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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 001-15169
PERFICIENT, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2853258
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7600B NORTH CAPITAL OF TEXAS HIGHWAY, SUITE 220
AUSTIN, TX 78731
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 306-7337
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) Yes X
No ___, and (2) has been subject to such filing requirements for the past
90 days. Yes ___ No X.
The number of shares outstanding of the Registrant's Common Stock as of
June 30, 1999 was 2,500,000.
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PERFICIENT, INC.
INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Part I. Financial Information
Item 1. Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 3
Statements of Operations for the three and six
months ended June 30, 1999 and 1998 (unaudited) 4
Statements of Cash Flows for the three and six
months ended June 30, 1999 and 1998 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosure About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit Index 24
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERFICIENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 32,694 $ 22,996
Accounts receivable, net of allowance for doubtful 489,887 164,961
accounts of $18,341 as of June 30, 1999 and $0 as of
December 31, 1998
Other current assets 300 0
---------- ----------
Total current assets 522,881 187,957
Property and equipment, net 47,580 42,050
Offering Expenses 182,876 0
Notes Receivable 5,000 0
---------- ----------
Total assets $ 758,337 $ 230,007
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 161,607 $ 18,640
Shareholder loan 100,000 0
Other current liabilities 79,430 31,858
---------- ----------
Total current liabilities 341,037 50,498
Deferred income tax 1,350 1,350
---------- ----------
Total liabilities $ 342,387 $ 51,848
Stockholders' equity:
Common Stock, $.001 par value; 20,000,000 shares authorized; 2,500 2,000
2,500,000 and 2,000,000 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively
Additional paid-in capital 1,505,500 148,000
Deferred stock compensation (190,000) 0
Retained earnings (deficit) (902,050) 28,159
---------- ----------
Total Equity 415,950 178,159
---------- ----------
Total liabilities and stockholders' equity $ 758,337 $ 230,007
========== ==========
</TABLE>
See accompanying notes to interim financial statements.
3
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PERFICIENT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Consulting revenues
Consulting fees $ 505,082 $ 108,800 $ 771,357 $ 135,700
Reimbursable expenses 106,152 24,571 152,200 36,642
--------------- -------------- -------------- ---------------
Consulting revenues 611,234 133,371 923,557 172,342
Cost of consulting revenues
Direct costs 199,918 46,455 352,951 66,818
Reimbursable expenses 107,363 24,571 153,460 36,642
--------------- -------------- -------------- ---------------
Cost of consulting revenues 307,281 71,026 506,411 103,460
--------------- -------------- -------------- ---------------
Gross margin 303,953 62,345 417,146 68,882
Selling, general and administrative 295,830 61,755 433,690 93,315
Stock compensation 19,000 0 918,000 0
--------------- -------------- -------------- ---------------
Income (loss) before income taxes $ (10,877) $ 590 $ (934,544) $ (24,433)
Provision (benefit) for income taxes 0 218 (4,335) (9,040)
--------------- -------------- -------------- ---------------
Net Income (loss) $ (10,877) $ 372 $ (930,209) $ (15,393)
=============== ============== ============== ===============
Net income (loss) per share-basic and diluted $ 0.00 $ 0.00 $ (0.38) $ (0.01)
=============== ============== ============== ===============
</TABLE>
See accompanying notes to interim financial statements.
4
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PERFICIENT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (10,877) $ 372 $ (930,209) $ (15,393)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation 5,222 2,558 9,737 3,671
Non-cash compensation 19,000 0 918,000 0
Deferred income taxes 0 218 0 (9,040)
Changes in operating assets and liabilities
Accounts receivable (246,891) (62,137) (324,926) (77,542)
Other assets (5,000) 0 (5,300) 912
Accounts payable 152,703 0 142,967 0
Other liabilities 43,414 7,599 47,572 17,513
--------------- ------------- ------------- -------------
Net cash used in operating activities (42,429) (51,390) (142,159) (79,879)
INVESTING ACTIVITIES
Purchase of property and equipment (15,267) (10,954) (15,267) (18,855)
--------------- ------------- ------------- -------------
Net cash used in investing activities (15,267) (10,954) (15,267) (18,855)
FINANCING ACTIVITIES
Proceeds from shareholder receivable 250,000 0 0 0
Proceeds from shareholder loan 100,000 18,846 100,000 59,297
Payments on shareholder loan 0 (15,000) 0 (15,006)
Proceeds from short-term borrowings 42,147 0 452,418 0
Payments on short-term borrowings (215,635) 0 (452,418) 0
Proceeds from stock issuances 0 67,000 250,000 67,000
Offering expenditures (182,876) 0 (182,876) 0
--------------- ------------- ------------- -------------
Net cash provided by (used in) financing (6,364) 70,846 167,124 111,291
activities
--------------- ------------- ------------- -------------
Change in Cash (64,060) 8,502 9,698 12,557
Cash at beginning of period 96,754 24,579 22,996 20,524
--------------- ------------- ------------- -------------
Cash at end of period $ 32,694 $ 33,081 $ 32,694 $ 33,081
=============== ============= ============= =============
</TABLE>
See accompanying notes to interim financial statements.
5
<PAGE>
PERFICIENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements for the three and six months ended
June 30, 1999 and 1998 are unaudited and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for their fair
presentation. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Registration Statement on Form SB-2 (File No. 333-78337) for the fiscal year
ended December 31, 1998. The results of operations for the interim period ended
June 30, 1999 are not necessarily indicative of results to be expected for the
full year or any other period.
2. 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss
per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of
Common Stock outstanding during the period. The calculation of diluted net
loss per share excludes shares that are subject to issuance if the effect is
antidilutive. Shares subject to issuance include Common Stock subject to
repurchase rights and shares of Common Stock issuable upon the exercise of
stock options and warrants.
The following table sets forth the computation of basic and diluted net
loss per share for the periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing $ (10,877) $ 372 $ (930,209) $ (15,393)
operations-numerator for basic earnings per
share
Denominator:
Denominator for basic earnings per
share-weighted average shares 2,500,000 2,000,000 2,500,000 1,500,000
Effect of dilutive securities: Stock options -- 60,000 -- --
--------------- --------------- ---------------- ---------------
Denominator for diluted earnings per
share-weighted average shares 2,500,000 2,060,000 2,500,000 1,500,000
=============== =============== ================ ===============
Basic and diluted earnings per share: $ 0.00 $ 0.00 $ (0.38) $ (0.01)
=============== =============== ================ ===============
</TABLE>
6
<PAGE>
4. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 130, Reporting
Comprehensive Income. The Company adopted SFAS 130 during the year ended
December 31, 1998. There was no impact to the reported results of operations
of the Company as a result of the adoption of SFAS 130, as there was no
difference between net income and comprehensive income.
Effective January 1, 1998, the Company adopted the FASB's SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
adoption of SFAS 131 did not have a significant effect on the disclosure of
segment information as the Company continues to consider its business
activities as a single segment.
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133" ("SFAS 133"), respectively. SFAS 133 is effective for all fiscal
quarters beginning with the quarter ending June 30, 2000. SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will adopt SFAS 133 in its quarter ending
June 30, 2000 and does not expect such adoption to have an impact on the
Company's reported results of operations, financial position or cash flows.
5. Balance Sheet Components
June 30, 1999 December 31, 1998
------------------- ----------------------
(unaudited)
Other current liabilities:
Accrued expenses .................. $27,873 $12,639
Income tax payable ................ 1,945 19,219
Payroll liability ................. 49,612 0
======= =======
$79,430 $31,858
======= =======
6. Related Party Transaction
In June 1999 the Company borrowed $100,000 from a shareholder. This loan
was repaid in July 1999 including accrued interest at 8%.
7. Subsequent Events
On July 1, 1999, the Company amended its January 12, 1999 factoring
agreement with a bank whereby the Company is able to borrow up to $1,000,000
against qualified accounts receivables. The agreement has a one year term and
borrowing under the agreement bears interest at the bank's prime rate. In
connection with this amendment, the Company issued warrants to the bank to
purchase 3,750 shares at the initial public offering price of $8 per share.
During July 1999, the Company granted options to acquire 40,000 shares of
common stock to two new outside directors at the initial public offering
price of $8 per share.
7
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Item 2.
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control
events in the future. The factors listed in the sections captioned "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as any other cautionary language, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that
the occurrence of certain of the events described in the "Risk Factors"
section and the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section could seriously harm our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes thereto and the other financial information included
elsewhere in this filing. In addition to historical information, this
management's discussion and analysis of financial condition and results of
operations and other parts of this filing contain forward-looking information
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking information as a
result of certain factors, including but not limited to, those set forth
under "risk factors" and elsewhere in this filing.
We were incorporated in September 1997 and began generating revenue in
February 1998. We generate revenues from professional services performed for
end-user customers of our partners and associated reimbursable out-of-pocket
expenses. We refer to the Internet companies with which we work as our
"partners." To date, our limited number of partners have consisted of Internet
software companies and we expect that Internet software companies will comprise
our partners for the foreseeable future. Our contractual relationships are with
our partners rather than their end-user customers. We perform services on a
time-and-materials basis and are reimbursed for expenses. We recognize revenue
for fees as services are performed and reimbursable expenses as incurred.
We established our first partner relationship with Vignette Corporation,
an Internet relationship management software company, in February 1998.
During the first four months of 1999, we established partner relationships
with three additional Internet software companies. Most of our revenues for
the near future are expected to be derived from Vignette with much smaller
portions derived from these newer partner relationships. In May 1999 we began
generating revenue from our partnership with Interwoven, Inc., with total
approximate revenues in May and June of approximately $32,000. We have had no
revenues from our other partners. As a result, our revenues and operating
results are subject to substantial variations based on Vignette's sales and
the frequency with which we are chosen to perform services for Vignette's
end-user customers. Our agreement with Vignette may be terminated at any time
by Vignette or by us. The agreement does not obligate Vignette to use our
services for any minimum amount or at all,
8
<PAGE>
and Vignette may use the services of our competitors. Nevertheless, we are
restricted, for as long as the agreement is in place, from performing services
for Vignette's competitors.
Our plan is to establish additional partner relationships with Internet
software companies and increase our number of information technology
professionals. In connection with our planned expansion, we expect to incur
substantial expenses in anticipation of identifying and being retained by new
partners. Therefore, we expect that we will continue to incur losses through at
least the remainder of 1999. We plan to spend significant amounts on:
- Recruiting, training and equipping information technology professionals;
- Expanding our management and technology infrastructure;
- Expanding our physical facilities;
- Sales and marketing expenses; and
- Working capital and general corporate purposes, including potential
acquisitions.
Our number of information technology professionals increased from zero at
December 31, 1997 to eight at December 31, 1998 and to 14 at June 30, 1999.
We expect our number of information technology professionals to grow
significantly during the next 12 months. Mr. John T. McDonald, our Chief
Executive Officer, who was not been paid a salary through June 30, 1999,
began receiving a salary on August 1, 1999. Our personnel costs represent a
high percentage of our operating expenses and are relatively fixed in advance
of each quarter. Accordingly, if revenues do not increase at a rate equal to
expenses, we will incur continuing losses and our business, financial
condition, operating results and liquidity will be materially and adversely
affected.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Consulting Revenues. Revenues increased from $172,000 for the six months
ended June 30, 1998 to $924,000 for the six months ended June 30, 1999. The
increase in revenues reflected the increase in the number of projects
performed and in the number of information technology professionals employed.
We commenced revenue generating activities during the first six months of
1998, and therefore, revenues were limited during such period. Our revenues
for the six months ended June 30, 1999 consisted of $771,000 in fees
generated by our information technology professionals and $152,000 of
reimbursable expenses. During the six month period ended June 30, 1999, 97%
of our revenues came from Vignette.
Cost of Consulting Revenues. Cost of revenues, consisting of direct
costs, primarily salaries and benefits for information technology
professionals assigned to projects and of reimbursable expenses, increased
from $103,000 for the six months ended June 30, 1998 to $506,000 for the six
months ended June 30, 1999, or 389%. The number of our information technology
professionals increased from three for the six months ended June 30, 1998 to
14 for the six months ended June 30, 1999.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of marketing activities to solicit partners,
salaries and benefits, travel costs and non-reimbursable expenses. Selling,
general and administrative expenses increased from $93,000 for the six months
ended June 30,
9
<PAGE>
1998 to $434,000 for the six months ended June 30, 1999. The
increase in selling, general and administrative expenses was related to our
increased marketing activities to solicit additional partners and to
increases in overhead costs necessary to support the growth in our workforce.
We expect these expenses to increase in absolute dollar amounts in connection
with our planned expansion. These costs also increased due to an increase in
an officer's salary from a nominal amount to a higher level for the periods
ended June 30, 1998 and 1999, respectively.
Stock Compensation. Stock compensation expense consists of non-cash
compensation arising from certain sales of stock and option grants to
officers, directors or other affiliated persons. We have recognized $880,000
in non-cash compensation in connection with the sale of stock that occurred
in January 1999. In addition, we have recorded in stockholders' equity on our
balance sheet aggregate deferred stock compensation totaling $228,000 in
connection with stock options that were granted in January 1999. Stock option
expense will be recognized to the extent of approximately $19,000 per quarter
over a three year period ending January 2002, which is the end of the vesting
period for the related options. We have recognized approximately $38,000 in
non-cash compensation expense during the six month period ended June 30, 1999
relating to the vesting of these options. Total non-cash compensation expense
for the six month period ended June 30, 1999 was $918,000.
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Consulting Revenues. Consulting revenues increased from $133,000 for the
three months ended June 30, 1998 to $611,000 for the three months ended June
30, 1999. The increase in revenues reflected the increase in the number of
projects performed and in the number of information technology professionals
employed. Our revenues for the three months ended June 30, 1999 consisted of
$505,000 in fees generated by our information technology professionals and
$106,000 of reimbursable expenses. During the three month period ended June
30, 1999, 95% of our revenues came from Vignette.
Cost of Consulting Revenues. Cost of revenues, consisting of direct
costs, primarily salaries and benefits for information technology
professionals assigned to projects and of reimbursable expenses, increased
from $71,000 for the three months ended June 30, 1998 to $307,000 for the
three months ended June 30, 1999. The number of our information technology
professionals increased from three for the three months ended June 30, 1998
to 14 for the three months ended June 30, 1999.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of marketing activities to solicit partners,
salaries and benefits, travel costs and non-reimbursable expenses. Selling,
general and administrative expenses increased from $62,000 for the three
months ended June 30, 1998 to $295,000 for the three months ended June 30,
1999. The increase in selling, general and administrative expenses was
related to our increased marketing activities to solicit additional partners
and to increases in overhead costs necessary to support the growth in our
workforce. We expect these expenses to increase in absolute dollar amounts in
connection with our planned expansion.
Stock Compensation. Stock compensation expense consists of non-cash
compensation arising from certain sales of stock and option grants to
officers, directors or other affiliated persons. Stock option expense will be
recognized to the extent of approximately $19,000 per quarter over a three
year period ending January 2002, which is the end of the vesting period for
the related options. We have recognized approximately $19,000 in non-cash
compensation expense during the three month period ended June 30, 1999
relating to the vesting of options.
10
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LIQUIDITY AND CAPITAL RESOURCES
We raised approximately $6.4 million in July 1999 from an initial public
offering of 1,000,000 shares of our common stock, net of underwriting
discounts, commissions and expenses. The primary purposes of the initial
public offering were to obtain additional equity capital, create a public
market for our common stock, and facilitate future access to public markets.
Pending the use of proceeds, we have invested the net proceeds of the
offering in investment grade, interest-bearing securities. Prior to the
offering, we have financed our operations primarily through equity financings
and bank borrowings. Through June 30, 1999, we raised $400,000 from private
sales of our common stock.
Through June 30, 1999, we had a factoring agreement with Silicon Valley
Bank, which allowed us to borrow up to $300,000 against our qualifying
accounts receivables. Borrowings under that agreement, which expires July 1,
2000, bear interest at 15% per annum. In connection with this bank agreement,
we issued warrants to acquire up to 3,750 of our common stock at $8 per
share. As of June 30, 1999, there were no borrowings under this loan
agreement. This line was increased to $1,000,000, bearing interest at the
bank's prime rate plus 1%. As of June 30, 1999 we were loaned $100,000 by a
shareholder, which was repaid in July 1999 including accrued interest at 8%,
prior to the public offering.
Cash used in operations for each of the quarters ended June 30, 1998 and
1999 was $51,000 and $42,000, respectively. As of June 30, 1999, we had
$33,000 in cash and working capital of $182,000. On August 3, 1999, our
initial public offering was completed and our cash increased by approximately
$6.4 million. We anticipate that the net proceeds of our initial public
offering will be sufficient to fund our operations and capital requirements
for at least 12 months following the offering. However, because of our
expansion and growth plans and the increased spending that will accompany any
growth, we expect to experience operating losses and negative cash flow from
operations during 1999. The timing and amount of our capital requirements
will depend on a number of factors, including demand for our services, the
need to develop new partner relationships, competitive pressures and the
availability of complementary businesses that we may wish to acquire.
If our capital is insufficient to fund our activities in either the
short or long term, we may need to raise additional funds. If we raise
additional funds through the issuance of equity securities, our existing
stockholders' percentage ownership will be diluted. These equity securities
may also have rights superior to our common stock. Additional debt or equity
financing may not be available when needed or on satisfactory terms. If
adequate funds are not available on acceptable terms, we may be unable to
expand our services, respond to competition, pursue acquisition opportunities
or continue our operations.
Recent Accounting Pronouncements
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133" ("SFAS 133"), respectively. SFAS 133 is effective for all fiscal
quarters beginning with the quarter ending June 30, 2000. SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. We will adopt SFAS 133 in our quarter ending June 30,
2000 and do not expect such adoption to have an impact on our reported
results of operations, financial position or cash flows.
11
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YEAR 2000 READINESS
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries
to distinguish the year 2000 from the year 1900. As a result, computer
systems and software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements to avoid
system failures or miscalculations causing disruptions of normal business
activities.
State of Readiness
We have made a preliminary assessment of the Year 2000 readiness of
our operating, financial and administrative systems. The assessment plan
consists of:
- determining our material hardware and software;
- assessing repair or replacement requirements;
- repairing or replacing non-compliant hardware and software; and
- creating contingency plans in the event of Year 2000 failures.
Since third parties developed the operating, financial and
administrative systems that we use, steps will be taken to ensure that
these third-party systems are Year 2000 compliant. We plan to confirm
this compliance through a combination of representations by these third
parties of their products' Year 2000 compliance and specific testing of
these systems. We plan to complete this process prior to the end of the
third quarter of 1999. Until such testing is completed, we will not be
able to completely evaluate whether our systems will need to be revised or
replaced.
We have contacted our partners to determine the extent to which they
are vulnerable to Year 2000 risks. We have not made a full assessment of
the extent to which our partners might be vulnerable to Year 2000 risks.
Costs
To date, we have incurred immaterial costs on Year 2000 compliance
issues. Most of our expenses are related to, and are expected to
continue to be related to, the operating costs associated with time
spent by employees in the evaluation process and Year 2000 compliance
matters generally. Such expenses, if higher than anticipated, could
have a material adverse effect on our business, results of operations
and financial condition.
Year 2000 Risks
We are not currently aware of any Year 2000 problems relating to our
operating, financial and administrative systems that would have a material
adverse effect on our business, results of operations or financial
condition. However, we may discover Year 2000 problems in the future or
Year 2000 problems may go undetected. Our failure to fix or replace these
services on a timely basis could result in lost revenues, increased
operating costs or the loss of customers and other business interruptions.
12
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If we fail to provide Year 2000 compliant solutions to the end-user
customers of our partners, we may incur reputational harm and legal
liability. Furthermore, if our partners fail to fix or replace any Year
2000 non-compliant software products or their internal systems on a
timely basis, it could result in an indirect adverse effect on our
business, financial condition and results of operation.
In addition, there can be no assurance that governmental agencies,
utility companies, third-party service providers and others outside of our
control will be Year 2000 compliant. The failure by such entities to be Year
2000 compliant could result in a systematic failure beyond our control such
as a transportation systems, telecommunications or electrical failure, which
could also prevent us from delivering our services to our partners' end-user
customers.
OTHER FACTORS AFFECTING OPERATING RESULTS
RISK FACTORS
Risks Relating To Our Business
We have lost money during most of the quarters during which we have been in
business and expect to lose money in the future.
We have incurred operating losses in most of the quarters during which we
have been in business. In future quarters, our operating results may not meet
public market analysts' and investors' expectations. If that happens, the price
of our common stock may fall. Many factors can cause these fluctuations,
including:
- the number, size, timing and scope of our projects;
- customer concentration;
- long and unpredictable sales cycles;
- contract terms of projects;
- degrees of completion of projects;
- project delays or cancellations;
- competition for and utilization of employees;
- how well we estimate the resources we need to complete projects;
- the integration of acquired businesses;
- pricing changes in the industry; and
- economic conditions specific to the Internet and information technology
consulting.
13
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We began our business in September 1997. We only began providing services
on any significant basis in mid-1998 and primarily to one partner. As a
result, we have a limited operating history upon which you may evaluate our
business and prospects. Companies in an early stage of development frequently
encounter greater risks and unexpected expenses and difficulties. As a
result, we cannot assure you of any operating results and we will likely
experience large variations in quarterly operating results.
We expect to incur operating losses at least through the end of 1999 and
perhaps thereafter. We plan to increase our expenditure on sales and
marketing, infrastructure development, personnel and general and
administrative expenses in connection with our efforts to expand our
business. As a result, we will need to generate significant revenues to
achieve profitability. Even if we do achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or annual basis in
the future. Although our revenues have grown in recent quarters, you should
not view our historical growth rates as indicative of our future revenues.
The loss of sales to Vignette Corporation would seriously harm our business.
Vignette Corporation accounted for 91% of our revenue during 1998 and 97%
of our revenue during the six months ended June 30, 1999. Any termination of
our relationship with Vignette would have a material adverse effect on our
operating results and financial condition. Vignette only retains our services
on a case-by-case basis and may choose at any time to use any other firm or
to provide the services that we perform for itself. Therefore, any downturn
in Vignette's business or any shift in its decisions to continue to use our
services could also result in substantially reduced sales by us.
Our partners are not obligated to use our services.
Our contracts with our partners do not obligate them to use our services. A
partner may choose at any time to use another consulting firm or to perform the
services we provide through an internal services organization. Any termination
of a relationship with a partner, or a partner's decision to employ other
consulting firms or perform services in-house, could seriously harm our
business.
We may align ourselves with partners that fail.
In selecting our partners, we seek to identify Internet software
companies that we believe will develop into market leaders. However, our
partners compete in new and rapidly changing markets. In certain of these
markets, only a few companies will survive. If we align ourselves with
companies that fail to become market leaders, our business may suffer because
our partners will not have significant demand for our services. We invest
substantial resources to train our information technology professionals
regarding the use and features of our partners' software, and we will lose
this investment if our partners fail.
We have agreed not to perform services for competitors of our partners, which
limits our potential market.
We have agreed with each of our partners not to perform services for
their competitors. These non-compete agreements substantially reduce the
number of our prospective partners. In addition, these agreements increase
the importance of our partner selection process, because many of our partners
compete in markets where only a limited number of companies gain significant
market share. If we agree not to perform services for a particular partner's
competitors and our partner fails to gain meaningful market share, we are
unlikely to receive future material revenues in that particular market.
We may not grow, or we may be unable to manage our growth.
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Our success will depend on our ability to rapidly expand the number of
partners and teams of information technology professionals. However, we may not
grow as planned or at all. If we do grow, our growth will place significant
strains on our management personnel and other resources. For example, it will be
difficult to manage information technology professionals who will be widely
dispersed around the country. If we are unable to manage our growth effectively,
this inability will adversely affect the quality of our services and our ability
to retain key personnel, and could harm our business.
Our management team may not be able to work together effectively to implement
our business plan.
We have recently hired many of our current executive officers to establish a
team to manage our operations. These newly hired officers include our Chief
Executive Officer, hired in April 1999, our Chief Financial Officer, hired in
April 1999, and our Chief Technology Officer, hired in May 1999. These
individuals have not worked together previously and are in the process of
integrating as a management team. Their failure to work together effectively
would seriously harm our ability to carry out our business plan.
We may not be able to attract and retain information technology professionals,
which could affect our ability to compete effectively.
Our business is labor intensive. Accordingly, our success depends in large
part upon our ability to attract, train, retain, motivate and manage highly
skilled information technology professionals. Because of the recent rapid growth
of the Internet, individuals who can perform the services we offer are scarce
and are likely to remain a limited resource for the foreseeable future.
Furthermore, there is a high rate of attrition among such personnel. Any
inability to attract, train and retain highly skilled information technology
professionals would impair our ability to adequately manage and staff our
existing projects and to bid for or obtain new projects, which in turn would
adversely affect our operating results.
Our success will depend on retaining our senior management team and key
technical personnel.
We believe that our success will depend on retaining our senior management
team and key technical personnel, including our President, Bryan Menell, and our
Chief Executive Officer, John T. McDonald. This dependence is particularly
important in our business, because personal relationships are a critical element
of obtaining and maintaining our partners. If any of these people stop working
for us, our level of management, technical, marketing and sales expertise could
significantly diminish. These people would be difficult to replace, and losing
them could seriously harm our business. We do not currently maintain key-man
insurance for these people.
Our quarterly operating results will be volatile and may cause our stock price
to fluctuate.
Our quarterly revenue, expenses and operating results have varied
significantly in the past and are likely to vary significantly in the future.
These quarterly fluctuations have been and will continue to be based on a number
of factors, including:
- The number and types of projects that we undertake;
- Our ability to attract, train and retain skilled management and
information technology professionals;
- Our employee utilization rates, including our ability to transition our
information technology professionals from one project to another;
- Changes in our pricing policies;
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- Our ability to manage costs; and
- Costs related to acquisitions of other businesses.
In addition, many factors affecting our operating results are outside of our
control, such as:
- Demand for Internet software;
- End-user customer budget cycles;
- Changes in end-user customers' desire for our partners' products and our
services;
- Pricing changes in our industry;
- Government regulation and legal developments regarding the use of the
Internet; and
- General economic conditions.
Although we have limited historical financial data, we expect that we will
experience seasonal fluctuations in revenues. We expect that revenues in the
quarter ending December 31 will typically be lower than our other quarters
because there are fewer billable days in this quarter due to vacations and
holidays. This seasonal trend may materially affect our quarter-to-quarter
operating results.
We face risks associated with finding and integrating acquisitions.
Our success will depend in part on our ability to identify suitable
acquisition candidates, acquire those companies on acceptable terms and
integrate their operations successfully. Acquisitions would involve a number of
potential additional risks, including:
- Adverse effects on operating results from increased goodwill amortization,
acquired in-process research and development, stock compensation expense
and increased compensation expense attributable to newly hired employees;
- Diversion of management attention from other aspects of our business;
- Failure to retain acquired personnel;
- Harm to our reputation if an acquired company performs poorly; and
- Assumption of liabilities of acquired companies, including potentially
hidden liabilities.
Year 2000 risks may harm our business.
In less than four months, computer systems and software used by many
companies will need upgrading to operate properly in the Year 2000 and
beyond. Our and our partners' efforts to comply with the Year 2000
requirements may be unsuccessful, and Year 2000 compliance by our partners'
end-user customers may reduce our partners' revenues and need for our
services.
16
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We are in the early stages of conducting a survey of our partners as to the
Year 2000 compliance of their software. If we implement our partners' software
that is not Year 2000 compliant, we may have liability to their end-user
customers. Any such litigation, regardless of merit, could result in substantial
costs and a diversion of our management's attention away from the operation of
our business.
We believe that our internal systems are currently Year 2000 compliant.
However, the failure of our internal systems to operate without Year 2000
complications could harm our business and require us to incur significant
unanticipated expenses to remedy any problems. In addition, we are subject to
external forces that might generally affect industry and commerce, such as
utility company Year 2000 compliance failures and related service interruptions.
Many current or potential end-user customers of our partners and potential
partners are expending significant resources to make their current systems Year
2000 compliant. Such expenditures may reduce the funds available to purchase our
partners' software and pay for our implementation services in connection with
such software.
Any of the above factors could harm our business and adversely affect our
operating results.
Risks Relating to Our Industry
We focus solely on companies in the market for Internet software.
Our business is dependent upon continued growth in the use of the Internet
to fuel the growth in the amount of Internet software sold by our partners and
prospective partners and used by their end-user customers. If use of the
Internet does not continue to grow, or grows more slowly than expected, our
growth would decline and our business would be seriously harmed. Any downturn in
the market for Internet software would harm our business, financial condition
and operating results.
Our business will suffer if we do not keep up with rapid technological change,
evolving industry standards or changing partner requirements.
Rapidly changing technology, evolving industry standards and changing
partner needs are common in the Internet professional services market.
Accordingly, our future success will depend, in part, on our ability to:
- effectively use leading technologies;
- continue to develop our strategic and technical expertise;
- enhance our current services;
- develop new services that meet changing partner and end-user customer
needs;
- advertise and market our services; and
- influence and respond to emerging industry standards and other
technological changes.
17
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We must accomplish all of these tasks in a timely and cost-effective manner.
We might not succeed in effectively doing any of these tasks, and our failure to
succeed could have a material and adverse effect on our business, financial
condition or results of operations.
Our market is highly competitive and has low barriers to entry.
The market for services to Internet software companies is relatively new,
intensely competitive, rapidly evolving and subject to rapid technological
change. In addition, there are relatively low barriers to entry into this
market. Many of our current and potential competitors have longer operating
histories, more established reputations and potential partner relationships and
greater financial, technical, industry and marketing resources than we do. This
may place us at a disadvantage to our competitors.
Risks Relating to Ownership of Our Stock
We are controlled by our officers and directors, which could result in our
taking actions that other stockholders do not approve.
Our executive officers, directors and 5% and greater stockholders
beneficially own or control approximately 68% of the voting power of our
company. These persons, if they were to act together, would be in a position
to elect and remove directors and control the outcome of most matters
submitted to stockholders for a vote. Additionally, these persons would be
able to significantly influence any proposed amendment to our charter, a
merger proposal, a proposed sale of assets or other major corporate
transaction or a non-negotiated takeover attempt. This concentration of
ownership may discourage a potential acquiror from making an offer to buy us,
which, in turn, could adversely affect the market price of our common stock.
It may be difficult for another company to acquire us, and this could depress
our stock price.
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders.
We may need to raise additional capital that may not be available on
satisfactory terms.
We anticipate that the net proceeds of our recent initial public offering
will be sufficient to fund our operations and capital requirements for at
least 12 months following the offering. After that, we may need to raise
additional funds. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to:
- open new offices;
18
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- hire, train and retain employees;
- respond to competitive pressures or unanticipated requirements; or
- pursue acquisition opportunities.
Our common stock could be delisted from the Nasdaq SmallCap market and the
Boston Stock Exchange, which would make trading in our stock more difficult.
Our common stock is listed on the Nasdaq SmallCap Market and the Boston
Stock Exchange. However, our shares could be subsequently delisted, which would
force us to list our shares on the OTC Bulletin Board or some other quotation
medium, such as "pink sheets," depending upon our ability to meet the specific
listing requirements of those quotation systems. As a result, an investor would
find it more difficult to dispose of, or to obtain accurate quotations for, the
price of our shares. Delisting may also reduce the visibility, liquidity and
price of our common stock.
If our common stock is delisted from the Nasdaq SmallCap Market and does not
trade on another national securities exchange, we may become subject to "penny
stock" regulations that impose additional sales practice disclosure and market
making requirements on broker-dealers who sell or make a market in our stock. In
such instance, the rules of the Securities and Exchange Commission would
generally define "penny stock" to be common stock that has a market price of
less than $5.00 per share. If our stock becomes subject to penny stock
regulations, it would adversely affect the ability and willingness of
broker-dealers who sell or make a market in our common stock and of investors to
sell our stock in the secondary market.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
At June 30, 1999, we had approximately $33,000 in a non-interest bearing
checking account. The effect of changes in interest rates of +/- 10% over a
six month horizon would have no effect on the fair market value of the
portfolio.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not a party to any material legal proceedings. We
received a demand letter from a company claiming that our Web Site induces
patent infringement by others and requesting that we enter into a license
agreement with the company that could require us to pay up to $150,000. We
believe the claim is without merit.
Item 2. Changes in Securities and Use of Proceeds.
The effective date of the registration statement for our initial
public offering, filed on Form SB-2 under the Securities Act of 1933, as
amended (File No. 333-78337), was July 28, 1999. The class of securities
offered and sold pursuant to the registration statement was common stock. The
offering commenced on July 29, 1999 and and the proceeds therefrom were
received August 3, 1999. The managing underwriter for the offering was
Gilford Securities. Accordingly, we did not have the proceeds from the
offering during the quarter ended June 30, 1999.
In the offering, we sold 1,000,000 shares of our common stock for
an aggregate offering price of $8.0 million. We incurred expenses of
approximately $1.6 million, of which approximately $1.0 million represented
underwriting discount and a non-accountable expense allowance payable to the
underwriter and approximately $.6 million represented other expenses related
to the offering. The net offering proceeds to us after total expenses was
approximately $6.4 million.
20
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Item 4. Submission of Matters to a Vote of Security Holders.
In the quarter ended June 30, 1999, the following matters were
submitted to our security holders:
In May 1999, prior to our initial public offering, we solicited and
obtained the approval of our stockholders through a Written Consent of
Stockholders to approve our 1999 Option Plan, our 1999 Employee Stock
Purchase Plan and a form of Indemnification Agreement for indemnification of
directors and executive officers. The number of shares for which consent was
received was 2,500,000 representing 100% of the 2,500,000 shares outstanding
at that time.
In May 1999, prior to our initial public offering, we solicited and
obtained the approval of our stockholders through a Written Consent of
Stockholders to amend and restate our Certificate of Incorporation. The
number of shares for which consent was received was 2,500,000 representing
100% of the 2,500,000 shares outstanding at that time.
21
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, we did not file any Current
Report on Form 8-K.
22
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PERFICIENT, INC.
Dated: September 10, 1999 /s/ John T. McDonald
--------------------------------------------
John T. McDonald, Chief Executive
Officer (Principal Executive Officer)
Dated: September 10, 1999 /s/ John A. Hinners
--------------------------------------------
John A. Hinners, Chief Financial Officer
(Principal Financial and Accounting Officer)
23
<PAGE>
Exhibit Index
-------------
No. Description
- --- -----------
27 Financial Data Schedule
24
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