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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
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 No. 000-27803
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SCIQUEST.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 56-2127592
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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5151 McCrimmon Parkway, Suite 208
Morrisville, North Carolina 27560
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(Address of Principal Executive Offices) (Zip Code)
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(919) 659-2100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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common stock, par value $0.001 per share The NASDAQ National Market
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [_]
As of February 29, 2000, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $1,361,976,250.
There were, as of February 29, 2000, 26,464,525 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its annual
meeting of stockholders scheduled for May 24, 2000 are incorporated by
reference into Part III of this Report.
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PART I
Item 1. Business
Overview
SciQuest.com is a Web-based, interactive marketplace for scientific and
laboratory products used by pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations worldwide. We have used our extensive
industry expertise to design a marketplace that streamlines the traditionally
inefficient scientific products supply chain. Our marketplace solutions allow
buyers of scientific products to cross-search content and purchase products
from multiple suppliers with a single order. Our approach does not give
priority to any particular scientific products distributor, which allows us to
create an open and scalable marketplace that we believe is more attractive to
both buyers and sellers.
Our marketplace benefits three distinct customers: scientists, purchasing
professionals and suppliers. Our solutions reduce the time scientists require
to find, compare, purchase, track and manage critical laboratory items, thus
allowing them to spend more time on research and testing. Our solutions allow
purchasing professionals to reduce procurement costs by automating order
processing, consolidating purchase orders and payments, reducing errors and
providing more control and information to support enterprise purchasing
policies. Our solutions serve as a more efficient sales channel that enables
suppliers to expand their market reach and reduce customer acquisition and
order processing costs.
Since our founding in 1995, we have developed a comprehensive online
database of over 8,000 suppliers with over 650,000 scientific products. Our
online database is a tool used by scientists and purchasing professionals to
locate supplies and products. On September 29, 1998, we acquired BioSupplyNet,
Inc., which publishes the Source Book, an annual printed catalog of vendors of
biomedical research supplies and equipment and scientific products for the
biomedical research industry. In April 1999, we introduced our e-commerce
marketplace solution to this growing community of online scientific product
buyers and suppliers. In the last quarter of 1999 and first quarter of 2000,
we entered into agreements to be the exclusive third-party provider of
electronic marketplace services in the United States for a period of five
years for the following suppliers: Alltech Associates, Inc., Ambion, Inc.,
Amersham Pharmacia Biotech, Inc., BioWhittaker, a Cambrex Company, Endogen,
Inc., NEN Life Science Products, Inc., PerkinElmer, Inc., Pierce Chemical
Company, QIAGEN N.V. and Shimadzu Scientific Instruments, Inc. In that same
period, we also entered into strategic purchasing agreements with Dow Chemical
Company, DuPont Pharmaceuticals Company and Monsanto Company and a letter of
intent with Merck & Company, Inc. to be their third-party electronic
aggregator for purchases of scientific products in North America for a period
of three years.
The illustration below summarizes the procurement process through our online
marketplace:
[ILLUSTRATION OF ONLINE MARKETPLACE]
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Recent Events
In March 2000, we acquired EMAX Solution Partners, Inc., a provider of
electronic research solutions designed to optimize pharmaceutical drug research
operations and expedite drug discovery, for 1,999,833 shares of our common
stock, which includes 415,692 shares subject to outstanding options and
warrants. EMAX helps clients in life sciences gain a competitive advantage
through the application of information technology to speed the process of
scientific discovery that leads to drug development. EMAX's OPTIMA software for
the management of both proprietary and commercial research substances is
designed to enable faster drug development, while decreasing cost per
scientific discovery by helping research operations realize the potential of
high throughput drug discovery. OPTIMA provides applications for reagent and
substance inventory, tracking, requisitioning, receiving, stockroom management
and experiment management which are being used by leading pharmaceutical
research operations and their supply chain partners.
We intend to integrate EMAX's proprietary compound and experiment management
solution and inventory and tracking solutions with our comprehensive,
interactive business-to-business e-commerce marketplace to create a seamless
tool that research scientists can use to streamline the drug discovery process.
The solutions provided by EMAX furthers our goal of empowering the research
scientist to be as productive as possible by making many of the administrative
activities that all research scientists must perform, as efficient and cost-
effective as possible. The acquisition of EMAX enables us to provide electronic
and Internet-based solutions to streamline the drug discovery processes of our
customers, including large pharmaceutical, biotechnology and life science
companies, by integrating their supply chains with critical research processes.
On February 2, 2000, we acquired all of the outstanding capital stock of
SciCentral, Inc. for a total purchase price of $2.5 million, which included the
issuance of 40,000 shares of our common stock and the assumption of
approximately $32,000 in net liabilities. SciCentral, Inc. provides users with
a gateway to online science and technology resources, news and information.
On January 14, 2000, we acquired all of the outstanding capital stock of
Intralogix, Inc. for a total purchase price of $2.1 million, which included the
issuance of 26,930 shares of our common stock, $192,000 in cash and the
assumption of $73,000 in liabilities. Intralogix provides tools that enable
scientists to search, compare and purchase chromatography products for their
research needs.
The EMAX, SciCentral and Intralogix acquisitions were accounted for using the
purchase method of accounting. The SciCentral and Intralogix acquisitions were
not financially significant as they related to the purchase price or past
results of operations of the acquired entities and therefore pro forma
financial information has not been presented for these acquisitions.
Industry Background
The Scientific Products Market
Based upon data from the Laboratory Products Association, a trade association
for laboratory product businesses, and Strategic Directions International, an
international management consulting firm specializing in analytical
instruments, we estimate that the market for scientific products in 1999 was
approximately $11.8 billion in North America and $36.4 billion worldwide. These
expenditures are driven, to a large extent, by increases in scientific research
and development investments, which are expected to continue to grow. Every
year, approximately 200,000 laboratories around the world purchase scientific
products from thousands of different suppliers to facilitate research and
testing activities. As the demand for scientific products grows, the need for
efficient procurement processes becomes more critical.
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The current scientific products market is characterized by:
. complex, information-intensive products;
. a highly fragmented supply chain; and
. a heavy concentration of manual purchasing processes consisting of
printed catalogs, paper requisitions and telephone and fax orders.
There are, generally, three types of scientific products: (1) highly
technical specialty items used for specific research and testing applications,
(2) commodity products that are used in a broad range of scientific
applications, and (3) highly technical instruments and other capital equipment.
Suppliers typically sell specialty scientific products and instruments directly
to customers, whereas commodity products are typically sold through
distributors.
Limitations of the Traditional Supply Chain
The traditional supply chain in the scientific products industry does not
adequately address the needs of scientists, purchasing professionals or
suppliers.
Scientists. Because scientists are continually developing applications and
testing new theories, they are typically unable to forecast many of the
chemicals, supplies and equipment that they will need to conduct their research
and testing. For this reason scientists often:
. have immediate needs for critical items that are highly technical and
have exacting criteria;
. need new products that they have not purchased before; and
. must purchase these items from new and different suppliers.
As a result, it is difficult and time-consuming for scientists to identify,
compare and purchase the scientific products required to meet their needs using
the traditional approach. In fact, we estimate that a typical laboratory spends
up to four hours weekly searching through paper catalogs and product literature
and requesting technical data from various suppliers.
Purchasing Professionals. The product ordering process traditionally has been
a paper-based process that requires manual preparation of purchase orders and
order tracking. Traditionally, scientists requisition supplies through
purchasing professionals within their organizations, who place orders with
multiple suppliers by telephone, fax and e-mail. This multi-step manual process
is highly susceptible to errors. Additionally, the traditional process makes it
difficult for purchasing professionals to enforce purchasing policies among
scientists who specify and request products. Buying organizations in a variety
of industries that were surveyed by the Aberdeen Group, a computer and
communications research and consulting organization, reported that it typically
costs $107 per requisition for orders processed manually, compared with $30 on
average to process an order through an Internet automated procurement system.
Suppliers. Traditionally, suppliers have used two sales channels: traditional
distributors and direct sales. While traditional distributors can give a
supplier access to a broad market, distributors separate suppliers from the
ultimate customer and may lack the ability to provide the technical assistance
required to sell specialty scientific products and instruments. As a result,
traditional distributors normally focus on selling commodity products.
Conversely, direct sales provide suppliers with greater control and contact
with their customers, enabling them to provide the technical assistance
necessary for the sale of specialty scientific products. However, direct sales
are often expensive and inefficient. Many suppliers have Web sites that are
essentially online versions of their catalogs, but these sites do not address
the primary cause of inefficiency for buyers--the inability to find products
and consolidate orders from different suppliers quickly and easily through a
single service.
The Online Market Opportunity
The limitations of the traditional scientific products supply chain and the
significant information needs of scientists make the scientific products market
well-suited to an automated e-commerce solution. Moreover, the
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scientific community is already accustomed to using the Internet. According to
a recent study by BioInformatics, Inc., 80% of the 680 scientists surveyed had
ordered a consumer product or service through the Internet and approximately
38% of them had purchased life science products over the Internet. We believe
this indicates that scientists will be comfortable adopting e-commerce
solutions for purchases of scientific products. The following percentage of
scientists responding to the study rated e-commerce superior to traditional
purchasing in each of the following areas:
. 82% of the 650 respondents rated e-commerce superior in reducing
administrative costs;
. 73% of the 656 respondents rated e-commerce superior in speed of
delivery to end users; and
. 70% of the 663 respondents rated e-commerce superior in fast, accurate
ordering.
Source: BioInformatics, Inc., telephone: 301-961-1985. BioInformatics, Inc.
is a market research and consulting firm, specializing in supporting marketing
and sales executives in the life science, medical device and pharmaceutical
industries.
For these reasons, we believe that the scientific products market will be an
early adopter of e-commerce solutions and that we are well positioned to take
advantage of this market opportunity.
The SciQuest.com Marketplace Solution
The SciQuest.com marketplace solution provides comprehensive public Web
sites and customized private sites that address the current limitations of the
scientific products supply chain by streamlining the process of buying and
selling of scientific products and reducing associated transaction costs. Our
distributor-neutral approach allows us to create an open and scalable
marketplace that we believe is more attractive to both buyers and suppliers.
Our solutions serve three primary and distinct customers:
Scientists. Our solutions offer scientists online tools to streamline the
process of finding, comparing, purchasing, tracking and managing laboratory
supplies. By reducing the time scientists spend on these functions, our
solutions allow them to be more productive and spend more time on research and
testing. Our solutions enable a scientist to:
. search our extensive database, using our industry-leading taxonomies, to
compare products, attributes and technical data across multiple
suppliers;
. locate a specific chemical, equipment or supply item; and
. consolidate, purchase and track orders from multiple suppliers through
the convenience of a single Web site, 24 hours a day, seven days a week.
Purchasing Professionals. Our solutions allow purchasing professionals to
automate order processing, consolidate purchase orders and payments and obtain
purchasing information. This provides purchasing professionals with greater
access to purchasing information to better monitor and control purchasing
patterns and to implement and enforce uniform purchasing policies that reduce
procurement costs. Our solutions enable purchasing professionals to:
. consolidate purchases from multiple suppliers onto one order;
. streamline the purchasing process and reduce the likelihood of errors;
. communicate and control purchasing policies and rules; and
. access detailed purchasing information and reports.
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In addition, our solutions are designed to be compatible with leading
enterprise software systems and do not require organizations to install
additional enterprise software systems. This compatibility allows organizations
to avoid the expense, time and training typically required to install and
support new enterprise software.
Suppliers. Our solutions offer suppliers a more efficient sales channel that
cost-effectively provides many of the benefits of direct sales and
distribution. As a result, by participating in our marketplace suppliers can
expand their market reach and reduce customer acquisition and order processing
costs. Our solutions enable suppliers to:
. market and sell products more cost-effectively through access to our
global audience of scientists and purchasing professionals;
. access valuable market and customer data;
. leverage our e-commerce functionality without capital investment;
. easily update product information;
. introduce new products to qualified buyers quickly and economically; and
. maintain contact with their customers.
Strategy
Our objective is to be the leading global solution for buying and selling
scientific products. We intend to achieve this objective through the following
strategies:
Leverage Our Brand Equity and Enhance Customer Loyalty. We intend to leverage
our strong brand identity to continue to grow our base of qualified scientific
buyers and participating suppliers. We will continue to invest heavily in the
SciQuest.com brand as well as in the delivery of a high level of customer
service. We believe that our strong brand identity coupled with superior
customer service will allow us to enhance customer loyalty and facilitate
repeat purchases by our customers.
Maintain Distributor Neutrality. We intend to maintain our distributor
neutral position to better serve our users and maximize our market opportunity.
We believe that our distributor neutral approach has and will continue to allow
us to provide our users access to broad and unbiased product information. We
believe that this will maximize the attractiveness of our marketplace to all
customer and supplier segments.
Deepen Our Customer Relationships. We intend to continue to broaden our
scientific product and service offerings that provide a comprehensive and
efficient solution to the various supply chain and research needs of the
scientific community. We believe that the continued extension of our products
and services will enhance loyalty and accelerate adoption by scientists. We
intend to develop these additional services and functionalities internally as
well as explore acquisitions of complementary service offerings. For example,
our acquisition of EMAX will enable us to integrate our interactive marketplace
with the chemical and reagent management software e-solutions that EMAX has
developed and that research scientists and many large pharmaceutical and
biotechnology companies use every day to streamline the drug discovery process.
Leverage Our Strategic Relationships with Suppliers. We intend to leverage
our strategic relationships with key suppliers to continue to grow our base of
scientific buyers in North America and internationally. These relationships
allow us to provide thousands of significant non-commodity laboratory products
and services to our customers, which we expect will significantly contribute to
the growth and loyalty of our customer base relationships. At the time of our
initial public offering, we entered into strategic relationship agreements with
eight key suppliers: Ambion, Inc., Amersham Pharmacia Biotech, Inc.,
BioWhittaker, a Cambrex Company, Endogen, Inc., NEN Life Science Products,
Inc., PerkinElmer, Inc., Pierce Chemical Company and QIAGEN N.V. Since our
initial public offering, we have added Alltech Associates, Inc. and Shimadzu
Scientific
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Instruments, Inc. to our list of strategic supplier relationships, and we
intend to continue to enter into similar agreements with additional key
suppliers. These strategic suppliers benefit from our growing base of large
buyers of scientific products, from our value added e-commerce service, from
our distributor neutral position, from our strong brand, and from the
efficiency that results from having only one provider of electronic marketplace
services.
Expand Internationally. We believe that the global reach of the Internet and
worldwide demand for scientific products presents a significant opportunity for
us to expand internationally. Our Web sites have to date been accessed by
buyers located in over 60 countries. As we continue to expand our product
offerings, we believe that we will attract a larger base of users globally. We
intend to leverage our strategic partnerships with key suppliers and buyers in
order to accelerate our international expansion since a significant number of
our partners already conduct business on a global scale. In addition, we intend
to invest resources and capital to expand our sales and marketing efforts
internationally in order to better address the needs of our customers
worldwide.
Leverage Our Existing E-Commerce Infrastructure. We intend to leverage our e-
commerce infrastructure to expand our marketplace services beyond the
scientific products market. For example, we intend to provide services and
products that streamline our current customers' research and development
processes such as effective procurement and management of proprietary chemicals
and substances. We also intend to apply our acquired business-to-business
knowledge, market making capabilities, and e-infrastructure across new market
segments where there are synergies with our existing customer and supplier
base. For example, we intend to expand our Internet based solutions to
streamline the processes of buying and selling all scientific and other
products and services used by science intensive companies, to create new
comprehensive e-commerce "exchanges" for each vertical customer segment.
Products and Services
SciQuest.com is a Web-based marketplace that serves the needs of scientists
and purchasing professionals by providing an easy to use comprehensive
portfolio of solutions. Leveraging our existing customer base and extensive
industry knowledge, we have built a market-driven portfolio of services. In
addition to our primary offering, an e-commerce marketplace for public and
private buyers, we offer customers extensive online products and services,
including a comprehensive sourcing guide, used equipment auctions, discounted
products and other resources. In addition to these Web-based services, we
publish and distribute a printed Source Book. Our services enable buyers and
suppliers to efficiently gather and update product information, conduct
transactions and facilitate post-order activities. Set forth below is a
detailed description of our products and services. We believe this
comprehensive service offering provides our customers with a unique online
marketplace for scientific products.
SciQuest.com Marketplace Solutions
A primary component of the SciQuest.com marketplace solution is our
electronic purchasing service that allows users to buy chemicals, supplies, lab
equipment and other scientific products from our growing database of over 430
suppliers. Buyers are able to search our proprietary life science taxonomy, a
hierarchical classification structure for organizing product content, developed
by Cold Spring Harbor Laboratory and our analytical and basic laboratory supply
taxonomy developed by Cahners Business Information. Buyers can also search
across multiple suppliers' products simultaneously, compare product attributes,
order products from multiple suppliers on one consolidated order form, track
order status, receive one invoice and have a single point of contact for
customer service. Buyers can also track order history and create a customized
list of frequently purchased products for easy repurchase.
Once a buyer submits an order to us, our customer care professionals oversee
the order fulfillment process. We purchase the items from suppliers at either a
pre-negotiated price or at a discount from the suppliers' list price and
arrange for shipment from the suppliers directly to the purchaser. We do not
physically take possession of the products. After the suppliers ship the items,
we present to the buyer a consolidated invoice for the products purchased.
Buyers then pay us by credit card/procurement card or through a more
traditional account setup and payment system.
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For customers requiring specific customization, such as pre-negotiated
pricing discounts from preferred suppliers or more advanced integration with
enterprise systems, we offer customized versions of our marketplace that allow
scientists in leading pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations to access enterprise-specific pricing
while also facilitating internal approval, workflow routing and financial
system integration.
Sourcing Guide
In addition to our e-commerce offerings, our proprietary, Web-based Sourcing
Guide provides a broad database of product information from more than 8,000
suppliers and service providers. Given the large number of industry
suppliers and fragmented nature of the scientific products market, having a
comprehensive database of suppliers and products is an important value-added
service for our customers. If a potential buyer is unable to purchase the
desired products through our e-commerce solutions, our Sourcing Guide provides
a means of identifying an alternative source for that product. We believe this
unique service engenders loyalty, repeat usage and customer satisfaction
relative to competitive offerings.
SciQuest.com Auctions
Our Web-based Auctions service enables customers to buy and sell used and
refurbished capital equipment and instrumentation through online auctions.
Auctions allows suppliers and laboratories to easily sell used equipment while
maximizing its value through the auction process. Auctions provides buyers an
economically attractive alternative to buying new products.
SciQuest.com LabDeals
Our Web-based LabDeals service is devoted to the sale of surplus scientific
products at discount prices. LabDeals provides suppliers with an additional
sales outlet for slow moving, obsolete or excess inventory. LabDeals provides
buyers access to an inventory of surplus scientific products at prices
discounted below manufacturers' suggested list price.
SciQuest.com Resources
Our Resources area offers a broad range of information and reference
materials for laboratory scientists. For instance, molecular biologists can
access our proprietary BioToolKit, one of the most comprehensive annotated
listings of databases related to molecular biology research currently available
on the Web. Our Ask Joe service helps customers locate hard-to-find items by
putting them in touch with our staff scientists. Our SciMail allows buyers to
simultaneously broadcast requests for technical data, product information and
price quotations to multiple suppliers. We intend to further expand our
Resources area to offer a broader array of information and reference materials
for laboratory scientists.
Source Book
In addition to our Web-based products and services, we also offer the Source
Book, the dominant print product directory for life scientists. The Source Book
utilizes the product taxonomy, a hierarchical classification structure for
organizing product content, developed by Cold Spring Harbor Laboratory and
contains product listings from more than 1,400 suppliers. In 2000, we expect
70,000 copies of the Source Book to be distributed to scientists in
pharmaceutical, clinical, biotechnology, chemical, industrial and educational
organizations. Its corresponding Web site, www.biosupplynet.com, which went
online in 1995, was the first Web-based product directory for the biomedical
research community. The Source Book helps accelerate buyer adoption of our Web-
based purchasing solutions.
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Sales & Marketing
We market and sell our portfolio of solutions through direct sales,
traditional and Internet marketing initiatives and co-marketing relationships.
Our primary audiences in the pharmaceutical, clinical, biotechnology,
chemical, industrial and educational markets are laboratory scientists, who
drive the decision-making process, and purchasing professionals, who drive the
procurement process.
Our experienced sales force concentrates on selling our enterprise
compatible solutions to larger purchasing organizations. We also sell our
purchasing solutions to medium-sized and smaller buyers. In addition, our
sales team assists suppliers in offering their products through our e-commerce
solutions. Our sales professionals average over 17 years of scientific
products industry experience. By leveraging their experience, we expect to
continue to attract and retain scientists, purchasing professionals and
suppliers, thereby growing our installed customer base and increasing repeat
purchases.
We leverage a variety of marketing channels to build our brand equity as
well as promote our solutions to both buyers and suppliers. These channels
include direct marketing, print and online advertising, trade shows and
seminars. We intend to use public relations group to communicate new product
and service offerings and other enhancements to industry analysts and targeted
scientific and business press on a regular basis through a combination of
press releases, phone briefings, in-person meetings and trade show
appointments.
As of December 31, 1999, we had 51 people in our sales and marketing group.
Strategic Relationships
We believe that a key element to the successful implementation of our
business strategy is to establish strategic relationships with prominent
buyers and suppliers of scientific products. We believe these relationships
will assist us in accelerating our aggregation of content, increasing the
transaction volume on the SciQuest marketplace, achieving further brand
awareness and building a critical mass of important core customers.
Strategic Relationships--Purchasing
We have entered into agreements with Dow Chemical Company, DuPont
Pharmaceuticals Company and Monsanto Company and a letter of intent with Merck
& Company, Inc. to establish purchasing relationships. Pursuant to these
agreements, we will be the exclusive third-party electronic aggregator for
purchases of scientific products in North America for Dow Chemical Company,
DuPont Pharmaceuticals Company and Merck & Company, Inc. and an approved
third-party electronic aggregator for purchases of scientific products in
North America for Monsanto Company. As an exclusive third-party electronic
aggregator, we will be the sole electronic means by which Dow Chemical
Company, DuPont Pharmaceuticals Company and Merck & Company, Inc. purchase
scientific products that are not sold primarily through traditional
distributors. As a third-party electronic aggregator, we will be an electronic
means by which Monsanto may purchase scientific products that are not sold
primarily through traditional distributors. Each of these agreements provides
that:
. the purchaser will use its reasonable efforts to purchase at least $5.0
million of scientific products annually through our marketplace but
otherwise there are no minimum purchase commitments;
. the purchaser will participate in case studies of our marketplace and
otherwise promote our marketplace within the scientific products
industry; and
. we will be the exclusive third-party electronic channel for marketing
and selling its used, refurbished and surplus scientific equipment.
In connection with these relationships, we have issued warrants to purchase
an aggregate of 328,914 shares of our common stock at an exercise price of
$0.01 per share. These warrants vest in equal annual installments over three
years. In addition, we have agreed to issue to each of these purchasers
additional incentive warrants, the number of which will be based on that
purchaser's volume of purchases through the SciQuest.com
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marketplace during the years 2000, 2001 and 2002. These incentive warrants will
be issued on February 15, 2001, 2002 and 2003, at an exercise price of $16.00,
and will be exercisable upon issuance for a period of five years.
In addition, we have sent non-binding term sheets to several buyers to be
their third-party provider of electronic marketplace services. We have issued
warrants to purchase 185,000 shares in connection with these term sheets. The
warrants issued to any buyer will terminate as of March 31, 2000 unless a
definitive agreement incorporating the provisions of the term sheet is entered
into by that date. We cannot assure you that we will enter into definitive
agreements with any of these buyers.
Strategic Relationships--Suppliers
We have entered into agreements to be the exclusive third-party provider of
electronic marketplace services in the United States for a period of five years
for the following suppliers of scientific products:
. Alltech Associates, Inc.;
. Ambion, Inc.;
. Amersham Pharmacia Biotech, Inc.;
. BioWhittaker, a Cambrex Company;
. Endogen, Inc.;
. NEN Life Science Products, Inc.;
. PerkinElmer, Inc.;
. Pierce Chemical Company;
. QIAGEN N.V.; and
. Shimadzu Scientific Instruments, Inc.
These agreements provide that:
. we will be the exclusive third-party provider of electronic marketplace
services in the United States for a period of five years;
. the suppliers will promote our marketplace, including participating in
co-marketing and advertising programs;
. these suppliers will have the opportunity to elect four of the seven
members of our Board of Governors, which will consist of various members
of the scientific products industry and will serve as an advisory board
for our management by providing suggestions and feedback and reviewing
potential new services;
. these suppliers will utilize our marketplace for their purchases of
scientific products;
. these suppliers may terminate the exclusive nature of the agreement
after 18 months, subject to forfeiture of outstanding warrants; and
. these agreements may be terminated by either party for material breach
or upon the occurrence of bankruptcy or similar events.
In connection with these agreements, we have issued warrants to purchase up
to an aggregate of 3,770,266 shares of our common stock at an exercise price of
$0.01 per share. These warrants generally vest in equal installments over four
or five years. A supplier's warrants will terminate automatically if that
supplier terminates the exclusive nature of our relationship or otherwise
terminates the agreement.
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We believe that these exclusive supplier relationships will provide us with a
competitive advantage by assisting us in accelerating our aggregation of
product content and providing potential buyers with a broader range of
products.
In addition, we have sent non-binding term sheets to approximately 20
suppliers to be their third-party provider of electronic marketplace services.
We have issued warrants to purchase 751,000 shares in connection with these
term sheets. The warrants issued to a supplier will terminate as of March 31,
2000 unless a definitive agreement incorporating the provisions of the term
sheet is entered into by that date. We cannot assure you that we will enter
into definitive agreements with any of these suppliers.
Co-Marketing Relationships
We have entered into co-marketing agreements with several leading Web-based
scientific communities, such as ChemWeb and BioMedNet. Through the
relationships with ChemWeb and BioMedNet, we gain access to their over 725,000
members. Under these agreements, ChemWeb and BioMedNet maintain on their sites
a hyperlink to a co-branded page from which their members can link directly to
our e-commerce marketplace, or to the BioSupplyNet search directory. Under the
agreements with ChemWeb and BioMedNet, we have agreed to pay usage fees for
each month in which a minimum number of members accesses the co-branded page,
plus a per search charge. ChemWeb and BioMedNet have also agreed to collaborate
with us on certain co-marketing activities and to share certain demographic
information. Both agreements terminate on December 31, 2000.
We also have entered into a Joint Marketing and Cooperation Agreement with
Cold Spring Harbor Laboratory that gives us access to its global audience of
laboratory manual buyers. Under the terms of this agreement, Cold Spring Harbor
Laboratory has agreed to provide marketing support for BioSupplyNet and the
Source Book until September 29, 2003, including distribution of the Source Book
and promotional materials, publication of advertisements in its publications
and the publications of the Cold Spring Harbor Press, creation of links from
its sites, and access to the Cold Spring Harbor Press customer mailing lists.
The Cold Spring Harbor Laboratory Press publishes the leading laboratory
techniques manuals in the life science community. The Source Book is referenced
in the manuals as being the source to turn to when one needs to find suppliers
for needed products. In addition, the Source Book is distributed with every
laboratory manual sold in the United States and at all of the Cold Spring
Harbor Laboratory scientific meetings and courses throughout the year.
In March 1999, we entered into a Collaboration Agreement with Cahners
Business Information, a division of Reed Elsevier, under which we are able to
offer timely new product information to our users for products listed on the
Cahners sites by linking to the new product information contained on certain
Cahners' Web sites. The agreement also provides for the creation of links
between our Web sites and Cahners' Web sites that contain product directories.
Through our relationship with Cahners, we can offer our customers access to
Cahners' analytical and basic laboratory supply taxonomy. Under the agreement,
we have agreed to pay referral fees for all product sales by customers referred
to us from or through Cahners when the aggregate sales exceed a specified
minimum amount in any twelve month period. The agreement also appoints Cahners
as our exclusive sales representative for online advertisements on our public
Web sites and gives us the right to place online or print advertisements on
Cahners' Web sites and in Cahners' publications. The agreement has a two-year
term and is automatically renewed thereafter. Either party may terminate the
agreement upon a material breach by the other party or in the event of
bankruptcy or similar events, or upon 90 days' notice or anytime after August
1, 1999. Under a second agreement with Cahners entered into in August 1999,
Cahners was appointed as our exclusive sales representative for advertisements
for the Source Book for a period of one year. The agreement automatically
renews for one year periods thereafter. The agreement is terminable by us for
breach, by Cahners upon bankruptcy or similar events, at any time by mutual
agreement or by either of us upon 90 days' notice.
Technology
We have integrated a broad array of specialized site management, search and
buyer interaction technologies, content management applications and transaction
processes and fulfillment services. We are using our own proprietary programs
and, where appropriate, commercially available, licensed technologies.
10
<PAGE>
We have developed our e-commerce solutions utilizing development
methodologies and tools that enable rapid development and deployment of
customized versions of our public marketplace. We believe this will allow us to
quickly deliver customer specific solutions while minimizing development time
and costs. Our database is designed to be scalable to accommodate the expected
growth in the number of products offered. We also convert and maintain the
product data provided by suppliers for inclusion in our database.
We own all of our front-office and back-office production servers and Web
site hardware. Our Web sites run off multiple redundant product application
servers. Our production servers are located at a third-party network operating
center located in Durham, North Carolina, which provides 24-hour systems
support, as well as connectivity to all major Internet bandwidth via redundant
high speed T-3 connections. The server and network architecture is designed to
provide high speed and reliability for the operation of our Web sites and all
our communications.
As of December 31, 1999, we had 75 people in our development and data
management groups. Development expenses were $140,000 in 1997, $1.2 million in
1998 and $9.0 million in 1999. We intend to continue to invest significantly in
enhancing our technology.
Intellectual Property
We rely on a combination of trade secret, copyright and trademark laws,
license agreements, nondisclosure and other contractual provisions and
technical measures to protect our proprietary rights in our products,
technology and processes. We pursue the registration of our trademarks in the
United States and internationally, however, we may not be able to secure
adequate protection for our trademarks in the United States and other
countries. We have applied for registration of the marks SCIQUEST.COM,
LABDEALS.COM and the SciQuest.com logo in the United States and for SCIQUEST in
the European Union. SCIQUEST, SCIMAIL and BIOSUPPLYNET are our registered
trademarks in the United States. Our software technology is not patented and
existing copyright laws offer only limited practical protection. We cannot
guarantee that the legal protections on which we rely will be adequate to
prevent misappropriation of our technology. Moreover, these protections do not
prevent independent third-party development of competitive products or
services. Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries do not protect intellectual
property to the same extent as do the laws of the United States. We believe our
products, trademarks and other proprietary rights do not infringe upon the
proprietary rights of third parties. However, we cannot provide any guarantees
about the third-party products sold on our Web sites or that third parties will
not assert infringement claims against us in the future or that any such
assertion will not require us to enter into a license agreement or royalty
agreement with the party asserting a claim. If the products sold on our Web
sites infringe the proprietary rights of third parties, we may be deemed to
infringe those rights by selling such products. Even the successful defense of
an infringement claim could result in substantial costs and diversion of our
management's efforts.
We also license, and will continue to license, certain content for our online
services from third parties. Additionally, we intend to license a significant
portion of our transaction fulfillment system from third parties. These
licenses may not be available to us on favorable terms in the future. In
addition, we must be able to successfully integrate this content in a timely
and cost-effective manner to create an effective finished product. If we fail
to obtain necessary content on favorable terms, are unable to successfully
integrate this content or if we are unable to continue to license our order
fulfillment transaction systems on favorable terms, it could have a material
adverse effect on our business operations.
Competition
The online scientific products market is new, rapidly evolving and intensely
competitive. Our primary competition includes the following:
E-Commerce Providers. A number of e-commerce providers have established
online marketplaces and are attempting to build an online e-commerce brand in
the scientific products market. These competitors include businesses such as
Chemdex Corporation, a subsidiary of Ventro Corporation.
11
<PAGE>
Online Scientific Communities. There are a number of Web sites that have
created e-communities to serve the information needs of the scientists.
Traditionally, these communities have provided a means of retrieving
scientific information as well as providing discussion groups, bulletin boards
and directories. Increasingly, these communities include an e-commerce
function that may compete with our product offerings. These communities are
operated by companies such as VerticalNet.
Suppliers' E-Commerce Initiatives. Many suppliers have developed their own
e-commerce enabled Web sites. As the online market for scientific products and
services grows, we expect that these and other scientific suppliers will
further develop their own online services.
We believe that companies in this market compete based on:
. brand recognition;
. number and quality of product offerings;
. price;
. ease of use; and
. customer service and fulfillment capabilities.
Competition is likely to intensify as this market matures. As competitive
conditions intensify, competitors may:
. enter into strategic or commercial relationships with larger, more
established and well-financed companies;
. secure services and products from suppliers on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
. secure exclusive arrangements with buyers that impede our sales; and
. devote substantially more resources to Web site and systems development.
Our current and potential competitors' Web sites may achieve greater market
acceptance than ours. Many of our existing and potential competitors,
including large traditional distributors, have longer operating histories in
the scientific products market, greater name recognition, larger customer
bases and greater financial, technical and market resources than we do.
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased competition, we may
experience reduced operating margins, as well as loss of market share and
brand recognition. We cannot be certain that we will be able to compete
successfully against current and future competitors and competition could have
a material adverse effect on our revenue growth and earnings.
Government Regulations
We are subject to various laws and regulations relating to our business,
which include numerous laws and regulations generally applicable to the
chemical, pharmaceutical, controlled substances, human and biological
reagents, and nuclear chemical businesses, and environmental spills. Although
we take legal title to the products offered through our marketplace, we do not
take physical possession of a shipment during any part of the transaction.
Legal title generally passes to the buyer at the time of product shipment. As
a result, we have historically relied, and will in the future rely to a
substantial degree, upon our suppliers to meet all packaging, distribution,
labeling, hazard and healthy information notices to purchasers, record keeping
and licensing requirements applicable to transactions conducted through our
system. In addition, we rely upon our carriers to comply with regulations
regarding the shipment of hazardous materials sold through our system. At
times, we may be unable to verify the accuracy of our suppliers' regulatory
staff determinations and regulatory compliance. We could be fined or exposed
to civil or criminal liability, including monetary fines and injunctions, if
the applicable governmental regulatory requirements are not fully met by our
suppliers, carriers or by us directly.
12
<PAGE>
Due to the increasing popularity and use of the Internet, it is possible that
a number of laws and regulations may be adopted or interpreted in the United
States and abroad with particular applicability to the Internet. It is also
possible that new laws and regulations may be adopted or interpreted by the
United States and foreign governments, to address the sale and distribution of
scientific research products utilizing the Internet. In addition, it is
possible that governments may enact legislation that may be applicable to us in
areas such as content, product distribution, network security, encryption and
the use of key escrow, data and privacy protection, electronic authentication
or "digital" signatures, illegal and harmful content, access charges and re-
transmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation, personal privacy, product liability and environmental protection,
as well as the necessity for governmental permits, labeling, certifications and
the need to supply information to relevant parties, is uncertain. Most of these
laws were adopted before the widespread use and commercialization of the
Internet and, as a result, do not contemplate or address the unique issues of
the Internet and related technologies. Any export or import restrictions, new
legislation or regulation or governmental enforcement of existing regulations
may limit the growth of the Internet, increase our cost of doing business or
increase our legal exposure. Any of these factors could have a negative effect
on our business, revenues, results of operations and financial condition.
We collect sales taxes in the jurisdictions where we are required to do so.
Our failure to properly collect and pay such taxes in all of such jurisdictions
could subject us to penalties that could adversely affect our earnings. Even if
we do collect taxes properly for each of the jurisdictions required, the
collection and payment of such taxes causes us to incur significant
administrative effort and expense.
Employees
As of December 31, 1999, we had 198 full-time employees. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
Directors and Executive Officers
Our directors and executive officers and their ages as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
M. Scott Andrews........ 34 President, Chief Executive Officer and Director
Peyton C. Anderson...... 33 Vice President of Business Development and Director
Lyle A. Brecht.......... 52 Chief Business Development Officer
Antony Francis.......... 49 Vice President of Operations
Robert M. Fusillo....... 33 Chief Information Officer
Cecil Kost.............. 46 Executive Vice President
James J. Scheuer........ 53 Chief Financial Officer
Bruce J. Boehm.......... 45 Director
Noel J. Fenton.......... 61 Director
Gautam A. Prakash....... 30 Director
Alan J. Taetle.......... 36 Director
Timothy T. Weglicki..... 48 Director
</TABLE>
M. Scott Andrews co-founded SciQuest.com in November 1995 and serves as our
Chief Executive Officer and as a director. From November 1995 to January 2000,
Mr. Andrews also served as our President. From October 1991 to January 1996,
Mr. Andrews was a sales professional for Baxter Healthcare Corporation, a
scientific products company, which was acquired by VWR Scientific Products
Corporation. From May 1987 to October 1991, Mr. Andrews served in the U.S. Army
as an aviation officer. Mr. Andrews received an M.B.A. from the University of
North Carolina at Chapel Hill and a B.S. in business management from the United
States Military Academy at West Point. Mr. Andrews currently serves as a
director of the North Carolina BioScience Fund.
13
<PAGE>
Peyton C. Anderson co-founded SciQuest.com in November 1995 and serves as our
Vice President of Business Development and as a director. From August 1989 to
January 1996, Mr. Anderson was a sales manager for Butler Manufacturing
Company, a metal buildings company. Mr. Anderson is a director of the Council
for Entrepreneurial Development, a mentoring organization for the North
Carolina entrepreneurial community. Mr. Anderson received an M.B.A. from the
University of North Carolina at Chapel Hill and a B.A. from the University of
Richmond, Phi Beta Kappa.
Lyle A. Brecht has served as Chief Business Development Officer since August
1999, Vice President of Data Services from December 1998 to August 1999 and
Executive Vice President from October 1998 to December 1998. From October 1996
to December 1998, Mr. Brecht served as President and Chief Operating Officer
and was co-founder of BioSupplyNet, Inc., a life science resource company that
was acquired by SciQuest.com in September 1998. From March 1996 to October
1996, Mr. Brecht served as a consultant for Harris & Harris Group, PC, business
development investment firm. From October 1994 to January 1995, Mr. Brecht
served as President of Applied Research and Technology, Inc., an Internet
commerce company. From July 1991 to December 1994, Mr. Brecht served as
President of Blue Heron Group, Inc., a publishing and data analysis company.
Mr. Brecht received an M.B.A. from Harvard University, and an M.S. in applied
ecology and a B.A. in psychology and mathematics from the University of
Minnesota.
Antony Francis has served as our Vice President of Operations since February
1999. From June 1994 to January 1999, Mr. Francis served as Vice
President/General Manager of the Logistics, and Customer Services Division for
the Federal Express Corporation at the European, Middle Eastern and African
headquarters. While at Federal Express, Mr. Francis also worked as managing
director of Financial Controls and Reporting and as managing director and
regional controller for the European headquarters from September, 1988 to June,
1994. Mr. Francis also served as Finance and Administration Director for
subsidiaries of the Guinness Group and Elf Aquitaine from 1979 to 1988, after
ten years with Ernst & Young. Mr. Francis is a chartered public accountant
(England and Wales certified) and a Fellow of the Institute of Transport &
Logistics (UK).
Robert M. Fusillo has served as our Chief Information Officer since November
1998. From September 1990 to October 1998, Mr. Fusillo served as Director of
Applications Development in the Information Systems Division of Wal-Mart
Stores, Inc. Prior to his employment with Wal-Mart, Mr. Fusillo was a senior
programmer for the Carrier Access Billing System at Nynex, a telecommunications
service company. Mr. Fusillo received a B.S. in computer science from State
University of New York at Buffalo.
Cecil Kost has served as our Executive Vice President since September 1999.
From March 1996 to December 1998, Mr. Kost served as President and Chief
Operating Officer of Oncor, Inc., a biotechnology company. From June 1976 to
October 1995, Mr. Kost served as Senior Vice President of Curtin Matheson
Scientific, a distributor of scientific products where he was responsible for
their industrial, clinical and international business sectors and clinical
diagnostic manufacturing operations. Mr. Kost is a former Chairman of the
Laboratory Products Association, a trade association of businesses serving
industrial and research laboratories. Mr. Kost received a B.S. in biology from
Tulane University.
James J. Scheuer has served as our Chief Financial Officer since September
1998. From March 1996 to March 1998, Mr. Scheuer served as Chief Operating
Officer and later Chief Financial Officer for Boise Marketing Services, Inc., a
subsidiary of Boise Cascade Office Products Corporation, and its predecessor.
From December 1989 to March 1996, Mr. Scheuer served as Senior Vice President--
Group Executive/Chief Financial Officer of Hickory Farms, Inc., and the
President of Canadian Hickory Farms, Ltd. From 1970 to 1989, Mr. Scheuer was
employed by Deloitte Haskins & Sells and was the partner in charge of its
Jacksonville, Florida office from 1985 to 1989. Mr. Scheuer is a certified
public accountant and received his B.A. in business administration from the
University of Wisconsin--Oshkosh.
Bruce J. Boehm has served as a director of SciQuest.com since October 1997.
Mr. Boehm has been active as an originator of and investor in early stage
technology companies since 1992. Mr. Boehm holds M.B.A. and M.S. degrees from
Stanford University and a B.S. from the Massachusetts Institute of Technology.
14
<PAGE>
Noel J. Fenton has served as a director of SciQuest.com since November 1998.
Mr. Fenton has been a Managing General Partner of Trinity Ventures since 1986.
From 1964 to 1986, he was a co-founder of three venture capital backed start-up
companies, for two of which, Acurex Corporation and Covalent Systems
Corporation, he served as CEO. Mr. Fenton received an M.B.A. from Stanford
University and a B.S. from Cornell University.
Gautam A. Prakash has served as a director of SciQuest.com since October
1998. Mr. Prakash is a partner with Bessemer Venture Partners, which he joined
in 1993. He is a director of a number of privately held electronic commerce and
healthcare companies. Prior to joining Bessemer, Mr. Prakash worked for
McKinsey & Co. Mr. Prakash graduated from Yale University with a B.S. in
molecular biophysics and biochemistry and a B.A. in economics.
Alan J. Taetle has served as a director of SciQuest.com since August 1998.
Mr. Taetle has been a General Partner with Noro-Moseley Partners, a venture
capital firm, since May 1998. From March 1995 to April 1998, Mr. Taetle was
Executive Vice President of Marketing and Business Development for MindSpring
Enterprises, an Internet service provider. From November 1992 to March 1995,
Mr. Taetle served as Director of Operations and Product Management at CogniTech
Corporation, a developer of retail management software. Mr. Taetle received an
M.B.A. from Harvard Business School and a B.A. in Economics from the University
of Michigan.
Timothy T. Weglicki has served as a director of SciQuest.com since May 1999.
Since December 1993, he has been principally employed as a Managing Member of
ABS Partners, L.P., the General Partner of ABS Capital Partners, L.P., a
private equity fund. Prior to that date, he was principally employed as a
Managing Director of Alex. Brown & Sons Incorporated where he established and
headed its Capital Markets Group. Mr. Weglicki holds an M.B.A. from the Wharton
Graduate School of Business and a B.A. from Johns Hopkins University. Mr.
Weglicki is a director of ElderTrust, a healthcare real estate investment
trust, and a number of privately held companies.
There are no family relationships between any of our directors or executive
officers.
Item 2. Properties
Our headquarters are located in Morrisville, North Carolina, where we
currently sublease approximately 41,000 square feet of office space. This lease
expires in February 2002. We have entered into a five-year lease for an
additional 93,000 square feet of office space at our headquarters location. We
expect these facilities to be sufficient for the foreseeable future.
We maintain an office in Plainview, New York, where our wholly-owned
subsidiary, BioSupplyNet, is located. This space is shared with Cold Spring
Harbor Laboratory Press and is rented on a month to month basis.
We have also entered into a sublease for approximately 2,300 square feet of
office space extending to December 31, 2002 for the offices of our subsidiary,
Internet Auctioneers International, Inc., located in Mountain View, California.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission Of Matters to a Vote of Security Holders
Effective as of November 12, 1999, our stockholders, acting by written
consent pursuant to Section 228 of the Delaware General Corporation Law (the
"DGCL"), approved an amendment to the Amended and Restated Certificate of
Incorporation which provided for (i) a 1.516643-for-1 share stock split with
respect to each issued and outstanding share of the Class A Common Stock, and
(ii) the reclassification (or renaming) of the Class A
15
<PAGE>
Common Stock as Common Stock. 6,976,650 votes were cast in favor of the
proposed amendment and there were no votes against.
Effective as of November 16, 1999, our stockholders, acting by written
consent pursuant to Section 228 of the DGCL, approved (i) the Second Amended
and Restated Certificate of Incorporation in connection with our initial public
offering, which was completed on November 19, 1999, and (ii) the adoption of
the SciQuest.com, Inc. 1999 Stock Incentive Plan which authorized the issuance
of a total of 2,854,998 shares of our Common Stock pursuant to awards made
under the Stock Incentive Plan. Both actions were approved conditioned upon the
happening of and effective upon the closing of our initial public offering.
12,481,719 votes were cast in favor of both actions and there were no votes
against.
Notice of the foregoing actions was properly provided to our stockholders who
did not consent in writing, in accordance with Section 228 of the DGCL.
16
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
SciQuest's common stock is traded on The Nasdaq National Market under the
symbol "SQST". The price per share reflected in the table below represents the
range of low and high closing sale prices for the Company's common stock as
reported by The Nasdaq Stock Market for the quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
------------- ---------- ---------
<S> <C> <C>
December 31, 1999 $84.125 $27.375
</TABLE>
The closing sale price of the Company's common stock as reported by The
Nasdaq Stock Market on March 27, 2000 was $36.125.
The number of shareholders of record of the Company's common stock as of
February 29, 2000, was approximately 260.
We have never declared or paid cash dividends on our capital stock and we do
not anticipate declaring or paying any cash dividends for the foreseeable
future. We currently expect to retain all earnings, if any, for investment in
our business.
Recent Sales of Unregistered Securities
The share numbers presented below are provided with respect to our shares of
common stock and Series A convertible preferred stock, Series B mandatorily
redeemable convertible preferred stock, Series C convertible preferred stock,
Series D mandatorily redeemable convertible preferred stock and Series E
convertible preferred stock and reflect (1) various stock splits and (2) the
recapitalization of the Series A convertible preferred stock, Series B
mandatorily redeemable convertible preferred stock, Series C convertible
preferred stock, Series D mandatorily redeemable convertible preferred stock
and Series E convertible preferred stock into common stock, which occurred
immediately prior to completion of our initial public offering.
Except as described below, there have been no securities sold by us within
the last year that were not registered under the Securities Act.
(a) Issuances of Securities
On July 30, 1999, we issued an aggregate of 114,995 shares of Series E
convertible preferred stock in connection with our acquisition of Internet
Auctioneers International, Inc., in exchange for the shares of capital stock
of the former stockholders of Internet Auctioneers International, Inc.
In May and June 1999, we sold an aggregate of 3,312,720 shares of Series D
mandatorily redeemable convertible preferred stock to certain of our existing
stockholders and new investors, with attached stock purchase warrants
exercisable for an aggregate of 1,004,829 shares of common stock, at an
aggregate offering price of $37,500,000.
On March 1, 1999, we sold 89,408 shares of restricted Series C convertible
preferred stock to Antony Francis, our vice president of operations, at an
aggregate purchase price of $250,000.
In October and December 1999, we agreed to issue warrants to acquire an
aggregate of 3,724,307 shares of common stock at an exercise price of $0.01 to
Ambion, Inc., Amersham Pharmacia Biotech, Inc., BioWhittaker, a Cambrex
Company, Dow Chemical Company, DuPont Pharmaceuticals Company, Merck &
Company, Inc., Monsanto Company, Endogen, Inc., NEN Life Science Products,
Inc., PerkinElmer, Inc., Pierce Chemical Company and QIAGEN N.V.
All references in this subsection (a) to number of shares and exercise price
for preferred stock do not reflect the effect of the 1.516643 to 1 common
stock split effected in November 1999. All of our outstanding preferred shares
were converted to our common stock upon completion of our initial public
offering as were all outstanding warrants to purchase preferred stock.
17
<PAGE>
(b) Hambrecht & Quist, LLC, served as placement agent in connection with the
offer and sale by us of our Series D convertible preferred stock and related
warrants to purchase Class A common stock and has received compensation in the
form of cash and warrants for such services. Except as so noted, underwriters
were involved in connection with the sales of securities referred to in
paragraph (a) of this Item 5.
(c) The convertible promissory notes, the warrants and the shares of Class B
common stock, Series C convertible preferred stock, Series D mandatorily
redeemable convertible preferred stock and Series E convertible preferred
stock described in paragraph (a) of this Item 15 were issued in reliance on
the exemption provided by Section 4(2) and/or Rule 506 of Regulation D
promulgated pursuant to the Securities Act. The issuances of stock options and
the shares of common stock issuable upon the exercise of the options as
described in paragraph (a) of this Item 5 were issued in reliance on the
exemption provided by Section 3(b) of the Securities Act and Rule 701
promulgated thereunder, as well as Section 4(2) of the Securities Act.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. All recipients either received adequate
information about us or had access, through employment or other relationships,
to such information.
Changes In Securities And Use Of Proceeds
On November 19, 1999, we commenced an initial public offering of our Common
Stock. The registration statement relating to this offering (File No. 333-
87433) was declared effective on November 19, 1999. Donaldson, Lufkin &
Jenrette, Deutsche Bank Alex. Brown, Hambrecht & Quist, DLJdirect, Inc. and
E*OFFERING were the managing underwriters of the offering. On November 24,
1999, we consummated the offering. The number of shares registered, the
aggregate price of the offering amount registered, the amount sold and the
aggregate offering price of the shares were sold were as follows:
<TABLE>
<CAPTION>
Aggregate Price of the
Number of Shares Offering Amount Aggregate Offering Price
Registered Registered Amount Sold of the Shares Sold
- ---------------- ---------------------- ----------- ------------------------
<S> <C> <C> <C>
8,625,000 138,000,000 8,625,000 138,000,000
</TABLE>
We incurred the following expenses with respect to the offering through
December 31, 1999:
<TABLE>
<CAPTION>
Underwriting Discounts
and Commissions Expenses Total Expenses
---------------------- ---------- --------------
<S> <C> <C>
$9,660,000 $1,200,000 $10,860,000
</TABLE>
The net proceeds from the offering to us after deducting the foregoing
discounts, commissions, fees and expenses were $127.4 million. Approximately
$1,452,126 million was used for capital expenditures and for other general
working capital purposes. None of the foregoing expenses constituted direct or
indirect payments to our directors, officers, general partners or their
associates or to persons owning 10% or more of any class of our equity
securities or to our affiliates.
18
<PAGE>
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Our selected financial data set forth below should be read in conjunction
with our financial statements and accompanying notes appearing elsewhere in
this report and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The historical statements of operations data for
the years ended December 31, 1997, 1998 and 1999, and the historical balance
sheet data as of December 31, 1998 and 1999 are derived from, and are
qualified by reference to, our financial statements which are included herein,
which have been audited by PricewaterhouseCoopers LLP. The historical
statement of operations data for the year ended December 31, 1996 and the
balance sheet data as of December 31, 1996 and 1997 are derived from our
audited financial statements not included in this report. Historical results
are not necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998 1999
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.................................. $ -- $ 196 $ 478 $ 3,882
Cost of revenues.......................... -- -- 42 3,426
------ ------ ------- ---------
Gross profit............................. -- 196 436 456
Operating expenses:
Development.............................. 85 140 1,191 9,008
Sales and marketing...................... 150 257 1,706 10,206
General and administrative............... 301 457 1,104 7,076
Stock based employee compensation........ -- -- -- 324
Stock based customer acquisition costs... -- -- -- 9,108
Purchased in process research and
development............................. -- -- 791 --
Amortization of goodwill................. -- -- -- --
------ ------ ------- ---------
Total operating expenses.................. 536 854 4,792 35,722
------ ------ ------- ---------
Operating loss............................ (536) (658) (4,356) (35,266)
Net interest income (expense)............. (9) (32) 80 1,869
------ ------ ------- ---------
Loss before income taxes.................. (545) (690) (4,276) (33,397)
Income tax benefit........................ -- -- 54 219
------ ------ ------- ---------
Net loss.................................. $ (545) $ (690) $(4,222) $ (33,178)
====== ====== ======= =========
Pro forma net loss per common share--basic
and diluted.............................. $ (2.09)
Pro forma weighted average common shares
outstanding.............................. 15,846
Net loss available to common
stockholders............................. $ (545) $ (690) $(4,550) $(112,467)
====== ====== ======= =========
Net loss per common share--basic and
diluted.................................. $(0.16) $(0.20) $ (1.33) $ (18.10)
Weighted average common shares
outstanding.............................. 3,412 3,412 3,412 6,215
<CAPTION>
As of December 31,
----------------------------------
1996 1997 1998 1999
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 9 $ 331 $ 5,391 $ 98,126
Working capital (deficit)................. (227) (28) 6,413 119,983
Total assets.............................. 77 385 9,173 156,902
Long-term liabilities..................... 66 79 385 1,257
Mandatorily redeemable convertible
preferred stock.......................... -- -- 10,883 --
Stockholders' equity (deficit)............ (254) (81) (3,102) 149,819
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes, which appear elsewhere in this
report. It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forwarding-looking statements as a result of various
factors, including those discussed below and elsewhere in this report,
particularly under the heading "Risk Factors."
Overview
SciQuest.com is a Web-based, interactive marketplace for scientific and
laboratory products used by pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations worldwide. We have used our extensive
industry expertise to design a marketplace that streamlines the traditionally
inefficient scientific products supply chain. Our marketplace solutions allow
buyers of scientific products to cross-search content and purchase products
from multiple suppliers with a single order. Our approach does not give
priority to any particular scientific products distributor, which allows us to
create an open and scalable marketplace that we believe is more attractive to
both buyers and sellers.
We were incorporated in November 1995 and commenced operations in January
1996. During 1996, we focused on developing our business model and the
required technology. We did not begin to recognize any revenues until 1997.
On September 29, 1998, we acquired BioSupplyNet, Inc. This acquisition was
accounted for using the purchase method of accounting with a total purchase
price of approximately $2.0 million. BioSupplyNet publishes the Source Book,
an annual printed catalogue of vendors of biomedical research supplies and
equipment and scientific products for the biomedical research industry. In
addition, at the time of acquisition, BioSupplyNet was in the process of
developing e-commerce technology to allow research scientists, lab technicians
and purchasing agents to quickly identify suppliers of specific scientific
products. We intend to continue to enhance and develop this technology. Since
the acquisition of BioSupplyNet, we have derived revenues from the sale of
advertising in the Source Book.
On July 30, 1999, we acquired all of the outstanding common stock of
Internet Auctioneers International, Inc. for a total purchase price of $1.4
million. This acquisition was accounted for using the purchase method of
accounting. Internet Auctioneers International provides auction services to
laboratories for the sale of used equipment. We will receive a commission for
performing these services, which will be recognized as revenues at the time
the sale is finalized.
The Internet Auctioneers International, Intralogix and SciCentral
acquisitions were not financially significant as they related to the purchase
price or past results of operations of the acquired entities and therefore pro
forma financial information has not been presented for these acquisitions.
These acquisitions were accounted for using the purchase method of accounting.
In October, November and December 1999, we entered into strategic
relationships with a number of key suppliers and buyers of scientific
products, whereby we issued warrants to these suppliers and buyers to purchase
approximately 5,035,180 shares of common stock at an exercise price of $0.01
per share. These warrants will vest over a period of three to five years and
will be exercisable until 2004. We have issued these warrants in connection
with these agreements, as we believe that these relationships are an integral
component of our business plan.
These strategic relationships include agreements to be the exclusive third-
party provider of electronic marketplace services in the United States for a
period of five years for ten key suppliers. Under the terms of these
agreements, these suppliers are not required to sell a minimum amount of
products through our electronic marketplace. The warrants to purchase our
common stock that were issued in connection with these agreements vest over a
four or five year period regardless of the level of sales by the suppliers
through our electronic marketplace.
20
<PAGE>
These strategic relationships also include agreements with Dow Chemical
Company, DuPont Pharmaceuticals Company and Monsanto Company and a letter of
intent with Merck & Company, Inc. to be their third-party electronic
aggregator for purchases of scientific products in North America for a period
of three years. Although these buyers have agreed to use reasonable efforts to
purchase at least $5.0 million of scientific products annually through our
marketplace, there are no minimum purchase commitments. The warrants issued in
connection with these relationships vest over a period of three years
regardless of their level of purchases through our electronic marketplace.
We have recorded deferred customer acquisition costs of approximately $400.2
million at December 31, 1999, related to the 5,035,180 warrants to purchase
our common stock issued to these key suppliers and buyers of scientific
products which is included as a separate component of stockholders' equity.
Deferred customer acquisition costs are determined based on the difference
between the closing trading price of our common stock and the $0.01 exercise
price of the stock warrants. The amount of deferred customer acquisition costs
recognized for all of the warrants issued to our key suppliers and buyers will
be adjusted in future reporting periods based on changes in the fair value of
the warrants until such date as the warrants are fully vested. Deferred
customer acquisition costs will be amortized to operating expense over the
term of the related contractual relationship, which in the case of the buyer
agreements is three years and in the case of the supplier agreements is five
years, using a cumulative catch up method.
We have also agreed to issue to Dow Chemical Company, DuPont Pharmaceuticals
Company, Merck & Company, Inc. and Monsanto Company additional incentive
warrants to purchase shares of our common stock with an exercise price of
$16.00 per share, the number of which will be based on each purchaser's volume
of purchases through our marketplace during the years 2000, 2001 and 2002.
These incentive warrants will be issued on February 15, 2001, 2002 and 2003,
will be fully vested and exercisable upon issuance and will continue to be
exercisable for a period of five years after the date of issuance. Deferred
customer acquisition costs will be recognized at the date of issuance of these
incentive warrants in an amount equal to the estimated fair value of the
warrants at the date of issuance determined using the Black Scholes valuation
model and will be amortized to operating expense over the remaining term of
the strategic relationship with these key buyers.
Revenues consist of (1) sales of scientific products in e-commerce
transactions originating on our Web sites, (2) banner advertising revenues
from our Web sites, (3) advertising revenues from the Source Book, and
(4) commissions received from the auction of used scientific equipment. Prior
to the launch of our e-commerce marketplace in April 1999, substantially all
of our revenues were derived from advertising on our Web sites and in the
Source Book. Revenues from e-commerce transactions became a significant source
of our revenues in the third quarter of 1999 and are expected to continue to
increase. For the year ended December 31, 1999, two customers accounted for
34% and 14% of our revenues, respectively.
We offer various Web-based solutions where potential buyers can cross-search
content from multiple suppliers and build a multiple line item order for
products from various suppliers. When a purchaser places an order through our
marketplace, we purchase that item from the supplier at either a pre-
negotiated price or at a discount from the supplier's list price and arrange
for shipment to the purchaser. We take legal title to the products purchased
at the date of shipment and relinquish title to our customers upon delivery.
After the supplier ships the product, we begin the collection process by
presenting a consolidated invoice to the buyer for the products and vendors
represented in the order. Payment by the buyer to us is then made by credit
card/procurement card or through a more traditional account setup and payment
system. We bear all credit risk on sales that we make and we are obligated to
pay the supplier of the products that we purchase regardless of whether we
receive payment from the customer for the products. For each transaction, we
recognize revenue in the amount of the sales price of the item to the
purchaser and recognize the amount paid to the supplier plus shipping costs as
cost of goods sold. The difference between revenues and cost of goods sold is
our gross profit.
Revenues from sales of scientific products in e-commerce transactions are
recorded as product revenues and are recognized upon notification from our
suppliers that the items ordered have been shipped to the customer. Product
shipments are made on our designated carriers and we are responsible for
shipping costs which are recorded as cost of revenues.
21
<PAGE>
Advertising revenues on banner contracts are recognized ratably over the
period in which the advertisement is displayed. Revenues from advertising
included in the Source Book are recognized at the date the Source Book is
published and distributed. Advertising on our Web sites is sold by Cahners
Business Information. Cahners will pay us a percentage of the total
advertising revenues, which it receives.
Recent Developments
In March 2000, we acquired EMAX Solution Providers, Inc., a provider of
electronic research solutions designed to optimize pharmaceutical drug
research operations and expedite drug discovery for 1,999,833 shares of our
common stock, which includes 415,692 shares subject to outstanding options and
warrants. The acquisition of EMAX enables us to provide electronic and
Internet-based solutions that are designed to streamline the drug discovery
processes of our customers, including large pharmaceutical, biotechnology and
life science companies, by integrating their supply chains with critical
research processes.
EMAX recognizes revenue from the sale of licenses to its software products,
the implementation and customization of its software products and the sale of
maintenance and support contracts. EMAX recognizes revenues from the sale of
licenses to its software products and implementation and customization of
these software products on a percentage of completion basis over the period of
the customization and implementation services, which generally ranges from
three to six months. EMAX recognizes revenues from the sale of maintenance and
support contracts ratably over the period of the maintenance and support
agreements, which is typically twelve months. Revenues from the sale of
software licenses and implementation and customization of software products
totaled $6.3 million for the year ended December 31, 1999 and revenues from
maintenance and support contracts totaled $0.4 million for the same period.
EMAX incurs costs to develop its software products for its own purposes and
in addition incurs development costs in the customization of its software
products for its customers. These costs are primarily comprised of salaries
and related benefits for EMAX's employees. EMAX typically retains the
intellectual property rights to modifications made to its software products
for individual customers and is then able to offer these modifications to
future customers. EMAX capitalizes its software development costs upon the
achievement of technological feasibility and ceases capitalization when the
software product is available for general release. To date, the achievement of
technological feasibility and availability of EMAX's software products for
general release have substantially coincided, therefore the amount of software
development cost capitalized by EMAX has been deminimis. EMAX incurred $5.2
million and $4.4 million in development costs and selling, general and
administrative expenses, respectively, during the year ended December 31,
1999.
Assuming the acquisition of EMAX had occurred on January 1, 1999, our pro
forma revenues, operating loss and net loss would have been $10.9 million,
$85.9 million and $83.6 million, respectively. This represents an increase of
$7.0 million in revenues, $52.6 million in operating loss and $52.4 million in
net loss. These pro forma operating results are not necessarily indicative of
what our results would have been had the acquisition of EMAX occurred on
January 1, 1999, nor can our future combined operating results be predicted
from these amounts. You should read the discussion of our pro forma operating
results in conjunction with the pro forma financial statements included in
this registration statement.
On January 14, 2000, we acquired all of the outstanding capital stock of
Intralogix, Inc. for a total purchase price of $2.1 million, which included
the issuance of 26,930 shares of our common stock, $192,000 in cash and the
assumption of $73,000 in liabilities. Intralogix provides tools that enable
scientists to search, compare and purchase chromatography products for their
research needs.
On February 2, 2000, we acquired all of the outstanding capital stock of
SciCentral, Inc. for a total purchase price of $2.5 million, which included
the issuance of 40,000 shares of our common stock and the assumption of
approximately $32,000 in net liabilities. SciCentral, Inc. provides users with
a gateway to online science and technology resources, news and information.
22
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.......................................... 100.0 % 100.0 % 100.0 %
Cost of revenues.................................. -- 8.8 88.3
------ ------- --------
Gross profit...................................... 100.0 91.2 11.7
------ ------- --------
Operating expenses:
Development...................................... 71.6 249.3 232.0
Sales and marketing.............................. 130.7 357.0 262.9
General and administrative....................... 232.7 231.0 182.2
Stock based non-cash employee compensation....... -- -- 8.3
Stock based non-cash customer acquisition........ -- -- 234.6
Purchased in process-research and development.... -- 165.6 --
------ ------- --------
Total operating expenses.......................... 435.0 1,002.9 920.0
------ ------- --------
Operating loss.................................... (335.0) (911.7) (908.3)
------ ------- --------
Net interest income (expense)..................... (16.2) 16.7 48.1
------ ------- --------
Loss before income taxes.......................... (351.2) (895.0) (860.2)
Income tax benefit................................ -- 11.5 5.6
------ ------- --------
Net loss.......................................... (351.2) (883.5) (854.6)
------ ------- --------
Net loss available to common stockholders......... (357.2)% (952.3)% (2,896.8)%
====== ======= ========
</TABLE>
Year Ended December 31, 1999 and 1998
Revenues
Revenues have been derived primarily from the sale of scientific products in
e-commerce transactions, advertising revenues from the Source Book and banner
advertising.
Revenues increased to $3.9 million for the year ended December 31, 1999 from
$0.5 million for the year ended December 31, 1998. This increase was primarily
due to $3.0 million in revenues from the sale of scientific products in e-
commerce transactions for the year ended December 31, 1999 as compared to zero
for the year ended December 31, 1998 as our e-commerce marketplace was not
implemented until April 1999. In addition, we had $0.8 million in advertising
revenues generated by BioSupplyNet for the year ended December 31, 1999
compared to zero in the year ended December 31, 1998, as we did not acquire
BioSupplyNet until September 29, 1998. This has been partially offset by a
decline of $0.4 million in revenues from banner advertisements as the sale of
banner advertisements is no longer a significant part of our business. Our
1998 revenues were primarily comprised of revenues from banner advertising.
Cost of Revenues
Cost of revenues consists of the purchase price of scientific products sold
in e-commerce transactions and related shipping costs for these products,
publishing and distribution costs related to the Source Book, and our Web site
advertising development costs.
Total cost of revenues increased to $3.4 million for the year ended December
31, 1999 from $42,000 for the year ended December 31, 1998. Cost of revenues
increased primarily due to $3.0 million in costs related to the sale of
scientific products in e-commerce transactions and $0.4 million in costs
incurred related to BioSupplyNet's advertising revenues during the year ended
December 31, 1999.
23
<PAGE>
Gross Profit
Gross profit increased to $0.5 million for the year ended December 31, 1999
from $0.4 million for the year ended December 31, 1998. Gross profit increased
by $35,000 as product sales began with the launch of the SciQuest.com
marketplace in April 1999.
Operating Expenses
Development Expenses. Development expenses consist primarily of personnel
and related costs to develop the data for, operate and maintain our Web sites
and the amortization of our capitalized development costs. Development costs
increased to $9.0 million for the year ended December 31, 1999 from $1.2
million for the year ended December 31, 1998. This increase resulted from
additional expenses incurred to develop the e-commerce functionality of our e-
commerce marketplace, including an increase in the development staff and the
costs of continuing the development of the e-commerce technology acquired with
BioSupplyNet. We expect that our development expenses will continue to
increase as we add products from additional suppliers to our e-commerce
marketplace, as we develop customized private Web sites for major customers
and as we continue to experience rapid increases in the volume of transactions
through our e-commerce marketplace. In addition, our development expenses will
continue to increase as we amortize development costs related to the
development of additional functionality for our Web sites and the completion
of the development of the e-commerce technology acquired with BioSupplyNet
which have previously been capitalized.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and other related costs for sales and marketing personnel, travel
expenses, public relations expenses and marketing materials. Sales and
marketing expenses increased to $10.2 million for the year ended December 31,
1999 from $1.7 million for the year ended December 31, 1998. This increase
resulted primarily from the hiring of additional sales and marketing personnel
to market our products and services and increased expenses to advertise and
promote our e-commerce marketplace and to a lesser extent sales and marketing
expenses related to BioSupplyNet and Internet Auctioneers International. We
expect that our sales and marketing expenses will continue to increase in the
next 12 months as we continue to add sales and marketing personnel, and as we
continue to incur expenses to promote the services provided by our e-commerce
marketplace.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, legal, human resources, investor
relations, facilities and information systems expenses. General and
administrative expenses increased to $7.1 million for the year ended December
31, 1999 from $1.1 million for the year ended December 31, 1998. General and
administrative expenses increased primarily as a result of increased payroll
costs due to the increase in the number of general and administrative
personnel, and an increase in professional fees and facilities costs incurred
to support the growth of our business. In addition, we have experienced an
increase in general and administrative costs as a result of becoming a public
company in November 1999, such as investor relations costs and directors and
officers insurance costs. We expect general and administrative expenses to
continue to increase in the next 12 months as we add administrative personnel
to support the growth of our business.
Interest Income (Expense)
Net interest income (expense) consists of interest income earned on cash
deposited in money market accounts and invested in short and long term U.S.
Government obligations reduced by interest expense incurred on notes payable
and capital lease obligations. Net interest income (expense) increased to net
interest income of $1.9 million for the year ended December 31, 1999 from net
interest income of $0.1 million for the year ended December 31, 1998. The
increase in net interest income was primarily the result of interest earned on
funds received from the sale of our series B mandatorily redeemable
convertible preferred stock in September 1998, series D mandatorily redeemable
convertible preferred stock in May and June 1999 and our initial public
offering in November 1999.
24
<PAGE>
Income Tax Benefit
Income tax benefit increased to $0.2 million for the year ended December 31,
1999 from $55,000 for the year ended December 31, 1998. The increase in income
tax benefit was the result of the reduction in net deferred tax liabilities
during the year ended December 31, 1999 due to the amortization of the
goodwill and other intangible assets recorded with our acquisition of
BioSupplyNet in September 1998.
Net Loss Available to Common Stockholders
Net loss available to common stockholders increased to $112.5 million for
the year ended December 31, 1999 from $4.5 million for the year ended December
31, 1998. The increase in net loss available to common stockholders was due to
the increase in our net loss of $29.0 million and the increase in accretion of
mandatorily redeemable preferred stock to $79.3 million for the year ended
December 31, 1999 from $0.3 million for the year ended December 31, 1998. Such
increase accretion resulted from the accretion of our series B mandatorily
redeemable convertible preferred stock to its estimated redemption amount at
the effective date of our initial public offering, November 19, 1999, and
accretion of our series D mandatorily redeemable convertible preferred stock
to its redemption amount over the period from the date of issuance to the
first redemption date. Our series B mandatorily redeemable convertible
preferred stock had a redemption price that was variable in amount (see note
12 to our financial statements), and its carrying value was required to be
adjusted to the estimated redemption amount at each balance sheet date rather
than being accreted to the redemption amount over the period from date of
issuance to the first redemption date. This resulted in accretion of $77.4
million on the series B mandatorily redeemable preferred stock being
recognized during the period from January 1, 1999 to November 19, 1999, which
was recorded as a charge to additional paid-in-capital and an increase to
preferred stock. Accretion of mandatorily redeemable preferred stock ceased
with the conversion of all of our outstanding mandatorily redeemable preferred
stock into shares of our common stock upon the effectiveness of our initial
public offering.
Years Ended December 31, 1998 and 1997
Revenues
Revenues increased to $0.5 million for the year ended December 31, 1998 from
$0.2 million for the year ended December 31, 1997. This increase was primarily
a result of hiring additional sales staff responsible for marketing
advertising space on our Web sites and the acquisition of BioSupplyNet in
September 1998. All of our revenues for the year ended December 31, 1998 and
substantially all of our revenues for the year ended December 31, 1997 were
generated from the sale of advertising with the remainder of these revenues
being generated from the creation of Web-based content and development
services.
Cost of Revenues
Cost of revenues increased to $42,000 for the year ended December 31, 1998
from zero for the year ended December 31, 1997. This increase resulted
primarily from costs associated with the development of advertising for
display on our Web sites and cost of revenues of BioSupplyNet, which was
acquired in September 1998.
Gross Profit
Gross profit increased to $0.4 million for the year ended December 31, 1998
from $0.2 million for the year ended December 31, 1997. Gross profit increased
as a result of the increase in advertising revenues from sale of advertising
on our Web sites, which has a relatively low amount of associated costs.
Operating Expenses
Development Expenses. Development expenses increased to $1.2 million for the
year ended December 31, 1998 from $0.1 million for the year ended December 31,
1997. This increase resulted primarily from the development of the e-commerce
functionality of our Web sites, which began during the fourth quarter of 1998.
25
<PAGE>
Development expenses incurred during the year ended December 31, 1997
consisted primarily of the costs of developing and maintaining our Web sites,
which functions were limited to providing a source for data about scientific
products.
Sales and Marketing Expenses. Sales and marketing expenses increased to $1.7
million for the year ended December 31, 1998 from $0.3 million for the year
ended December 31, 1997. The increased sales and marketing expenses were
primarily due to an increase in the number of sales and marketing personnel
during the year ended December 31, 1998 and sales and marketing expenses of
BioSupplyNet from the date of the acquisition through December 31, 1998.
General and Administrative Expenses. General and administrative expenses
increased to $1.1 million for the year ended December 31, 1998 from $0.5
million for the year ended December 31, 1997. This increase primarily resulted
from hiring additional general and administrative staff to support the rapid
growth of our business, and we incurred $0.3 million of general and
administrative expense in 1998 as a result of the acquisition of BioSupplyNet
in September 1998.
Purchased In-Process Research and Development Expense. For the year ended
December 31, 1998, we recognized an in-process research and development charge
of $0.8 million as a result of the acquisition of BioSupplyNet. Based on our
valuation of BioSupplyNet and its assets, we allocated a portion of the
BioSupplyNet purchase price to in-process e-commerce technology being
developed by BioSupplyNet which had not reached technological feasibility and
had no alternative use at the date of the acquisition of BioSupplyNet. We are
using this technology in the development of the e-commerce and scientific
products search capabilities on our Web sites. At the date of the acquisition,
the e-commerce technology being developed by BioSupplyNet was approximately
50% complete. We estimated at the acquisition date that we would incur
approximately $1.9 million to complete the development of this e-commerce
technology and that the development would be completed by March 2000. Since
the date of the acquisition of BioSupplyNet we have completed the development
of the e-commerce taxonomy and ontology functionality and made significant
progress in the completion of the Web-based directory services and search
engine technology that was being developed by BioSupplyNet. The development of
the BioSupplyNet e-commerce technology was approximately 70% complete at
December 31, 1999 and there have been no significant changes in the estimated
scope of the work to be performed since the date of the acquisition. The
remaining $1.2 million of the purchase price of BioSupplyNet was allocated to
the tangible and intangible assets of BioSupplyNet. The fair values assigned
to in-process research and development, tangible and intangible assets of
BioSupplyNet were based on a management's valuation.
Interest Income (Expense)
Net interest income (expense) increased to net interest income of $0.1
million for the year ended December 31, 1998 from net interest expense of
$32,000 for the year ended December 31, 1997. Net interest income increased
primarily as a result of interest earned on funds received from sale of our
series B mandatorily redeemable convertible preferred stock between September
and November 1998.
Income Tax Benefit
The income tax benefit increased to $55,000 for the year ended December 31,
1998 from zero for the year ended December 31, 1997. The income tax benefit
increased as a result of a reduction in deferred tax liabilities due to the
amortization of the goodwill and other intangible assets recorded as a result
of the acquisition of BioSupplyNet in September 1998.
Net Loss Available to Common Stockholders
Net loss available to common stockholders increased to $4.5 million for the
year ended December 31, 1998 from $0.7 million for the year ended December 31,
1997. The increase in net loss available to common
26
<PAGE>
stockholders was due to the increase in our net loss of $2.6 million and the
increase in accretion of mandatorily redeemable convertible preferred stock to
$0.3 million for the year ended December 31, 1998 from zero for the year ended
December 31, 1997. Prior to December 31, 1998, we did not have any mandatorily
redeemable convertible preferred stock outstanding; therefore, we did not
recognize any accretion in the year ended December 31, 1997.
Quarterly Results of Operations
The following is a table of our unaudited quarterly statement of operations
data for each of the periods indicated. This information is unaudited, but in
our opinion, has been prepared substantially on the same basis as our audited
financial statements, which are included elsewhere in this report. All
necessary adjustments, consisting only of normal recurring adjustments, have
been included in these amounts to present fairly the unaudited quarterly
results of operations. You should read these quarterly data in conjunction
with our audited financial statements. You should not view the results of
operations for any period as an indication of the results of operations for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 81 $ 110 $ 118 $ 170 $ 63 $ 822 $ 359 $ 2,638
Costs of revenues....... -- -- -- 42 -- 486 337 2,603
----- ----- ------- ------- ------- ------- ------- --------
Gross profit............ 81 110 118 128 63 336 22 35
----- ----- ------- ------- ------- ------- ------- --------
Operating expenses:
Development............ 85 95 210 801 1,235 1,947 3,116 2,710
Sales and marketing.... 317 191 320 878 1,232 1,934 3,020 4,021
General and
administrative........ 77 74 225 728 652 1,542 1,698 3,184
Stock based non-cash
employee
compensation.......... -- -- -- -- -- -- 104 219
Stock based non-cash
customer acquisition
costs................. -- -- -- -- -- -- -- 9,108
Purchased in-process
research and
development........... -- -- 791 -- -- -- -- --
----- ----- ------- ------- ------- ------- ------- --------
Total operating
expenses............... 479 360 1,546 2,407 3,119 5,423 7,939 19,242
----- ----- ------- ------- ------- ------- ------- --------
Loss from operations.... (398) (250) (1,428) (2,279) (3,056) (5,087) (7,017) (19,207)
Interest income, net of
interest Expense....... (5) (8) 24 68 37 265 453 1,114
----- ----- ------- ------- ------- ------- ------- --------
Loss before income
taxes.................. (403) (258) (1,404) (2,211) (3,019) (4,822) (6,564) (18,093)
Income tax benefit...... -- -- -- 55 55 55 55 55
----- ----- ------- ------- ------- ------- ------- --------
Net loss................ $(403) $(258) $(1,404) $(2,156) $(2,964) $(4,767) $(6,509) $(18,038)
===== ===== ======= ======= ======= ======= ======= ========
</TABLE>
We have a limited operating history upon which to evaluate our business and
to predict revenues and plan operating expenses. We expect our quarterly
operating results to vary significantly in the future due to a variety of
factors, many of which are outside our control. Our revenues increased
significantly in 1999 as a result of the launch of our e-commerce marketplace
in April 1999.
Liquidity and Capital Resources
We have primarily funded our operations through private placements of our
preferred stock and our initial public offering which closed in November 1999.
As of December 31, 1999, we had cash and cash equivalents of $98.1 million,
short term investments of $24.3 million and long term investments of $23.6
million.
27
<PAGE>
Cash used in operating activities during the year ended December 31, 1999
was $23.5 million and during the years ended December 31, 1998 and 1997 was
$3.1 million and $0.4 million, respectively. Cash used in operating activities
was principally for the development of our Web sites, the development of our
e-commerce marketplace, the expansion of our sales and marketing force and the
expansion of the administrative and operations staff to support our growth.
Cash used in investing activities during the year ended December 31, 1999
was $48.4 million and during the years ended December 31, 1998 and 1997 was
$2.2 million and zero, respectively. Cash used in investing activities has
primarily been comprised of purchases of investments in US government
obligations, commercial paper and corporate bonds, net of maturities, and
purchases of computer equipment.
Cash provided by financing activities during the year ended December 31,
1999 was $164.7 million and during the years ended December 31, 1998 and 1997
was $10.4 million and $0.7 million, respectively. Between March and September
1997, we received an aggregate of $80,000 in the form of bridge loans. These
bridge loans were converted into 90,702 shares of series A convertible
preferred stock in October 1997. In October 1997, we raised an aggregate of
$0.6 million through the issuance of 678,519 shares of our series A
convertible preferred stock at a price of $0.91 per share. Between March and
June 1998, we received $0.5 million in the form of bridge loans. These bridge
loans were converted into 187,394 shares of series B mandatory redeemable
convertible preferred stock in July 1998. Between July and November 1998, we
raised an aggregate of $10.0 million through the issuance of 3,590,232 shares
of our series B mandatorily redeemable convertible preferred stock at a price
of $2.80 per share. Purchasers of the series B mandatorily redeemable
convertible preferred stock whose shares were issued pursuant to the
conversion of bridge loans also received 57,545 warrants to purchase series B
mandatorily redeemable convertible preferred stock at an exercise price of
$2.80 per share. In May and June 1999, we raised an aggregate of $37.5 million
through the issuance of 3,312,720 shares of our series D mandatorily
redeemable convertible preferred stock at a price of $11.32 per share.
Purchasers of the series D mandatorily redeemable convertible preferred stock
also received 1,004,829 warrants to purchase our common stock at an exercise
price of $7.46 per share. In March 1999, we sold 89,408 shares of series C
convertible preferred stock to an executive officer for $0.2 million, or $2.80
per share. In November 1999, we received $126.9 million in net proceeds from
the sale of 8,625,000 shares of our common stock in our initial public
offering. All of our outstanding preferred shares were converted into shares
of our common stock upon the completion of our initial public offering.
We believe that our existing liquidity and capital resources, including the
proceeds resulting from the sale of our common stock in this offering, will be
sufficient to satisfy our cash requirements for the next 36 months. To the
extent that such amounts are insufficient, we will be required to raise
additional funds through equity or debt financing. There can be no assurance
that we will be able to raise such funds on favorable terms, or at all.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes a number
of existing standards. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, as
amended, is not expected to have a material impact on our consolidated
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101) which addresses certain criteria for revenue recognition. SAB 101 is
required to be adopted for reporting periods beginning after January 15, 2000.
The adoption of SAB 101 is not expected to have a material impact on our
consolidated financial position or results of operations.
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Year 2000
Impact of Year 2000 Computer Issues
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This
situation could result in system failures or miscalculations causing
disruptions in the operations of any business. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply
with year 2000 requirements. Our ability to operate is dependent upon delivery
of accurate, electronic information via the Internet. To the extent year 2000
issues result in the long-term inoperability of the Internet or our Web sites,
our business could be materially and adversely affected.
We completed an assessment of our information technology systems for year
2000 problems in June 1999. We have not replaced any of our systems based on
the results of our assessment. However, we have made modifications to some
systems based on our assessment, at a cost to us of approximately $175,000. We
have not experienced any material adverse effects as a result of the year 2000
computer problem.
Quantitative and Qualitative Disclosures About Market Risk
Most of our cash equivalents, short-term and long-term investments and
capital lease obligations are at fixed interest rates, therefore the fair
value of these investments is affected by changes in market interest rates.
However, because our investment portfolio is primarily comprised of
investments in U.S. Government obligations and high-grade commercial paper, an
immediate 10% change in market interest rates would not have a material effect
on the fair market value of our portfolio. Therefore, we would not expect our
operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on our investment
portfolio.
Factors That May Affect Future Results
Since we have a limited operating history, forecasting future performance may
be difficult.
We commenced operations in 1995, first recognized revenues in 1997 and
launched our interactive e-commerce Web site in April 1999. Accordingly, we
have only a limited operating history on which to evaluate our business. As a
result of our limited operating history, the emerging nature of the online
scientific products market and the evolving nature of our business model, we
may be unable to accurately forecast our revenues. We incur expenses based
predominantly on operating plans and estimates of future revenues. Our
expenses are to a large extent fixed. We may be unable to adjust our spending
in a timely manner to compensate for any unexpected revenue shortfalls.
Accordingly, a failure to meet our revenue projections will have an immediate
and negative impact on profitability. In addition, we cannot be certain that
our evolving business model will be successful, particularly in light of our
limited operating history.
We have a history of losses and anticipate incurring losses in the future. We
may not achieve profitability.
We incurred a net loss of $33.2 million for the year ended December 31,
1999. As of December 31, 1999, we had an accumulated deficit of $38.6 million.
If our acquisition of EMAX had taken place on January 1, 1999, our pro forma
net losses for the year ended December 31, 1999 would have been $83.6 million.
We expect to incur substantial operating losses and continued negative cash
flow from operations for the foreseeable future. In fact, we expect these
losses to increase significantly through at least December 31, 2000 because,
as part of our strategy to achieve profitability, we intend to significantly
increase our spending on items such as sales and marketing, content
development, technology and operating infrastructure. If these expenses do not
generate increased revenues, our earnings may be materially and adversely
affected and anticipated net losses may be greater than expected. We may not
be able to increase revenues sufficiently to achieve profitability.
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Unless a broad range of purchasers and suppliers of scientific products adopt
our e-commerce solution, we will not be successful.
Our success will require, among other things, that our solutions gain broad
market acceptance by our customers, suppliers, users and strategic partners.
For example, purchasers may continue purchasing products through their
existing methods and may not adopt a Web-based solution because of:
. their comfort with current purchasing habits and direct supplier
relationships;
. the costs and resources required to switch purchasing methods;
. the need for products not offered through our Web site;
. security and privacy concerns; or
. general reticence about technology or the Internet.
If we do not successfully market the SciQuest.com brand, our business may
suffer.
We believe that establishing, maintaining and enhancing the SciQuest.com
brand is critical in attracting and expanding traffic to our Web sites. There
are a number of Web sites that offer competing services. Some of these sites
already have well-established brands in either online services or the
scientific products industry. As a result, it is critical that we maintain and
enhance our brand. We believe that increased competition may make establishing
and maintaining our brand significantly more expensive. Promotion of our brand
will depend largely on expanding our sales and marketing capabilities and
providing a high-quality online experience. We intend to use a portion of the
proceeds of this offering to expand our sales and marketing activities and
further develop our online services. We cannot be certain that we will be
successful in marketing the SciQuest.com brand. If we are unable to
successfully promote our brand, or if we incur substantial expenses in
attempting to do so, our revenues and earnings could be materially and
adversely affected.
If we are unable to increase our transaction volume, our future revenues may
suffer.
We expect that a substantial portion of our future revenues will be
generated by the products offered by us for sale through our e-commerce
marketplace. Accordingly, our revenues will be highly dependent on the dollar
volume of transactions conducted through our Web sites. Our profits depend
upon the discount levels we are able to negotiate with our suppliers. To
maintain revenue growth, we will need to increase the total dollar value of
transactions conducted through our Web sites. In order to increase our
transaction volume, we will need to:
. generate higher and continuously increasing levels of traffic, from both
new and repeat visitors, to our Web sites;
. increase the percentage of visitors to our Web sites who purchase
scientific products; and
. increase the average transaction size and/or number of repeat purchases.
Failure to do one or more of the foregoing could have a material adverse
effect on our revenues.
Unless we negotiate favorable pricing terms with our suppliers, our profit
margins will be adversely affected.
Our profits depend upon the prices we are able to negotiate with our
suppliers. We anticipate that the prices we negotiate with our suppliers will
vary based on a number of factors such as:
. size of supplier;
. product portfolio;
. relationship with key customers;
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. degree to which products are critical to our customers;
. extent to which transactions are conducted electronically; and
. extent that costs are shared with us.
Our profit margins may decline in the future, particularly as competition in
the scientific products industry increases. A significant decline in profit
margins without a corresponding increase in transaction volume would adversely
affect our earnings.
If we cannot timely and accurately add supplier product data to our e-commerce
database, we may lose sales and customers, which would adversely affect our
revenues.
Currently, we are responsible for loading supplier product information into
our database and categorizing the information for search purposes. We
currently have a backlog of varying amounts of product data from approximately
200 companies to be loaded in our e-commerce marketplace. We anticipate that a
majority of these products will be loaded into the e-commerce marketplace by
the end of the second quarter of 2000. However, we continuously receive new
product data to load. We will not derive revenue from these products until
this data is loaded into our system. Timely loading of these products into our
database depends upon a number of factors, including the file formats of the
data provided to us by suppliers and our ability to further automate and
expand our operations to accurately load this data into our product database,
any of which could delay the actual loading of these products beyond the dates
estimated by us.
In addition, we are generally obligated under our supplier agreements to
load updated product data into our database for access through our marketplace
within a reasonable period of time following their delivery from the supplier.
Our current supplier data backlog could make it difficult for us to meet these
data update obligations to our suppliers. While we intend to further automate
the loading and updating of supplier data on our system, we cannot assure you
that we will be able to do so in a timely manner. Although we screen our
suppliers' information before we make it available to our customers and users,
we cannot guarantee that the product information available in our e-commerce
marketplace will always be accurate, complete and current, or comply with
governmental regulations. This could expose us to liability or result in
decreased adoption and use of our Internet-based purchasing solution, which
could reduce our revenues and therefore have a negative effect on our results
of operations and financial condition.
Sales to larger customers may increase the length of our sales cycle and
decrease our profit margins.
Increasing sales to larger buyers is an important element of our business
strategy. As we sell more sophisticated solutions to larger organizations, we
expect the time from initial contact to final approval to increase. During
this sales cycle, we may expend substantial funds and management resources
without any corresponding revenue. If approval is delayed or does not occur,
our financial condition and operating results for a particular period may be
adversely affected. Approvals are subject to delays over which we have little
or no control, including the following:
. potential customers' internal approval processes;
. implementation of systems integration solutions;
. customers' concerns about implementing a new strategy and method of
doing business; and
. seasonal and other timing effects.
Increased sales to larger accounts may result in lower or negative profit
margins as larger customers typically have greater leverage in negotiating the
price and other terms of business relationships. We also typically incur costs
associated with customization of our systems with a sale to a large account.
If we do not generate sufficient transaction volume to offset any lower
margins or these increased costs, our operating results may be materially and
adversely affected. Also, the time between billing and receipt of revenues is
often longer when dealing with larger accounts due to increased administrative
overhead.
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If we are unable to list a broad range of products on commercially favorable
terms, our marketplace will be less attractive to potential buyers.
A number of factors could significantly reduce the number of products and
product sources listed on our Web sites, including the following:
. consolidation among suppliers; and
. exclusive arrangements signed by suppliers with our competitors.
If the number of products and product sources that are available for listing
is reduced, the effectiveness of our Web sites and their attractiveness to
potential buyers could be materially and adversely affected.
If we are unable to retain a critical mass of suppliers and customers, our
ability to grow our business will be adversely affected.
Our business model depends in large part on our ability to build a critical
mass of products and suppliers. To attract and maintain suppliers we must
build a critical mass of customers. However, customers must perceive value in
our purchasing solution which, in large part, depends upon the breadth of the
product offerings from our suppliers. Creating a network effect, where the
value to buyers and suppliers alike increases as the number of participants
increases, is a key component of our strategy. If we are unable to increase
the number of suppliers and draw more customers to our Web sites, we will not
be able to benefit from this network effect. As a result, the overall value of
our purchasing solution would be harmed, which would negatively affect our
revenues and earnings.
If suppliers terminate their agreements with us, our product offerings may
suffer.
Following an initial one-year term, many of our standard supplier agreements
may be terminated by either party on 90 days' notice. After expiration of the
initial term, such suppliers may terminate or seek to renegotiate their
agreements. If a significant number of suppliers terminate their agreements
with us, the range of products we can offer would be adversely affected. The
ability of suppliers to terminate their agreements may result in negotiating
new agreement terms that are less favorable to us, which could have a material
adverse effect on our earnings.
If our exclusive suppliers elect to terminate the exclusive nature of their
agreements with us, our business could be adversely affected.
Our exclusive supplier agreements have a five-year term, but the exclusive
nature of such agreements may be terminated after 18 months. If a significant
number of the exclusive suppliers terminate the exclusive nature of such
agreements, the volume of our order flow will be reduced significantly. We may
also be forced to negotiate new agreements with terms that are less favorable
to us.
If we do not enter into definitive agreements by March 31, 2000 with several
buyers and approximately 20 suppliers of scientific products that we have sent
non-binding term sheets to, our business could be adversely affected.
We have sent non-binding term sheets to several buyers and approximately 20
suppliers of scientific products. These non-binding term sheets will expire on
or after March 31, 2000 if we do not enter into definitive agreements before
such time. A failure to enter into mutually satisfactory definitive agreements
with a significant number of these buyers and suppliers could have a material
adverse effect on our business.
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We have relied and continue to rely on a limited number of large customers for
a significant portion of our revenues. Losing one or more of these customers
may adversely affect our revenues.
We expect that for the foreseeable future we will generate a significant
portion of our revenues from a limited number of large customers. Further, our
large customers are not obligated to use our purchasing solution exclusively
or for any minimum number of transactions or dollar amounts. In addition, our
contracts with our customers are for limited terms and our customers may
discontinue use of our system at any time upon short notice and without
penalty. If we lose any of our large customers or if we are unable to add new
large customers, our revenues will not increase as expected. In addition, our
reputation and brand name would be harmed. For the year ended December 31,
1999, two customers accounted for 34% and 14%, respectively, of our revenues.
Since we rely on third-party suppliers and carriers to fulfill orders for our
customers, we have limited control over the timing and accuracy of order
fulfillment. As a result, we may not be able to guarantee customer
satisfaction.
We do not carry inventory or directly supply products. As a result, we rely
on our suppliers and carriers for rapid order fulfillment and other customer
service functions to ensure buyer satisfaction. If our suppliers do not
provide high quality customer service, our business reputation and customer
satisfaction could be materially and adversely affected. Most of our supplier
arrangements do not guarantee the availability of merchandise, establish
guaranteed prices or require continuity of pricing practices. As a result, we
have little or no control over the fulfillment of buyers' orders. In order to
be successful, we must maintain relationships with suppliers that will
produce, stock and deliver high quality products to buyers through our Web
sites.
We rely on third-party carriers to ensure accurate and timely delivery of
products to buyers. Although suppliers are responsible for product shipment,
we designate the carrier and are responsible for carrier charges. We cannot be
certain that our carriers will consistently provide high quality performance.
If our carriers fail to deliver products accurately and on a timely basis, our
reputation and business could be materially and adversely affected.
If our Web sites and transaction processing systems are not able to adequately
service increasing traffic levels, our ability to satisfy our customers and
maintain revenue growth may suffer.
Our success depends in large part on the number of buyers who use our Web
sites to purchase scientific supplies and products. Accordingly, our Web
sites, transaction-processing systems and network infrastructure must be able
to service increasing traffic levels while maintaining adequate buyer service
levels. Any system interruptions or delays in our transaction system would
reduce the volume of sales and the attractiveness of our service offerings,
which could have a material adverse effect on our customer satisfaction and
our ability to maintain revenue growth. We have experienced infrequent system
interruptions in the past during implementation of system upgrades. These
interruptions could continue to occur from time to time and could have a
material adverse effect on our service offerings. Substantial increases in the
volume of traffic on our Web sites or the number of purchases made by buyers
will require expansion and upgrades of our technology, transaction-processing
systems and network infrastructure. We cannot be certain that our transaction-
processing systems and network infrastructure will be able to accommodate
traffic in the future.
If we are not able to successfully integrate our systems with the internal
systems of our key suppliers and buyers, our operating costs and relationships
with our suppliers and buyers will be adversely affected.
A key component of all services is the efficiencies created for suppliers
and buyers through our online systems. In order to create these efficiencies,
it will often be necessary that our systems integrate with each major
supplier's and buyer's internal systems, such as inventory, customer service,
technical service, freight programs and financial systems. In addition, there
is little uniformity in the systems used by our suppliers and buyers. The
integration with our suppliers' systems also involves the downloading of a
significant amount of data, which increases the resources needed to execute
the integration. If these systems are not successfully integrated, our
operating costs and relationships with our suppliers and buyers would be
adversely affected, which could have a material adverse effect on our
financial condition and results of operations.
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Our computer and telecommunications systems are in a single location, which
makes them more vulnerable to damage or interruption.
Substantially all of our computer and telecommunications systems are located
in the same geographic area. These systems are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins and similar events. While we have business interruption insurance, this
coverage may not adequately compensate us for lost business. Although we have
implemented network security measures, our systems, like all systems, are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These disruptions could lead to interruptions, delays, loss of
data or the inability to accept and confirm buyer purchases. Any of these
occurrences could have a material adverse effect on our revenues.
If our exclusive sales representative does not perform adequately, our
advertising revenues could be adversely affected.
To date, a significant portion of our revenues has come from the sale of
print and online advertising to our suppliers, although we expect advertising
revenue as a percentage of total revenue to decrease significantly in the
future. Cahners Business Information is the exclusive sales representative for
online advertising on our Web sites and for print advertising in our Source
Book. Accordingly, our advertising revenues are highly dependent on the
success of Cahners' efforts. We cannot assure you that Cahners will be
successful in selling advertising for us.
We bear the risk of credit sales on our Web sites, which could put a
significant strain on our liquidity and capital resources.
Our supplier agreements generally require us to pay the supplier for any
orders processed through our Web sites as we usually take title to these
products at the time of shipment. Accordingly, if a buyer fails to pay for the
products it purchased, we would be obligated to pay the supplier. Thus, we
bear the risk of collection. We also may be required to refund payments to
buyers for products returned to the supplier. Slow payment by buyers for
products purchased would negatively impact our cash flows. As our transaction
volume and average transaction size grow, these risks will increase. We
generally do not process an order from a buyer without a credit card or other
payment confirmation although we do extend credit terms to certain qualified
buyers. However, we cannot be certain that our credit confirmation practices
will be effective to protect us against these payment obligations. If a
significant number of buyers default on their payment obligations, or
suppliers fail to refund payments to us for products returned by our buyers,
or buyers do not pay their obligations to us on time, we could incur
significant and immediate cash payment obligations or suffer significant cash
flow constraints. These obligations could put a significant strain on our
liquidity and capital resources, which could prevent us from using our working
capital to further expand our business or require us to obtain additional
financing.
If we are not able to effectively manage our growth, our business may suffer.
We are rapidly expanding our operations. In particular, we have
significantly expanded our operations and sales, marketing and technology
staffs. We have also expanded our management and administration to support
this growth. We expect this expansion to continue at an accelerated rate. This
expansion has placed, and is expected to continue to place, a significant
strain on our management, operational and financial resources. For example, we
may be unable to increase the scale of our operations (including order
fulfillment, customer service, transaction processing and other "back office"
operations) to account for the increase in transaction volume that our
supplier and buyer growth creates. If we are unable to manage the growth of
our business effectively, our earnings could be materially and adversely
affected.
We have also recently acquired EMAX. We could have difficulty in effectively
assimilating and integrating EMAX into our operations. Any difficulties in
this process could disrupt our ongoing business, distract our management,
increase our expenses and otherwise adversely affect our business.
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Many of our employees have only recently joined us. Additionally, several of
our key executives have been employed by us for one year or less. If our
employees do not work well together or some of our employees do not succeed in
their designated roles, our financial condition and results of operations
could be materially adversely affected. We cannot be certain that our
management, operational and financial resources will be adequate to support
our future operations.
If we fail to attract and retain key employees, our business may suffer.
A key factor of our success will be the continued services and performance
of our executive officers and other key personnel. If we lose the services of
any of our executive officers, our financial condition and results of
operations could be materially and adversely affected. We do not have long-
term employment agreements with any of our key personnel. Our success also
depends upon our ability to identify, hire and retain other highly skilled
technical, managerial, editorial, marketing and customer service
professionals. Competition for this personnel is intense. In particular, it is
important that we hire additional customer service personnel in order to
maintain high quality service and maintain buyer and supplier loyalty. We
cannot be certain of our ability to identify, hire and retain sufficiently
qualified personnel. For example, we may encounter difficulties in attracting
a sufficient number of qualified software developers and operations personnel
for our online services and transaction-processing systems. Failure to
identify, hire and retain necessary technical, managerial, editorial,
merchandising, marketing and buyer service personnel could have a material
adverse effect on our financial condition and results of operations.
If we are unable to adapt our services to rapid technological change in online
commerce, our revenues and profits could be materially and adversely affected.
The Internet and the online commerce industry undergo rapid changes in
technology, products and services, user profiles and operating standards.
These changes could render our Web sites and proprietary technology and
systems obsolete. We must continually improve the performance, features and
reliability of our online services, particularly in response to our
competition. Our success will depend, in part, on our ability to:
. enhance our existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our target markets; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
We cannot be certain of our success in accomplishing the foregoing. If we
are unable, for technical, legal, financial or other reasons, to adapt to
changing market conditions or buyer requirements, our market share could be
materially adversely affected.
We may become exposed to product liability claims, which could result in
substantial costs and liability.
The sale of scientific products involves the risk of product liability
claims. We face potential liability for claims based on the type and adequacy
of the information and data that suppliers publish on our Web sites as well as
the nature of the products that are sold through our Web sites, including
claims for breach of warranty, product liability, misrepresentation, violation
of governmental regulations and other commercial claims. Although we maintain
general liability insurance and product liability insurance, our insurance may
not cover some claims and may not be adequate to fully indemnify us for
liabilities that may be imposed. A product liability claim against us, if
successful, could result in a significant liability that would have a material
adverse effect on our liquidity and capital resources. In addition, even the
successful defense of a product liability claim could result in substantial
costs and diversion of our management's efforts.
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We will be liable for any third party claims that may rise against EMAX
including claims related to important proprietary rights regarding EMAX's
technology. These claims could adversely affect our business.
In our acquisition of EMAX, we have acquired important proprietary rights
that are embodied in its software technology. This software technology is not
patented and existing copyright laws offer only limited practical protection.
By virtue of this acquisition, we will be liable for any valid third-party
claims that may arise against EMAX in relation to their proprietary rights or
contracts with suppliers and customers. While we have investigated EMAX's
proprietary rights and business practices, we cannot be certain that
ownership, infringement or other claims will not arise against EMAX. A
successful claim by a third-party could result in significant liability on our
part and could materially and adversely affect the value of the technology
that we are acquiring. As a precaution, a portion of the purchase price for
EMAX has been deposited into an escrow fund. If we become liable for any
claims against EMAX, we may be entitled to compensation from this escrow fund.
However, this escrow fund will terminate after two years and may not be
sufficient to adequately compensate us for any claims that do arise.
If we are not able to offer new services, we may not be able to maintain
revenue growth.
We plan to introduce new and expanded services and to expand our third-party
relationships in order to attract more buyers and suppliers to our Web sites
and increase transaction volume. We cannot be certain that we will be able to
offer these services in a cost-effective or timely manner. Any new services
that are not favorably received by buyers or suppliers could damage our
reputation or brand name. Expansion of our services will require us to devote
a significant amount of time and money and may strain our management,
financial and operating resources. The failure to generate profits from our
expanded services could have a material adverse effect on our earnings.
The content of our Web sites may expose us to various claims, which could
result in substantial costs and liabilities.
Our Web sites contain information concerning the products offered by
suppliers, including product descriptions, specifications and pricing. This
information is provided by suppliers and we generally do not independently
verify this information. As a result, we could potentially face liability for
fraud, negligence, copyright, patent or trademark infringement and other
claims based on the information contained on our Web sites. A successful claim
could subject us to significant liability that would have a material adverse
effect on our liquidity and capital resources. In addition, even the
successful defense of a claim could result in substantial costs and division
of our management's efforts and damage to our brand perception by our
customers.
If we are unable to protect our intellectual property rights, our business
could be materially and adversely affected.
Our software technology is not patented and existing copyright laws offer
only limited practical protection. We cannot guarantee that the legal
protections that we rely on will be adequate to prevent misappropriation of
our technology. Also, these protections do not prevent independent third-party
development of competitive products or services. Failure to protect against
the misappropriation of our intellectual property could have a material
adverse effect on our business operations.
We are dependent on proprietary technology licensed from third parties, the
loss of which could be costly.
We license a portion of the content for our online services from third
parties. Additionally, we intend to license a significant portion of our
transaction fulfillment systems from third parties. These third-party content
licenses may not be available to us on favorable terms, or at all, in the
future. In addition, we must be able to successfully integrate this content in
a timely and cost-effective manner to create an effective finished product. If
we fail to obtain necessary content on favorable terms or are unable to
successfully integrate this content or if we are unable to continue to license
our order fulfillment transaction systems on favorable terms, it could have a
material adverse effect on our business operations.
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Our products, trademarks and other proprietary rights may infringe on the
proprietary rights of third parties, which may expose us to litigation.
While we believe that our products, trademarks and other proprietary rights
do not infringe upon the proprietary rights of third parties, we cannot
provide any guarantees about the third-party products that are sold on our Web
sites or guarantee that third parties will not assert infringement claims
against us in the future or that any such assertion will not require us to
enter into a license agreement or royalty agreement with the party asserting a
claim. If the third-party products sold on our Web sites infringe the
proprietary rights of third parties, we may be deemed to infringe those rights
by selling such products. Even the successful defense of an infringement claim
could result in substantial costs and diversion of our management's efforts.
The failure to integrate successfully businesses that we have acquired or may
acquire could adversely affect our business.
We have acquired and intend to continue to acquire complementary businesses.
In particular, we acquired BioSupplyNet, Inc. in 1998, Internet Auctioneers
International, Inc. in 1999, SciCentral.com, Inc., Intralogix, Inc. and EMAX
in 2000. An element of our strategy is to broaden the scope and content of our
products and services through the acquisition of existing products,
technologies, services and businesses. Acquisitions entail numerous risks,
including:
. the integration of new operations, products, services and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
. the inability to generate revenues from new products and services
sufficient to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and policies;
. accounting effects that may adversely affect our financial results;
. the impairment of employee and customer relations as a result of any
integration of new management personnel;
. dilution to existing stockholders from the issuance of equity
securities; and
. liabilities or other problems associated with an acquired business.
We may have difficulty in effectively assimilating and integrating these, or
any future joint ventures, acquisitions or alliances, into our operations. Any
difficulties in the process could disrupt our ongoing business, distract our
management and employees, increase our expenses and otherwise adversely effect
our business. Any problems we encounter in connection with our acquisitions
could have a material adverse effect on our business.
Our planned international expansion will require significant financial
resources and management attention and could have a negative effect on our
earnings.
We intend to invest resources and capital to expand internationally. As a
result, we may need to establish international operations, hire additional
personnel and establish relationships with additional suppliers and customers.
This expansion will require significant financial resources and management
attention and could have a negative effect on our earnings. We cannot assure
you that we will be successful in creating international demand for our e-
commerce solutions and services. In addition, our international business may
be subject to a variety of risks, including, among other things, increased
costs associated with maintaining international marketing efforts, applicable
government regulation, fluctuations in foreign currency, difficulties in
collecting international accounts receivable and the enforcement of
intellectual property rights. We cannot assure you that these factors will not
have an adverse effect on future international sales and earnings. In
addition, we are currently contemplating registering our trademarks in other
countries. We cannot assure you that we will be able to do so.
37
<PAGE>
We rely on our suppliers and carriers in complying with government regulations
regarding the sale and distribution of regulated products, and their failure
to so comply could result in substantial civil and criminal liability.
Many of the products offered through our Web sites are subject to direct
regulation by governmental agencies, which includes numerous laws and
regulations generally applicable to the chemical, pharmaceutical, controlled
substances, human and biological reagents, nuclear chemical businesses, and
environmental spills. Because of our presence in the distribution chain, we
may be subject to significant liability for violations of these regulations
regardless of our actual involvement in a violation. We could be fined or
exposed to civil or criminal liability, including monetary fines and
injunctions for any violations. We have historically relied, and will in the
future rely, upon our suppliers to meet all packaging, distribution, labeling,
hazard and health information notices to purchasers, record keeping and
licensing requirements applicable to transactions conducted through our
system. In addition, we rely upon our carriers to comply with regulations
regarding the shipment of hazardous materials sold through our system. We
cannot assure you that our suppliers and carriers will comply with all
applicable government regulations.
Significant fluctuation in the market price of our common stock could result
in securities class action claims against us.
Significant price and value fluctuations have occurred with respect to the
securities of Internet-related companies. Our common stock price is likely to
be volatile in the future. In the past, following periods of downward
volatility in the market price of a company's securities, class action
litigation has often been pursued against such companies. If similar
litigation were pursued against us, it could result in substantial costs and a
diversion of our management's attention and resources.
Our future revenue growth would be adversely affected by a reduction in
spending in the scientific products industry.
We derive substantially all of our revenue from the scientific products
industry. We expect our future growth to depend on spending levels in this
industry. Any reduction in spending in the scientific products industry would
have a material adverse effect on our revenues.
Unless Web-based purchasing achieves widespread acceptance, we will have
difficulty achieving revenue growth.
Use of the Internet to purchase products, particularly in the scientific
products market, is at an early stage of development. Convincing buyers to
purchase scientific products online may be particularly difficult as such
buyers have traditionally relied on distributors of scientific products and
mail order catalogs to purchase their scientific products. If the use of e-
commerce services does not grow in the future, our Web site traffic and
resulting revenue could be materially and adversely affected.
The continued growth of e-commerce services is dependent upon a number of
factors that are beyond our control, including the following:
. continued growth in the number of buyers who use e-commerce services;
. continued development of transaction security technology;
. continued development of e-commerce technology;
. continued development and successful implementation of enterprise
software solutions;
38
<PAGE>
. emergence of standard and common nomenclature and methodology for e-
commerce; and
. development of complementary services and products.
The online scientific products market is highly competitive, which makes
achieving market share and profitability more difficult.
The online scientific products market is new, rapidly evolving and intensely
competitive. Our primary competition includes e-commerce providers, online
scientific communities and suppliers' e-commerce initiatives.
Competition is likely to intensify as this market matures. As competitive
conditions intensify, competitors may:
. enter into strategic or commercial relationships with larger, more
established and well-financed companies;
. secure services and products from suppliers on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
. secure exclusive deals with buyers that impede our sales; and
. devote substantially more resources to Web site and systems development.
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased competition, we may
experience reduced operating margins, as well as loss of market share and
brand recognition. We may not be able to compete successfully against current
and future competitors. These competitive pressures could have a material
adverse effect on our revenue growth and earnings.
Online commerce and database security concerns could adversely affect traffic
on our Web sites and our revenues.
The secure transmission of confidential information over public networks is
a fundamental requirement for online commerce. Concerns over the security of
transactions and commercial online services and other privacy issues may also
inhibit the growth of the Internet and the online commerce industry. We
license encryption and authentication technology for the transmission of
confidential information, such as buyer credit card numbers, through our
online system. In addition, we maintain an extensive confidential database of
buyer profiles and transaction information. Technological advances, including
new discoveries in the field of cryptography, could result in a compromise or
breach of our security systems. Security breaches could have a material
adverse effect on our reputation, financial condition and results of
operations. An intruder who breaches our security measures could
misappropriate proprietary information or cause interruptions in our
operations. We could be required to spend a significant amount of time and
money to protect against security breaches or to alleviate problems caused by
such breaches. Security breaches could also expose us to a risk of loss or
litigation and possible liability. We cannot be certain that our security
measures will prevent security breaches.
Additional regulation of online commerce could adversely affect demand for our
products and services.
There are currently few laws and regulations directly applicable to the
Internet and e-commerce services. However, we expect that additional
regulation may be adopted covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality
of products and services. In addition, the growth and development of e-
commerce may prompt calls for more stringent buyer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the growth of the
Internet or commercial online services, which could, in turn, decrease the
demand for our products and services. Additional regulation could also
increase our cost of doing business.
39
<PAGE>
The application of sales and other taxes to online commerce could adversely
affect demand for our products and services and are administratively
burdensome.
The application of sales and other taxes by state and local governments to
online commerce is uncertain and may take years to resolve. In particular, the
federal government and a number of states are currently reviewing the
appropriate tax treatment of online commerce, and new federal laws or state
tax regulations may subject us and/or the suppliers and buyers that use our
Web sites to additional state sales and income taxes. The imposition of
additional sales taxes on transactions conducted through our Web sites could
make this service less valuable to buyers and adversely impact transaction
volume. The imposition of any such taxes or other regulations could have a
material adverse effect on our revenues and earnings. In addition, the
collection and payment of such taxes may cause us to incur significant
administrative effort and expense. Our failure to properly collect and pay
such taxes in any jurisdiction could subject us to penalties that could
adversely affect our earnings.
Items 7a: Quantitative and Qualitative Disclosures About Market Risk
Not Applicable. See Item 7.
Item 8. Financial Statements and Supplementary Data
The Financial Statements of SciQuest are filed together with this Report.
See the Index to Financial Statements on page F-1 for a list of the Financial
Statements filed herewith.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Directors of SciQuest is presented under the
caption "Election of Directors" in SciQuest's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 24, 2000, which will be
filed with the Securities and Exchange Commission (the "SEC") on or about
April 12, 2000, and is incorporated herein by reference.
Information concerning the Company's executive officers can be found in Part
I, Item 1, of this Form 10-K under the caption "Executive Officers" in
accordance with Instruction 3 of Item 401(b) of Regulation S-K and General
Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
Information in answer to Item 11 is presented under the caption
"Compensation of Executive Officers and Other Information" excluding the
information under the captions "Report of the Officer Compensation Committee
on Executive Compensation" and "Stockholder Return Performance Graph" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 24, 2000, which will be filed with the SEC on or about April
12, 2000, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in answer to Item 12 is presented under the caption "Stock
Ownership" in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 24, 2000, which will be filed with the SEC
on or about April 12, 2000, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information in answer to Item 13 is presented under the captions "Certain
Business Relationships" in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2000, which will be filed
with the SEC on or about April 12, 2000, and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements.
See the Index to Financial Statements and Financial Statement Schedules on
page F-1 for a list of the Financial Statements filed herewith.
2. Financial Statement Schedules.
Not Applicable.
3. List of Exhibits.
See (c) below for a list of the Exhibits incorporated by reference herein or
filed herewith.
(b) Reports on Form 8-K.
None.
41
<PAGE>
(c) Exhibits required by Item 601 of Regulation S-K.
The following exhibits are filed as a part of, or are incorporated by
reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the
Registrant defining rights of the holders of Common Stock of the
Registrant.
4.2* Specimen Stock Certificate.
10.1* SciQuest.com, Inc. Stock Option Plan dated as of September 4, 1997.
10.2* Amendment No. 1 to SciQuest.com, Inc. Stock Option Plan dated as of
September 11, 1998.
10.3* Amendment No. 2 to SciQuest.com, Inc. Stock Option Plan dated as of
February 26, 1999.
10.4* Amendment No. 3 to SciQuest.com, Inc. Stock Option Plan dated as of
March 1, 1999.
10.5* Amendment No. 4 to SciQuest.com, Inc. Stock Option Plan dated as of
August 27, 1999.
10.6* Agreement of Sublease by and between Inspire Pharmaceuticals, Inc. and
the Registrant dated July 31, 1998.
10.7* Sublease Agreement by and between Applied Innovation, Inc. and the
Registrant dated March 11, 1999.
10.8* Sublease Agreement by and between Vascular Therapeutics, Inc. and the
Registrant dated August 19, 1999.
10.9* Master Lease Agreement by and between Comdisco, Inc. and the
Registrant dated May 21, 1999, as amended.
10.10* Stock Restriction Agreement by and between the Registrant and Antony
Francis dated March 1, 1999.
10.11* Registration Rights Agreement by and among the Registrant and the
purchasers of Class B Common Stock and the purchasers of Series A
Preferred Stock dated October 17, 1997, as amended.
10.12* Registration Rights Agreement by and among the Registrant and the
purchasers of Series C Preferred Stock dated September 29, 1998.
10.13* Registration Rights Agreement by and among the Registrant and Antony
Francis dated March 1, 1999.
10.14* Registration Rights Agreement by and among the Registrant, the holders
of Series B Preferred Stock and the purchasers of Series D Preferred
Stock dated May 18, 1999, as amended.
10.15* Registration Rights Agreement by and among the Registrant and the
holders of Series E Preferred Stock dated July 27, 1999.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.16* Merger Agreement by and among the Registrant, SciQuest Merger
Subsidiary, Inc., Internet Auctioneers International, Inc. and Mark
Atlas dated July 27, 1999.
10.17* Merger Agreement by and among the Registrant, SciQuest Acquisition,
Inc. and BioSupplyNet, Inc. dated September 29, 1998.
10.18* Lease Agreement by and between Duke-Weeks Realty Limited Partnership
and the Registrant dated as of October 19, 1999.
10.19* Content Conversion Services Agreement by and between the Registrant
and Requisite Technology, Inc. dated December 18, 1998.
10.20** Form of Strategic Alliance Plus Agreement.
10.21** Form of Strategic Purchasing Agreement.
10.22** Registration Rights Agreement by and among the Registrant and the
former holders of Intralogix, Inc. stock dated January 14, 2000.
10.23* Amendment No. 5 to SciQuest.com, Inc. Stock Option Plan.
10.24* SciQuest.com, Inc. 1999 Stock Incentive Plan dated as of October 12,
1999.
10.25** First Amendment to 1999 Stock Incentive Plan.
10.26** Merger Agreement by and among the Registrant, Lujack Subsidiary, Inc.,
Intralogix, Inc., Mary T. Romac, Timothy M. Brady and Dale L. Young
dated January 14, 2000.
10.27** Merger Agreement by and among the Registrant, SciCentral Acquisition
Subsidiary, Inc., SciCentral.com, Inc. and the shareholders of
SciCentral.com, Inc. dated February 2, 2000.
10.28** Registration Rights Agreement by and among the Registrant and the
former holders of SciCentral, Inc. stock dated February 2, 2000.
10.29** Restricted Stock Agreement between the Registrant and W. Andrew
McKenna dated January 31, 2000.
10.30** Agreement and Plan of Merger and Reorganization between the
Registrant, ESP Acquisition, Inc. and EMAX Solution Partners, Inc.
dated March 13, 2000.
10.31** Registration Rights Agreement by and among the Registrant and the
former holders of EMAX Solution Partners, Inc. stock dated March 13,
2000.
21.1** List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-87433).
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-32582).
43
<PAGE>
Item 8--Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SciQuest.com, Inc.:
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997,
1998 and 1999............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SciQuest.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit), and
of cash flows present fairly, in all material respects, the financial position
of SciQuest.com, Inc. and its subsidiaries (the "Company") at December 31,
1999 and 1998, and the results of their operations and their cash flows for
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 2, 2000
Raleigh, North Carolina
F-2
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 5,391,462 $ 98,126,414
Short-term investments............................ 1,886,693 24,285,293
Accounts receivable............................... 104,082 1,771,634
Prepaid expenses and other assets................. 37,057 1,625,355
----------- -------------
Total current assets............................. 7,419,294 125,808,696
----------- -------------
Restricted cash.................................... 82,236 --
Long-term investments.............................. -- 23,592,483
Property and equipment, net........................ 357,460 2,869,423
Capitalized development costs, net................. -- 1,392,085
Other assets....................................... 1,314,109 3,238,997
----------- -------------
Total assets..................................... $ 9,173,099 $ 156,901,684
----------- -------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.................................. $ 694,611 $ 4,250,978
Accrued liabilities............................... 280,003 1,111,395
Current maturities of capital lease obligations... 18,048 463,141
Current maturities of notes payable............... 14,060 --
----------- -------------
Total current liabilities........................ 1,006,722 5,825,514
----------- -------------
Deferred income taxes.............................. 285,005 66,225
Capital lease obligations, less current
maturities........................................ 35,082 1,190,786
Notes payable, less current maturities............. 65,128 --
Commitments and contingencies (Note 14)............ -- --
Mandatorily redeemable convertible preferred
stock............................................. 10,882,702 --
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par
value; 769,231 and no shares designated; 769,221
and no shares issued and outstanding as of
December 31, 1998, and 1999, respectively........ 683,135 --
Series C convertible preferred stock, $0.001 par
value; 700,000 and no shares designated,
respectively; 546,405 and no shares issued and
outstanding as of December 31, 1998 and 1999,
respectively..................................... 1,524,470 --
Preferred stock, undesignated, 10,000,000 shares
authorized; none issued or outstanding........... -- --
Common stock, $0.001 par value; 90,000,000 shares
authorized; 3,412,447 and 26,353,652 shares
issued and outstanding as of December 31, 1998,
and 1999, respectively........................... 3,412 26,354
Class B common stock, $0.001 par value, 250,020
and no shares authorized, issued and outstanding
as of December 31, 1998, and 1999, respectively.. 100,000 --
Additional paid-in capital........................ 49,949 591,841,571
Deferred compensation............................. -- (12,276,151)
Deferred customer acquisition costs............... -- (391,138,705)
Accumulated other comprehensive loss.............. (6,673) --
Accumulated deficit............................... (5,455,833) (38,633,910)
----------- -------------
Total stockholders' equity (deficit).............. (3,101,540) 149,819,159
----------- -------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 9,173,099 $ 156,901,684
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Revenues............................... $ 196,381 $ 477,818 $ 3,882,441
Cost of revenues....................... -- 41,880 3,426,692
--------- ----------- -------------
Gross profit......................... 196,381 435,938 455,749
--------- ----------- -------------
Operating expenses:
Development........................... 140,520 1,191,135 9,008,261
Sales and marketing................... 256,699 1,706,033 10,206,133
General and administrative............ 457,058 1,104,010 7,075,907
Stock based non-cash employee
compensation......................... -- -- 323,676
Stock based non-cash customer
acquisition costs.................... -- -- 9,107,753
Purchased in-process research and
development.......................... -- 791,102 --
--------- ----------- -------------
Total operating expenses............. 854,277 4,792,280 35,721,730
--------- ----------- -------------
Operating loss......................... (657,896) (4,356,342) (35,265,981)
--------- ----------- -------------
Interest income (expense):
Interest income....................... 3,235 110,565 1,897,115
Interest expense...................... (35,028) (30,524) (27,991)
--------- ----------- -------------
Net interest income (expense)........ (31,793) 80,041 1,869,124
--------- ----------- -------------
Loss before income taxes............... (689,689) (4,276,301) (33,396,857)
Income tax benefit..................... -- 54,695 218,780
--------- ----------- -------------
Net loss............................... (689,689) (4,221,606) (33,178,077)
========= =========== =============
Pro forma net loss per common share--
basic and diluted..................... $ (2.09)
Pro forma weighted average common
shares outstanding.................... 15,846,189
Net loss available to common
stockholders.......................... $(689,689) $(4,550,329) $(112,467,099)
========= =========== =============
Net loss per common share--basic and
diluted............................... $ (0.20) $ (1.33) $ (18.10)
Weighted average common shares
outstanding--basic and diluted........ 3,412,447 3,412,447 6,214,893
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series C Series E Class B
Preferred Stock Preferred Stock Preferred Stock Common Stock Common Stock
------------------- --------------------- --------------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- --------- ----------- --------- ----------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ -- $ -- -- $ -- -- $ -- 3,412,447 $ 3,412 250,020 $ 100,000
Noncash
management
compensation
expense......... -- -- -- -- -- -- -- -- -- --
Issuance of
Series A
convertible
preferred stock
at $0.91 per
share in
exchange for
cash and
conversion of
promissory note,
net............. 769,221 683,135 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- ----------- ---------- ------- --------- ---------
Balance at
December 31,
1997............ 769,221 683,135 -- -- -- -- 3,412,447 3,412 250,020 100,000
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
shares of
BioSupplyNet,
Inc. ........... -- -- 546,405 1,524,470 -- -- -- -- -- --
Issuance of
stock warrants.. -- -- -- -- -- -- -- -- -- --
Accretion of
mandatorily
redeemable
preferred
stock........... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
Other
comprehensive
loss--unrealized
loss on
investments..... -- -- -- -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- ----------- ---------- ------- --------- ---------
Balance at
December 31,
1998............ 769,221 683,135 546,405 1,524,470 -- -- 3,412,447 3,412 250,020 100,000
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
cash............ -- -- 89,408 250,000 -- -- -- -- -- --
Issuance of
Series E
convertible
preferred stock
at $11.32 per
share in
exchange for
shares of IAI,
Inc. ........... -- -- -- -- 114,995 1,255,616 -- -- -- --
Issuance of
Common Stock
warrants in
connection with
Series D
preferred
stock........... -- -- -- -- -- -- -- -- -- --
Realized loss on
sale of
investments..... -- -- -- -- -- -- -- -- -- --
Accretion of
mandatorily
redeemable
preferred
stock........... -- -- -- -- -- -- -- -- -- --
Deferred
compensation
related to
acquisition of
IAI, Inc. ...... -- -- -- -- -- -- -- -- -- --
Deferred
compensation
related to
issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Deferred partner
acquisition
costs related to
issuance stock
warrants........ -- -- -- -- -- -- -- -- -- --
Conversion of
preferred stock
into common
stock........... (769,221) (683,135) (635,813) (1,774,470) (114,995) (1,255,616) 13,438,185 13,438 (250,020) (100,000)
Proceeds from
sale of common
stock in initial
public
offering........ -- -- -- -- -- -- 8,625,000 8,625 -- --
Exercise of
common stock
options......... -- -- -- -- -- -- 436,874 437 -- --
Exercise of
common stock
warrants........ -- -- -- -- -- -- 441,146 442 -- --
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation
related to
acquisition of
IAI, Inc. ...... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred partner
acquisition
costs........... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- ----------- ---------- ------- --------- ---------
Total at
December 31,
1999............ -- $ -- -- $ -- -- $ -- 26,353,652 $26,354 -- $ --
========= ========= ========= =========== ========= =========== ========== ======= ========= =========
<CAPTION>
Deferred Accumulated Total
Additional Customer Other Stockholders'
Paid Deferred Acquisition Comprehensive Accumulated Equity
in Capital Compensation Costs Income (Loss) Loss (Deficit)
------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ $ 186,588 $ -- $ -- $ -- $ (544,538) $ (254,538)
Noncash
management
compensation
expense......... 180,000 -- -- -- -- 180,000
Issuance of
Series A
convertible
preferred stock
at $0.91 per
share in
exchange for
cash and
conversion of
promissory note,
net............. -- -- -- -- -- 683,135
Net loss........ -- -- -- -- (689,689) (689,689)
------------- ------------- -------------- ------------- ------------- --------------
Balance at
December 31,
1997............ 366,588 -- -- -- (1,234,227) (81,092)
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
shares of
BioSupplyNet,
Inc. ........... -- -- -- -- -- 1,524,470
Issuance of
stock warrants.. 12,084 -- -- -- -- 12,084
Accretion of
mandatorily
redeemable
preferred
stock........... (328,723) -- -- -- -- (328,723)
Net loss........ -- -- -- -- (4,221,606) (4,221,606)
Other
comprehensive
loss--unrealized
loss on
investments..... -- -- -- (6,673) -- (6,673)
------------- ------------- -------------- ------------- ------------- --------------
Balance at
December 31,
1998............ 49,949 -- -- (6,673) (5,455,833) (3,101,540)
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
cash............ -- -- -- -- -- 250,000
Issuance of
Series E
convertible
preferred stock
at $11.32 per
share in
exchange for
shares of IAI,
Inc. ........... -- -- -- -- -- 1,255,616
Issuance of
Common Stock
warrants in
connection with
Series D
preferred
stock........... 726,137 -- -- -- -- 726,137
Realized loss on
sale of
investments..... -- -- -- 6,673 -- 6,673
Accretion of
mandatorily
redeemable
preferred
stock........... (79,289,022) -- -- -- -- (79,289,022)
Deferred
compensation
related to
acquisition of
IAI, Inc. ...... -- (400,000) -- -- -- (400,000)
Deferred
compensation
related to
issuance of
stock options... 12,199,827 (12,199,827) -- -- -- --
Deferred partner
acquisition
costs related to
issuance stock
warrants........ 400,246,458 -- (400,246,458) -- -- --
Conversion of
preferred stock
into common
stock........... 129,106,344 -- -- -- -- 125,306,561
Proceeds from
sale of common
stock in initial
public
offering........ 126,916,635 -- -- -- -- 126,925,260
Exercise of
common stock
options......... 60,351 -- -- -- -- 60,788
Exercise of
common stock
warrants........ 1,824,892 -- -- -- -- 1,825,334
Amortization of
deferred
compensation
related to stock
options......... -- 240,341 -- -- -- 240,341
Amortization of
deferred
compensation
related to
acquisition of
IAI, Inc. ...... -- 83,335 -- -- -- 83,335
Amortization of
deferred partner
acquisition
costs........... -- -- 9,107,753 -- -- 9,107,753
Net loss........ -- -- -- -- (33,178,077) (33,178,077)
------------- ------------- -------------- ------------- ------------- --------------
Total at
December 31,
1999............ $591,841,571 $(12,276,151) $(391,138,705) $ -- $(38,633,910) $149,819,159
============= ============= ============== ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................ $(689,689) $(4,221,606) $(33,178,077)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization.......... 12,421 205,122 1,264,120
Noncash management compensation
expense............................... 180,000 -- --
Amortization of debt discount.......... -- 12,084 --
Purchased in process research and
development........................... -- 791,102 --
Deferred tax benefit................... -- (54,695) (218,780)
Amortization of deferred compensation.. -- -- 323,676
Amortization of deferred customer
acquisition costs..................... -- -- 9,107,753
Amortization of discount on
investments........................... -- -- (215,069)
Changes in operating assets and
liabilities
Accounts receivable................... 6,460 (61,425) (1,650,144)
Prepaid expenses and other assets..... (4,830) (47,535) (594,544)
Accounts payable...................... 13,125 469,833 3,556,367
Other assets.......................... -- -- (2,688,588)
Accrued liabilities................... 91,659 (184,467) 766,928
--------- ----------- ------------
Net cash used in operating
activities.......................... (390,854) (3,091,587) (23,526,358)
--------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment...... -- (273,341) (3,420,505)
Proceeds from sale of equipment......... -- -- 704,522
Cash received from acquisitions......... -- 9,173 4,918
Maturity of investments................. -- -- 11,854,602
Purchase of investments, including
restricted cash........................ -- (1,975,602) (57,541,707)
--------- ----------- ------------
Net cash used in investing
activities.......................... -- (2,239,770) (48,398,170)
--------- ----------- ------------
Cash flows from financing activities
Borrowings under notes payable.......... 211,581 562,110 --
Repayment of notes payable.............. (90,869) (206,348) (175,188)
Repayment of capital lease obligations.. (8,322) (2,758) (87,689)
Proceeds from exercise of common stock
warrants............................... -- -- 1,825,334
Proceeds from exercise of common stock
options................................ -- -- 60,788
Proceeds from issuance of Class B common
stock, net............................. -- -- --
Proceeds from issuance of Series A
convertible preferred stock, net....... 600,596 -- --
Proceeds from issuance of Series C
convertible preferred stock, net....... -- -- 250,000
Proceeds from issuance of Series B
mandatorily redeemable convertible
preferred stock, net................... -- 10,038,979 --
Proceeds from issuance of Series D
mandatorily redeemable convertible
preferred stock, net................... -- -- 35,860,975
Proceeds from sale of common stock in
initial public offering, net........... -- -- 126,925,260
--------- ----------- ------------
Net cash provided by financing
activities.......................... 712,986 10,391,983 164,659,480
--------- ----------- ------------
Net increase in cash and cash
equivalents............................. 322,132 5,060,626 92,734,952
Cash and cash equivalents at beginning of
period.................................. 8,704 330,836 5,391,462
--------- ----------- ------------
Cash and cash equivalents at end of
period.................................. $ 330,836 $ 5,391,462 $ 98,126,414
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
SciQuest.com, Inc. ("SciQuest.com" or the "Company"), which began operations
on November 27, 1995, is a Web-based, interactive marketplace for scientific
and laboratory products used by pharmaceutical, clinical, biotechnology,
chemical, industrial and educational organizations worldwide. The Company's
marketplace solutions utilize enabling Internet technologies and leverage its
management's extensive industry expertise to streamline the traditionally
inefficient scientific products supply chain. The Company's distributor-
neutral approach allows it to create an open and scalable marketplace that it
believes is more attractive to both buyers and suppliers. The Company earns
revenues from e-commerce transactions generated by purchases made through the
SciQuest.com Web sites. In addition, SciQuest.com earns revenue for banner
advertising on its Web sites and advertising in the printed catalogue of
scientific products (the "Source Book"), which is prepared and distributed by
the Company's subsidiary, BioSupplyNet, Inc. ("BioSupplyNet") and on
commissions received for the auction, through one of the Company's Web sites
of used scientific equipment by the Company's subsidiary, Internet Auctioneers
International, Inc. ("IAI"). SciQuest.com's technology allows buyers to
quickly find vendors of the scientific products and services they need and
then order these products directly from the supplier using SciQuest.com's Web
sites.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of SciQuest.com,
Inc. and its wholly-owned subsidiaries, BioSupplyNet, Inc. and Internal
Auctioneers International, Inc. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Investments
The Company considers all investments that are not considered cash
equivalents and with a maturity of less than one year from the balance sheet
date to be short term investments. The Company considers all investments with
a maturity of greater than one year to be long term investments. At December
31, 1998, all investments were considered as available-for-sale and were
carried at fair value with unrealized gains and losses recognized as a
component of other comprehensive income. At December 1999, all investments are
considered as held-to-maturity and are carried at amortized cost, as the
Company has both the positive intent and ability to hold them to maturity. The
unrealized holding loss of $6,673 on the Company's investments at December 31,
1998 was amortized to interest income over the period from the date of the
transfer of the investments to held-to-maturity to the maturity date of the
related investments. Interest income includes interest, amortization of
investment purchases premiums and discounts, and realized gains and losses on
sales of securities. Realized gains and losses on sales of investment
securities are determined based on the specific identification method.
F-7
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Cash
Restricted cash was comprised of a certificate of deposit which served as
collateral on the Company's bank loan. This certificate of deposit was to be
maintained until the bank loan was repaid. During the year ended December 31,
1999, the Company repaid the bank loan, and therefore this certificate of
deposit is no longer restricted.
Accounts Receivable
The Company bears all risk of loss on credit sales of scientific products in
e-commerce transactions. Accounts receivable are presented net of an allowance
for uncollectable accounts of $37,000 and $39,000 at December 31, 1998 and
1999, respectively.
Property and Equipment
Property and equipment is primarily comprised of furniture and computer
equipment which are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which range from three to five years.
Property and equipment includes certain equipment under capital leases. These
items are depreciated over the shorter of the lease period or the estimated
useful life of the equipment.
Development Costs
Development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web sites and costs of
managing and integrating data on this Company's web sites. In March 1998, the
Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants ("AICPA") issued Statements of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or obtained for
Internal Use," ("SOP No. 98-1") which provides guidance regarding when
software developed or obtained for internal use should be capitalized. SOP No.
98-1 is effective for financial standards for fiscal years beginning after
December 15, 1998. The Company adopted SOP No. 98-1 effective January 1, 1999.
The adoption of SOP No. 98-1 did not have a material impact on the Company's
consolidated financial statements. With the adoption of SOP No. 98-1, the
Company began accounting for the software development component of development
costs in accordance with SOP No. 98-1 which requires certain costs associated
with the development of the Company's Web sites to be capitalized and
amortized over the useful life of the related applications, which generally
range from three months to one year. Capitalized development cost are
amortized over the estimated life of the related application.
Capitalized Software Costs
Software development costs are required to be capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. Capitalized software
costs which are included in capitalized development costs result from the
acquisition of BioSupplyNet (see Note 3) and were determined by an independent
valuation of BioSupplyNet.
These capitalized software costs are primarily associated with a search
engine with e-commerce capabilities and high level electronic taxonomy and
ontological conventions under development by BioSupplyNet at the date of
acquisition. These costs are being amortized over a period of 27 months.
Intangible Assets
Intangible assets, which resulted primarily from the acquisition of
BioSupplyNet, were determined by valuations prepared by management and are
primarily associated with the Source Book and contracts with certain Web sites
(the "Web Site Agreements") to provide a link to the SciQuest.com Web site.
Because the Source
F-8
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Book is a printed publication, which must be updated on an annual basis,
capitalized costs related to the Source Book are being amortized over a period
of 15 months. Capitalized costs related to the Web Site Agreements are being
amortized over a 12 month period which is the remaining term of such
agreements.
Goodwill represents the excess of the purchase price of BioSupplyNet and
Internet Auctioneers International, Inc. over the fair value of the assets
acquired. Goodwill is being amortized over a period of three to five years.
Purchased In-Process Research and Development
The acquisition cost of in-process technology that at the date of purchase
has not achieved technological feasibility and has no alternative future use
is charged to operations in the period such technology is acquired. Purchased
in-process research and development costs for the year ended December 31, 1998
relate to the acquisition of BioSupplyNet (see Note 3).
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1998 and 1999 approximated their fair
value due to the short-term nature of these items. The Company considers its
short-term and long-term investments to be held-to-maturity and therefore
these investments are carried at amortized cost. The fair value of the
Company's short-term and long-term investments at December 31, 1998 and 1999,
based on market quotes, is presented in note 5.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets or the business to which such assets relate. No impairments were
required to be recognized during the years ended December 31, 1997, 1998, and
1999.
Revenue Recognition
The Company's revenues have historically been derived from services provided
to customers for development of Internet services, short term contracts for
banner advertising on its Web sites and from the sale of advertising included
in the Source Book. In April 1999, the Company began selling scientific
products through its e-commerce Web sites.
Advertising revenues on banner contracts are recognized ratably over the
period in which the advertisement is displayed, provided that the Company has
no significant remaining obligations to the advertiser and that collection of
the resulting receivable is probable. Revenues from advertising included in
the Source Book are recognized at the date the Source Book is published and
distributed to the purchasers of scientific products as the Company has met
all of its obligations to the advertisers at that date.
Revenues received from the sale of scientific products in e-commerce
transactions are recorded as product revenues and are recognized by the
Company upon notification from the suppliers of scientific products that the
items ordered have been shipped to purchasers. A reserve for returns is
recognized for estimated product returns to the Company's suppliers. Product
revenues totaled approximately $2,979,000 for the year ended December 31,
1999.
F-9
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues received from the auction of used scientific products by the
Company's subsidiary, IAI, represents commissions which are determined based
on a percentage of the value of the scientific products sold. The Company
recognizes these commissions in revenue at the date the related piece of
scientific equipment is sold.
Cost of Revenues
Cost of product revenues represents the purchase price to the Company of the
scientific products sold through its e-commerce Web sites, shipping and
handling fees and the cost of maintaining such Web sites. The Company
generally takes legal title to the scientific products purchased at the date
of shipment and relinquish title to our customers upon delivery.
In addition, the Company bears all credit risk for its sales of scientific
products in e-commerce transactions.
Cost of advertising and subscription revenue includes the cost of preparing
the banner ads for display on the Company's Web sites and the cost of
publishing and distributing the Source Book. Advertising production costs are
recorded as cost of revenues the first time an advertisement appears on the
Company's Web sites.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales
and marketing expenses also include costs of advertising, trade shows and
certain indirect costs. All costs of advertising the services and products
offered by the Company are expensed as incurred. Advertising expense totaled
approximately $15,000, $181,000 and $1,900,000 for the years ended December
31, 1997, and 1998, and 1999, respectively.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the
temporary differences between financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock Based Compensation
The Company accounts for non-cash stock based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", ("APB No. 25") which states that no
compensation expense is recognized for stock options or other stock-based
awards to employees that are granted with an exercise price equal to or above
the estimated fair value per share of the Company's common stock on the grant
date. In the event that stock options are granted with an exercise price below
the estimated fair market value of the Company's common stock at the grant
date, the difference between the fair market value of the Company's common
stock and the exercise price of the stock option is recorded as deferred
compensation. Deferred compensation is amortized to compensation expense over
the vesting period of the related stock option. The Company recognized
$323,676 in noncash compensation expense related to amortization of deferred
compensation during the year ended December 31, 1999. The Company did not
recognize any noncash compensation expense related to stock options during the
years ended December 31, 1997 and 1998, as no options were granted with
exercise prices below fair value until 1999. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires
compensation expense to be disclosed based on the fair value of the options
granted at the date of the grant.
F-10
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and investments. Cash and cash equivalents are deposited with high
credit quality financial institutions which invest primarily in U.S.
Government securities, highly rated commercial paper and certificates of
deposit guaranteed by banks which are members of the FDIC. The counterparties
to the agreements relating to the Company's investments consist primarily of
the U.S. Government and various major corporations with high credit standings.
In 1997, one customer accounted for 30% of revenues. No single customer
accounted for more than 10% of the Company's revenues during the year ended
December 31, 1998. During 1999, two customers comprised 14% and 34%,
respectively, of the Company's revenue. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
customers comprising the Company's customer base and because all customers are
located in the United States. At December 31, 1998, one customer comprised 30%
of the accounts receivable balance. At December 31, 1999, two customers
comprised 21% and 27%, respectively, of the accounts receivable balance. All
of the Company's revenues are from sales transactions originating in the
United States.
The Company relies on a number of third party suppliers for various
services, including e-commerce fulfillment services. While the Company
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in supply of these services by the
current suppliers could materially harm the business.
Cash Flows
The Company made cash payments for interest of $33,416, $18,521, and $27,681
during the years ended December 31, 1997, 1998, and 1999, respectively.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $0, $55,130, and $1,688,485 during the
years ended December 31, 1997,1998, and 1999 respectively.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS No. 130"). Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. The Company's only item of
other comprehensive income during the year ended December 31, 1998 was the
unrealized gain on investments in debt securities considered as available-for-
sale. The Company had no items of other comprehensive income for the year
ended December 31, 1999.
Segment Reporting
The Company has determined that it does not have any separately reportable
operating segments as of December 31, 1998 and 1999.
Net Income (Loss) Per Common Share
Historical
Basic net income (loss) per common share ("Basic EPS") is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding. Diluted net
F-11
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income (loss) per common share ("Diluted EPS") is computed by dividing net
income (loss) available to common stockholders by the weighted average number
of common shares and dilutive potential common share equivalents then
outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
Class B common stock and convertible preferred stock. The calculation of the
net loss per share available to common stockholders for the years ended
December 1997, 1998, and 1999, does not include 545, 5,325,054 and 6,662,854,
respectively, potential shares of common stock equivalents, as their impact
would be anti-dilutive.
Pro Forma (Unaudited)
Pro forma net income (loss) per common share is calculated assuming the
reclassification of all outstanding shares of Class A common stock to common
stock and the conversion of all outstanding shares of Class B common stock and
all outstanding shares of preferred stock into common stock which occurred
upon the effectiveness of the Company's initial public offering on November
19, 1999 as if such conversion occurred on January 1, 1999, or the date of
issuance of the applicable preferred stock if later. Therefore, accretion of
mandatorily redeemable preferred stock of $79,289,022 for the year ended
December 31, 1999 is excluded from the calculation of pro forma net loss per
common share.
The calculation of pro forma net loss per common share for the year ended
December 31, 1999 does not include , respectively, potential shares of
common stock equivalents, as their impact would be anti-dilutive.
The calculation of the Company's pro forma net loss per common share before
stock based noncash charges for the year ended December 31, 1999, is presented
below:
<TABLE>
<S> <C>
Net Loss...................................................... $(33,178,077)
Stock based noncash charges................................... 9,431,429
------------
Net loss before stock based noncash charges................... $(23,746,648)
============
Pro forma net loss per common share........................... $ (1.50)
============
Pro forma weighted average common stock shares outstanding.... 15,846,189
</TABLE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes a new
model for accounting for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarter's of fiscal years beginning after June 15,
2000. The Company currently does not and does not presently intend in the
future to invest in derivative financial instruments and therefore does not
expect that the adoption of SFAS No. 133 will have a material impact on the
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") which addresses certain criteria for revenue recognition. SAB 101
is required to be adopted for reporting periods beginning after January 15,
2000. The adoption of SAB 101 is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
F-12
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Acquisitions
On September 29, 1998, the Company purchased all of the outstanding common
and preferred stock of BioSupplyNet in exchange for the issuance of 546,405
shares of the Company's Series C convertible preferred stock and 162,718
warrants to purchase the Company's common stock at an exercise price of $1.85
per share. In addition, the Company issued 192,280 options to purchase the
Company's common stock primarily to former employees of BioSupplyNet who
became employees of the Company. Of those options, 189,297 issued with an
exercise price of $0.18 per share which was the fair value of the Company's
common stock on the date of the grant. The remaining 2,983 options were
replacement options with an exercise price of $0.002 per share. The Company
did not record any purchase price related to the 2,983 options issued with an
exercise price of $0.002 per share, as the value of the options as calculated
in accordance with SFAS No. 123 was determined to be de minimis. The
acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price allocated to the assets acquired and
liabilities assumed based on our estimates of fair value at the acquisition
date. The fair value assigned to intangible assets acquired was based on a
valuation prepared by management of the Company of the purchased in-process
research and development, developed technology, the Source Book and the
management of BioSupplyNet. The fair value of the tangible and intangible
assets acquired and purchased in-process research and development was
determined by a valuation prepared by the management of the Company using the
average of a risk-adjusted income approach based on stage of completion and
the estimated cost actually incurred by BioSupplyNet in developing the
technology, for acquired research and development and completed technology,
and a risk-adjusted income approach for the Source Book and the Web Site
Agreements. The excess of the purchase price over the fair values of assets
acquired less liabilities assumed was allocated to goodwill.
The total purchase price of $1,988,524 consisted of 546,405 shares of the
Company's Series C preferred stock with an estimated fair value of $2.80 per
share, based on the per share price of the Company's Series B mandatorily
redeemable convertible preferred stock which was sold between July and
November 1998, and the assumption of $464,054 of net liabilities of
BioSupplyNet. Of the total purchase price, $791,102 was allocated to acquired
in process research and development and immediately charged to operations
because the in-process technology acquired had not reached the stage of
technological feasibility at the date of the acquisition and had no
alternative future use. In addition, $364,148 of the purchase price was
allocated to capitalized software costs for completed technology, $378,592 was
allocated to the Source Book, $80,766 was allocated to the Web Site Agreements
and $79,809 was allocated to the tangible assets of BioSupplyNet, which were
comprised of cash, accounts receivable and furniture and equipment. The
remaining purchase price of $294,107 was allocated to goodwill.
Of the total purchase price, $791,102 represents purchased in-process
research and development related to an e-commerce product offering being
developed by BioSupplyNet that had not yet reached technological feasibility
and had no alternative future use. The value assigned to in-process research
and development was based on a valuation prepared by management of the
Company. The value assigned to e-commerce technology being developed by
BioSupplyNet was adjusted to reflect the relative value of this e-commerce
technology based on stage of completion, complexity of the work completed at
the date of the acquisition, difficulty of completing the development, the
development costs already incurred by BioSupplyNet and projected costs to
complete the development of the e-commerce technology and resulting projected
net cash flows from the e-commerce technology. The value assigned to purchased
in-process research and development was based on key assumptions, including
projected revenues from the e-commerce product offering, current and expected
industry trends and acceptance of the e-commerce products technology.
BioSupplyNet had projected that it would generate revenues from its e-commerce
technology during its fiscal year ended June 30, 2000 and positive gross
margins beginning in its fiscal year ended June 30, 2002. A risk adjusted
discount rate of 45% was used to
F-13
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discount the projected cash flows from the e-commerce technology from the
fiscal year ended June 30, 2000 through June 30, 2004, which is the date at
which management of BioSupplyNet projected the e-commerce technology would be
obsolete.
BioSupplyNet had incurred approximately $1,000,000 in development costs
related to its e-commerce technology, which was approximately 50% complete,
prior to its acquisition by SciQuest.com. The Company expects to incur
approximately $1,900,000 to complete development of all aspects of
BioSupplyNet's e-commerce technology. This development is projected to be
completed by March 2000.
As the acquisition of BioSupplyNet was a stock for stock transaction which
was structured as a tax free exchange, the purchase price of BioSupplyNet was
in excess of the carryover tax basis of the assets acquired. This resulted in
the immediate recognition of a deferred tax liability of and additional
goodwill of $339,700 as the difference between the recognized fair value of
the acquired assets and their historical tax basis is not deductible for tax
purposes.
On July 30, 1999, the Company purchased all of the outstanding common stock
of Internet Auctioneers International, Inc. ("IAI") in exchange for the
issuance of 114,995 shares of the Company's Series E convertible preferred
stock. In connection with the purchase of IAI, a former shareholder and
officer of IAI entered into a two year employment agreement with the Company.
In the event that this individual voluntarily terminates his employment prior
to the end of the two year period, this individual would be required to pay an
amount equal to $400,000, reduced by $50,000 upon completion of each 90 day
period of continuous employment, payable either in cash or by surrendering a
number of Series E preferred shares of an equivalent value, as determined in
the individual's employment agreement. The Company also entered into a three
year non-compete agreement with this individual.
The purchase price of $1,416,000 consisted of the 114,995 shares of the
company's Series E preferred, with an estimated fair value of $11.32 per
share, based on the per share price of the Company's Series D preferred that
was sold in May and June 1999, and the assumption of $160,000 of net
liabilities of IAI. The excess of the purchase price over the fair value of
assets acquired less liabilities assumed was allocated to goodwill. Of the
total purchase price, $22,000 was allocated to the tangible assets of IAI,
which were comprised of cash and accounts receivable. In addition, $400,000
was allocated to the employment agreement with the former shareholder and
recorded as deferred compensation to be amortized to compensation expense over
a period of three years, and $994,000 was allocated to goodwill.
On January 14, 2000, the Company purchased all of the outstanding stock of
Intralogix, Inc. ("Intralogix") in exchange for the issuance of 26,930 shares
of the Company's common stock with a value of $1,880,000 at the closing date
of the acquisition, cash payments in the amount of $234,000 and assumption of
$81,000 in net liabilities of Intralogix. This acquisition will be accounted
for using the purchase method of accounting.
On February 2, 2000, the Company purchased all of the outstanding stock of
SciCentral, Inc. in exchange for the issuance of 40,000 shares of the
Company's common stock with a value of $2,476,000 at the closing date of the
acquisition and the assumption of approximately $32,000 in net liabilities of
SciCentral. This acquisition will be accounted for using the purchase method
of accounting.
4. Management Services
During the year ended December 31, 1997, certain members of the Company's
management provided services to the Company on a full time basis for no
consideration. A charge to general and administrative expenses and an increase
to additional paid in capital for $180,000 was recorded to reflect the value
of these services. The amount of this charge was based on management's
estimate of the market rate of compensation for these individuals in a start-
up company environment.
F-14
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Investments
The aggregate fair values of investment securities at December 31, 1998 and
1999 along with unrealized gains and losses determined on an individual
investment security basis are as follows:
December 31, 1998
<TABLE>
<CAPTION>
Gross
Unrealized
Gain Market
Description Cost (Loss) Value
----------- ----------- ---------- -----------
<S> <C> <C> <C>
Short-Term Investments:
U.S. Government obligations.............. $ 1,893,366 $ (6,673) $ 1,886,693
=========== ========= ===========
December 31, 1999
<CAPTION>
Gross
Unrealized
Amortized Gain Market
Description Cost (Loss) Value
----------- ----------- ---------- -----------
<S> <C> <C> <C>
Short-Term Investments:
Commercial paper......................... $ 6,866,942 $ (442) $ 6,866,500
Corporate bonds.......................... 9,977,792 4,408 9,982,200
U.S. Government obligations.............. 7,440,559 (9,464) 7,431,095
----------- --------- -----------
$24,285,293 $ (5,498) $24,279,795
=========== ========= ===========
Long-Term Investments:
Corporate bonds.......................... $ 9,510,225 $ (12,647) $ 9,497,578
U.S. Government obligations.............. 14,082,258 (259,492) 13,822,766
----------- --------- -----------
$23,592,483 $(272,139) $23,320,344
=========== ========= ===========
</TABLE>
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
-------- ----------
<S> <C> <C>
Furniture and equipment................................... $ 42,094 $ 304,928
Computer software and equipment........................... 408,752 3,005,479
Leasehold improvements.................................... -- 46,675
-------- ----------
Total costs............................................. 450,846 3,357,082
Less accumulated depreciation............................. (93,386) (487,659)
-------- ----------
Net book value.......................................... $357,460 $2,869,423
======== ==========
</TABLE>
The Company leases certain equipment under capital lease agreements. The
cost of equipment under capital leases at December 31, 1998 and 1999 was
approximately $66,000 and $1,700,000, respectively.
7. Capitalized Development Costs
Development cost represent the cost of development of the applications
developed for the Company's e-commerce web sites. The Company capitalized
development costs of $1,498,234 during the year ended December 31, 1999 and
has accumulated amortization of $106,149 at December 31, 1999 related to
capitalized development costs.
F-15
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Other Assets
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Goodwill............................................. $ 638,416 $1,627,561
Prepaid customer acquisition costs................... -- 1,600,000
Web site agreements.................................. 80,766 80,766
Source Book.......................................... 378,592 378,592
Capitalized software costs........................... 364,148 364,148
Deposits............................................. -- 111,642
Other................................................ 20,248 8,049
---------- ----------
1,482,170 4,170,758
Less accumulated amortization........................ (168,061) (931,761)
---------- ----------
$1,314,109 $3,238,997
========== ==========
9. Accrued Liabilities
Accrued liabilities are comprised of the following:
<CAPTION>
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Deferred revenues.................................... $ 136,024 45,275
Accrued compensation................................. 139,219 626,404
Accrued consulting................................... -- 365,000
Other................................................ 4,760 74,716
---------- ----------
$ 280,003 1,111,395
========== ==========
</TABLE>
10. Income Taxes
The components of the Company's income tax benefit for the years ended
December 31, 1997, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1997 1998 1999
----- -------- ---------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State............................................ -- -- --
----- -------- ---------
-- -- --
----- -------- ---------
Deferred:
Federal.......................................... -- (44,158) (176,654)
State............................................ -- (10,537) (42,126)
----- -------- ---------
-- (54,695) (218,780)
----- -------- ---------
Total........................................... $ -- $(54,695) $(218,780)
===== ======== =========
</TABLE>
The Company recognized a deferred tax benefit of $54,695 and $218,780 for
the years ended December 31, 1998 and 1999, respectively, resulting primarily
from the reduction of the difference between the book and tax basis of the
assets and liabilities recorded in conjunction with the acquisitions of
BioSupplyNet and IAI.
The Company did not have an income tax provision for the year ended December
31, 1997 due to net operating losses incurred during the portion of the year
that the Company was a taxable entity (see Note 2).
F-16
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.................... $ 1,708,406 $ 11,206,025
Accrual to cash adjustment.......................... 324,514 221,545
Research and development............................ -- 102,122
Allowance for doubtful accounts..................... -- 19,057
Compensation accruals............................... -- 147,337
Stock and warrant based compensation................ -- 3,556,165
Other............................................... 30,832 26,790
----------- ------------
Total deferred tax assets......................... 2,063,752 15,279,041
Valuation allowance for deferred.................. (2,063,752) (14,776,590)
----------- ------------
Deferred tax assets............................... -- 502,451
----------- ------------
Acquired intangibles................................ (285,005) (66,225)
Capital development costs........................... -- (502,451)
----------- ------------
Total deferred tax liabilities.................... (285,005) (568,676)
----------- ------------
Net deferred tax liability........................ $ (285,005) $ (66,225)
=========== ============
</TABLE>
During 1998, the Company recorded deferred tax liabilities of $339,700 in
conjunction with the acquisition of BioSupplyNet.
The Company has provided a valuation allowance against the balance of its
deferred tax assets since realization of these benefits cannot be reasonably
assured. The change in valuation allowance was an increase of $81,358,
$1,840,020 and $12,712,814 in 1997, 1998 and 1999, respectively. The charge
primarily relates to additional operating losses in those years. The 1998 and
1999 deferred tax assets have been adjusted to reflect the net operating loss
carryforwards of BioSupplyNet and Internet Auctioneers International. The
increase in valuation allowance primarily resulted from the generation of net
operating loss carryforwards.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of $28,771,000. These net operating loss carryforwards
begin to expire in 2012. The utilization of the federal net operating loss
carryforwards may be subject to limitation under the rules regarding a change
in stock ownership as determined by the Internal Revenue Code.
F-17
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision (benefit) for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
December 31, December December 31,
1997 31, 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Effective rate..................... 0 % (1)% (1)%
--------- ----------- ------------
United States Federal tax at
statutory rate.................... $(234,494) $(1,453,942) $(11,354,932)
State taxes (net of Federal
benefit).......................... (34,140) (211,677) (1,630,433)
Change in valuation allowance...... 81,358 1,840,020 12,712,814
Acquired research and development
write-off......................... -- 312,963 --
Nondeductible compensation......... 70,110 -- --
Acquired net operating losses...... -- (583,029) --
Other nondeductible expenses....... -- 48,688 155,998
Research and development credits... -- -- (94,362)
Other.............................. 117,166 (7,718) (7,865)
--------- ----------- ------------
Provision (benefit) for income
tax............................... $ -- $ (54,695) $ (218,780)
========= =========== ============
</TABLE>
11. Notes Payable
At December 31, 1998 the Company had an outstanding balance on the bank loan
of $75,188 of which $14,060 was reflected as a current liability. During the
year ended December 31, 1999, the bank loan was repaid.
In connection with the acquisition of IAI (See Note 3) the Company assumed
convertible notes payable to stockholders which were due in April, 2000. The
Company also assumed other notes payable totaling $20,000 with interest rates
of 10% per annum, which are due upon demand. These notes were all repaid in
October 1999.
12. Capital Stock
In June 1997, the Company issued a common stock dividend of 211/2 shares for
each issued and outstanding share of common stock. In September 1997, the
Company converted 250,020 shares of common stock to Class B common stock. All
share and per share amounts in the accompanying financial statements for all
periods presented have been retroactively adjusted to reflect these events.
On October 22, 1999, the Board of Directors approved a 1.516643-for-1 Class
A common stock split which was declared effective on November 12 , 1999. The
Company's Class A common stock was also reclassified as common stock with a
par value of $0.001 per share. All share and per share information in the
accompanying financial statements has been retroactively restated to reflect
the effect of this stock split and the reclassification of the Company's Class
A common stock to common stock.
During the year ended December 31, 1998, the Company's Articles of
Incorporation were amended to authorize 10,000,000 shares of preferred stock
with no par value, of which 769,231 shares were designated as Series A
convertible preferred stock (the "Series A preferred"), 3,835,180 shares were
designated as Series B convertible preferred stock (the "Series B preferred")
which are mandatorily redeemable, 601,046 shares were designated as Series C
convertible preferred stock (the "Series C preferred"), and 4,794,543 shares
were undesignated. The Company authorized 30,203,689 shares of common stock
with no par value, of which 250,020 shares were designated as Class B common
stock and 29,953,669 were designated as Class A common stock. In February
1999, the Company's Articles of Incorporation were amended and restated to
increase the number of authorized shares of Series C preferred to 700,000 and
to decrease the number of undesignated preferred shares
F-18
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to 4,695,589. In March 1999, the Company reincorporated under the laws of the
State of Delaware and amended and restated its Certificate of Incorporation to
assign a par value of $0.001 to all classes of capital stock. In June 1999,
the Company's Certificate of Incorporation was amended whereby 3,312,720
shares of preferred stock were designated as Series D convertible preferred
stock (the "Series D preferred"), which are mandatorily redeemable, and the
number of undesignated preferred shares were decreased to 1,382,869. In July
1999, the Company filed a Certificate of Designation whereby 126,500 shares of
preferred stock were designated a Series E convertible preferred stock (the
"Series E preferred"), and which decreased the number of undesignated
preferred shares to 1,256,369. Upon the effectiveness of the Company's initial
public offering on November 12, 1999, the number of authorized shares of the
Company's common stock was increased to 90,000,000 shares and 10,000,000
shares of preferred stock were authorized. At all times, the Company shall
reserve a number of shares of unissued common stock for the purpose of
effecting the conversion of its issued and outstanding shares of all
outstanding warrants and options to purchase the Company's common stock.
In August 1996, the Company sold 250,020 shares of Class A common stock to
an investor for $50,000 in cash and the cancellation of convertible debt of
$50,000. These shares were converted to Class B common stock in September
1997.
In October 1997, the Company sold 678,519 shares of Series A preferred in a
private placement transaction in exchange for proceeds of $600,596, net of
issuance costs of $16,854, and issued 90,702 shares of Series A preferred in
exchange for the cancellation of notes payable of $80,000 and accrued interest
of $2,539. The notes payable were issued between March and September 1997, and
bore interest at 10% per annum. Certain notes were issued with a total of
14,583 warrants, which expire in 2000, for the purchase of common stock with
exercise prices of $1.25 per share. The Company did not record any additional
paid in capital related to the value of these warrants because the fair market
value of the warrants at the date of issuance, as calculated using the Black-
Scholes option pricing model, was de minimis.
In September 1998, the Company issued 546,405 shares of Series C preferred
and 192,280 options and 162,718 warrants to purchase the Company's common
stock to the former stockholders, option holders and warrant holders of
BioSupplyNet in exchange for all of the outstanding common and preferred
stock, options and warrants of BioSupplyNet (see Note 3).
In March 1999, the Company sold 89,408 shares of Series C preferred to an
officer of the Company at $2.80 per share, which shares are subject to vesting
over a two year period.
Rights, Preference and Terms of Capital Stock
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of common and preferred stock:
Conversion
Each share of Series A, Series B, Series C, Series D, and Series E preferred
and Class B common stock, at the option of the holder, is convertible into
shares of common stock of the Company at 1.516643-for-1 conversion ratio,
subject to certain adjustments as defined. All outstanding shares of Series A,
Series B, Series C, Series D, and Series F preferred stock converted into
13,438,185 shares of the Company's common stock upon the closing of the
Company's initial public offering.
F-19
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Mandatorily Redeemable Convertible Preferred Stock
In July 1998, the Company sold 1,442,500 shares of Series B preferred in a
private placement transaction for $2.80 per share which resulted in net
proceeds of $4,033,503 and issued 187,394 shares of Series B preferred in
exchange for the cancellation of notes payable in the aggregate principal
amount of $515,000. The notes payable were issued between March and June 1998
and bore interest at 6% per annum. Attached to the notes were warrants to be
issued upon repayment or conversion of such notes. The number of warrants was
determined based on a formula as set forth in the agreements. When the notes
payable were converted to Series B preferred, the Company issued 57,545
warrants to purchase shares of Series B preferred with exercise prices of
$2.80 per share. The Company recorded a debt discount of $12,084 for the value
of these warrants as determined using the Black-Scholes option pricing model.
In October and November of 1998, the Company sold 2,147,732 shares of Series B
preferred in private placement transactions in exchange for proceeds of
$6,005,476.
Upon any request by any holder of Series B preferred shares at any time
after July 30, 2003, the Company was required to redeem the Series B preferred
in three equal annual installments. The redemption price was to be equal to
the greater of the appraised value of the Series B preferred shares at the
date of the redemption request or an amount equal to the invested amount plus
interest at a rate of 10% per annum, less the aggregate amount of all
dividends actually paid since the issuance date.
As was redemption price of the Series B preferred was variable in amount,
its carrying value was required to be adjusted to the estimated redemption
amount at each balance sheet date. The Company recorded charges to
stockholders' equity of $328,723 for the year ended December 31, 1998 and
$45,215,043 for the period from January 1, 1999 to November 22, 1999, the
effective date of the Company's initial public offering, to reflect the Series
B preferred at its estimated fair value at each date based on the price of the
most recent sales of the Company's preferred stock and the projected initial
public offering price, respectively.
In May and June, 1999, the Company sold 3,312,720 shares of Series D
preferred in a private placement transaction for $11.32 per share which
resulted in proceeds of $35,860,975, net of issuance costs of $1,639,025. In
addition, the Company issued 1,004,829 warrants to purchase the Company's
common stock at an exercise price of $7.46 per share and 41,733 warrants to
purchase the Company's common stock at an exercise price of $9.33 per share.
The estimated fair value of the warrants of $726,137 according to the Black-
Scholes pricing model using an estimated fair value of $3.30 per common share
for the Company's common stock was recorded as a reduction in the carrying
value of the Series D preferred and an increase to additional paid in capital.
The Company recorded a charge to stockholders' equity of $1,431,858 during the
nine months ended September 30, 1999 to record the accretion on the Series D
preferred. Accretion of all mandatorily redeemable preferred stock ceased upon
the effectiveness of the Company's initial public offering on November 22,
1999.
Upon any request by any holder of Series D preferred shares at any time
after the Initial Redemption Exercise Date, the Company was required to redeem
the Series D preferred at the amount invested per share plus a per annum
interest charge for the period the share has been outstanding of 10%
compounded annually and prorated for any partial year less the aggregate
amount of all dividends actually paid since the issuance date.
14. Stock Options and Warrants
Stock Options
In September 1997, the Company adopted the SciQuest, Inc. Stock Option Plan
(the "Plan") which provided for the grant of up to 341,245 employee stock
options. In September 1998, the Plan was amended to provide for the grant of
up to 1,272,299 employee stock options. In February 1999, the Plan was amended
to provide for the grant of up to 1,484,820 employee stock options. In August
1999, the Plan was further amended to allow for the grant of up to 2,647,247
employee stock options. Stock options granted under the Plan are for periods
not to exceed ten years. In December 1999, the Company adopted the
Sciquest.com, Inc. 1999 Stock
F-20
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option Plan which provides for the grant of up to 2,854,998 employee stock
option. Options granted under the Plans during the years ended December 31,
1997, 1998 and December 31, 1999 generally vest in periods between three and
five years as determined by the board of directors, although certain grants
have been vested immediately upon the grant of the option.
The Company continues to apply APB No. 25 and related interpretations in
accounting for the Plans. The Company recognized $323,676 in non-cash
compensation expense related to amortization of deferred compensation during
the year ended December 31, 1999. No deferred compensation or compensation
expense was recorded related to stock option grants during the years ended
December 31, 1996, 1997 and 1998. Had compensation expense for the Plans been
determined based on the fair value at the grant dates for awards under the
Plans consistent with the methods of SFAS No. 123, the Company's net loss for
the years ended December 31, 1997, and 1998, and 1999 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31, December December 31,
1997 31, 1998 1999
------------ ----------- -------------
<S> <C> <C> <C>
Net loss available to common
stockholders:
As reported........................ $(689,689) $(4,550,329) $(112,467,099)
SFAS 123........................... $(691,591) $(4,554,641) $(113,233,101)
Pro Forma SFAS 123................. $ (33,944,079)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1997, 1998,
and 1999: risk free interest of 5.5%, 6.0%, and 6.1%, respectively; expected
lives of five years; dividend yields of 0%; and volatility factors of 0%. The
weighted average fair value of options granted during the years ended December
31, 1997, 1998, and 1999 according to the Black-Scholes pricing model was
$0.05, $0.02, and $3.42, respectively.
A summary of the status of the Plans as of December 31, 1997, and 1998, and
1999 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1999
-------------------- --------------------
Weighted Weighted
Shares Average Shares Average
Underlying Exercise Underlying Exercise
Options Price Options Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 117,596 $0.06 1,004,310 $ 0.13
Granted.............................. 887,958 0.15 1,733,970 14.82
Exercised............................ -- -- (436,874) .14
Forfeited............................ (1,244) 0.18 (107,682) .12
--------- ----- --------- ------
Outstanding at end of period......... 1,004,310 $0.13 2,193,724 $11.74
========= ===== ========= ======
</TABLE>
All incentive stock options granted during the years ended December 31, 1997
and 1998 were granted with an exercise price equal to the fair value of the
underlying common stock on the grant date, as determined by the board of
directors. The Company recorded $12,199,827 of deferred compensation as a
charge to stockholders equity during the year ended December 31, 1999 to
reflect the difference between the aggregate fair market value and exercise
price of all stock options granted during this period with an exercise price
below the fair market value of the Company's common stock at the date of the
grant.
F-21
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's outstanding
stock options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average Number of
Options Contractual Exercise Options
Range of Exercise Prices Outstanding Life Price Exercisable
------------------------ ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$0.002--0.07.................. 136,801 8.3 $ 0.03 68,340
$0.18......................... 659,648 9.1 0.18 99,952
$2.08......................... 87,317 9.6 2.08 2,852
$3.30......................... 374,994 9.9 3.30 --
$7.58......................... 201,564 10 7.58 --
$16.00........................ 84,300 10 16.00 --
$23.75........................ 400,000 10 23.75 --
$47.50........................ 249,100 10 47.50 --
--------- --- ------ -------
2,193,724 9.3 $11.74 171,144
========= === ====== =======
</TABLE>
Warrants
At December 31, 1998, and 1999, the Company had 177,300, and 5,889,303,
respectively, warrants outstanding and exercisable to purchase the Company's
common stock at prices ranging from $0.01 to $9.33, which includes the
warrants issued to strategic partners discussed in Note 15. These warrants
expire at various dates between 2000 and 2004. At December 31, 1998, the
Company had 57,545 warrants outstanding and exercisable to purchase the
Company's Series B preferred at exercise prices of $2.80 which were converted
into warrants to purchase 87,275 shares of the Company's common stock at an
exercise price of $1.85 per share upon the effectiveness of the Company's IPO.
14. Commitments and Contingencies
The Company leases certain equipment under various noncancellable capital
leases and leases its office space and certain equipment under operating
leases. Future minimum lease payments required under the leases at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
2000................................................. $ 570,968 $ 566,483
2001................................................. 563,988 626,895
2002................................................. 549,468 350,735
2003................................................. 192,033 229,534
2004................................................. -- 235,029
Thereafter........................................... -- 98,725
---------- ----------
Total minimum lease payments....................... 1,876,457 $2,107,404
---------- ==========
Less amount representing interest from 12 to 32%..... (222,530)
----------
Present value of net minimum lease payment........... 1,653,927
Less current maturities.............................. (463,141)
----------
Long-term maturities of capital lease obligations.... $1,190,786
==========
</TABLE>
Rent expense recognized under operating leases totaled $3,400, $34,490, and
$439,314 for the years ended December 31, 1997, 1998, and 1999 respectively.
F-22
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1999, the Company entered into a lease agreement for additional
office space for a period of three years with a monthly rental of $16,771.
During the year ended December 31, 1999, the Company entered into a leasing
agreement with a leasing Company. The Company obtained a total commitment
amount of $2,500,000 from the leasing Company which expires in August 2000. To
date the Company has borrowed $1,700,000. The Company may purchase furniture
and equipment and lease the items over a three and a half year term. Payments
are due monthly. Prior to the end of the lease term, the Company has the
option to either purchase the equipment or renew the lease at a price not to
exceed fifteen percent of the equipment cost.
In connection with this agreement, the Company was entitled to enter into a
sale and leaseback transaction of approximately $700,000 for its existing
furniture and equipment located at the facility in North Carolina. No gain or
loss was recognized on this transaction. For accounting purposes, the Company
has treated the transaction as a financing agreement and has recognized the
resulting liability for future lease payments as a capital lease obligation.
The Company is involved in certain legal proceedings as a part of its normal
course of business. Management does not believe that the ultimate resolution
of these matters will have a material impact on the Company's results of
operations or financial position in any quarterly or annual period.
15. Strategic Partnerships
In October, November, and December 1999, the Company entered into strategic
relationships with a number of key suppliers and buyers of scientific
products. As a part of these arrangements, the Company issued to these
companies 5,035,180 warrants to purchase the Company's common stock at an
exercise price of $0.01 per share. At December 31, 1999 the Company has
recorded deferred customer acquisition costs of approximately $400,246,458
related to these warrants. In the event that the Company commits to issue
additional warrants to purchase its common stock as more strategic
relationships are formed, the Company will be required to record additional
deferred customer acquisition costs equal to the difference between the fair
value of the Company's common stock on the date the warrants are issued and
the exercise price of the warrants of $0.01. The amount of deferred customer
acquisition costs will be adjusted in future reporting periods based on
changes in the fair value of the warrants until such date as the warrants are
fully vested. Deferred customer acquisition costs will be amortized to
operating expense over the term of the related contractual relationship, which
in the case of the buyer agreements is three years and in the case of the
supplier agreements is five years, using a cumulative catch-up method. The
Company recognized $9,107,753 in stock based noncash customer acquisition
expense during the fourth quarter of 1999 related to the amortization of
deferred customer acquisition costs.
These strategic relationships include agreements to be the exclusive third
party provider of electronic marketplace services in the United States for a
period of five years for eight key suppliers. Under the terms of these
agreements, these suppliers are not required to sell a minimum amount of
products through the Company's electronic marketplace. The warrants to
purchase the Company's common stock that will be issued in connection with
these agreements will vest over a four or five year period regardless of the
level of sales by the suppliers through the Company's electronic marketplace.
These strategic relationships also include agreements with several major
enterprise buyers to be their third party electronic aggregator for purchases
of scientific products in North America for a period of three years. Although
these enterprise buyers have agreed to use reasonable efforts to purchase at
least $5 million of scientific products annually through the Company's
marketplace, there are no minimum purchase commitments. The warrants issued in
connection with these relationships vest over a period of three years
regardless of their level of purchases through the Company's electronic
marketplace.
F-23
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Company has agreed to issue to certain major enterprise
buyers additional incentive warrants, the number of which will be based on
each purchaser's volume of purchases through the Company's market place during
the years 2000, 2001 and 2002. These incentive warrants will be issued on
February 15, 2001, 2002 and 2003, at an exercise price equal to the price per
share of common stock in the Company's initial public offering, and will be
exercisable upon issuance. Deferred partner acquisition costs will be
recognized in an amount equal to the difference between the fair market value
of the Company's common shares on the issuance date, less the exercise price
for these warrants and will be amortized over the remaining term of the
related strategic relationship as determined by the Black Scholes Model of the
agreement to operating expense upon each issuance of the incentive warrants.
16. Subsequent Event (unaudited)
In March 2000, we entered into an agreement to acquire all of the
outstanding stock of EMAX Solution Partners, Inc., a provider of electronic
research solutions that optimize pharmaceutical drug research operations and
speed discovery, in exchange for the issuance of 1,999,833 shares of our
common stock. This acquisition will be accounted for using the purchase method
of accounting.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, SciQuest.com, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SciQuest.com, Inc.
(Registrant)
/s/ M. Scott Andrews
By: _________________________________
M. Scott Andrews
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ M.Scott Andrews Chief Executive Officer and March 29, 2000
_________________________________ Director (Principal
M. Scott Andrews Executive Officer)
/s/ Peyton C. Anderson Vice President of Business March 29, 2000
_________________________________ Development and Director
Peyton C. Anderson
/s/ James J. Scheuer Chief Financial Officer March 29, 2000
_________________________________ (Principal Financial and
James J. Scheuer Accounting Officer)
/s/ Noel J. Fenton Director March 29, 2000
_________________________________
Noel J. Fenton
/s/ Gautam Prakash Director March 29, 2000
_________________________________
Gautam Prakash
/s/ Alan J. Taetle Director March 29, 2000
_________________________________
Alan J. Taetle
/s/ Bruce J. Boehm Director March 29, 2000
_________________________________
Bruce J. Boehm
/s/ Timothy T. Weglicki Director March 29, 2000
_________________________________
Timothy T. Weglicki
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of SciQuest.com, Inc. and its subsidiaries on Form S-8 (File No. 333-94163) of
our report dated February 2, 2000, on our audits of the consolidated financial
statements of SciQuest.com, Inc. and its subsidiaries as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999,
which report is included in this annual report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR AUDITED
DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 98,126,414
<SECURITIES> 24,285,293
<RECEIVABLES> 1,771,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,808,696
<PP&E> 3,357,082
<DEPRECIATION> 487,659
<TOTAL-ASSETS> 156,901,684
<CURRENT-LIABILITIES> 5,825,514
<BONDS> 0
0
0
<COMMON> 26,354
<OTHER-SE> 149,792,805
<TOTAL-LIABILITY-AND-EQUITY> 156,901,684
<SALES> 3,882,441
<TOTAL-REVENUES> 3,882,441
<CGS> 3,426,692
<TOTAL-COSTS> 3,426,692
<OTHER-EXPENSES> 35,721,730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,991
<INCOME-PRETAX> (33,396,857)
<INCOME-TAX> 218,780
<INCOME-CONTINUING> (33,178,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,178,077)
<EPS-BASIC> (18.10)
<EPS-DILUTED> (18.10)
</TABLE>
