 135,317 shares of common stock.
In connection with the acquisition of Sagent U.K., Ltd. on June 11, 1999,
Sagent issued 259,000 shares of Common Stock valued at $1.0 million.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
<PAGE> 19
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1
</TABLE>
(b) Reports on Form 8-K
None
<PAGE> 20
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.
SAGENT TECHNOLOGY, INC.
(Registrant)
November 12, 1999
/s/ VIRGINIA WALKER
-------------------
Virgina Walker
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,222
<SECURITIES> 36,795
<RECEIVABLES> 7,417
<ALLOWANCES> (508)
<INVENTORY> 0
<CURRENT-ASSETS> 53,652
<PP&E> 4,148
<DEPRECIATION> (1,724)
<TOTAL-ASSETS> 59,387
<CURRENT-LIABILITIES> 10,208
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 2,910
<TOTAL-LIABILITY-AND-EQUITY> 59,387
<SALES> 7,289
<TOTAL-REVENUES> 10,035
<CGS> 217
<TOTAL-COSTS> 1,526
<OTHER-EXPENSES> 8,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481
<INCOME-PRETAX> 722
<INCOME-TAX> 63
<INCOME-CONTINUING> 659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
