sv1za
As filed with the Securities and Exchange Commission on
April 13, 2010
Registration No. 333-163476
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 6
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SPS COMMERCE, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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7372
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41-2015127
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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333 South Seventh Street, Suite 1000
Minneapolis, MN 55402
(612) 435-9400
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Archie C. Black
President and Chief Executive Officer
SPS Commerce, Inc.
333 South Seventh Street, Suite 1000
Minneapolis, MN 55402
(612) 435-9400
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Andrew G. Humphrey
Jonathan R. Zimmerman
Faegre & Benson
LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN
55402-3901
(612) 766-7000
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Mark J. Macenka
Kenneth J. Gordon
Goodwin Procter LLP
Exchange Place
53 State Street
Boston, MA 02109
(617) 570-1000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company x
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate Offering
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Registration
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Securities to be Registered
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Price (1)
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Fee
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Common stock, par value $0.001 per share
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$49,833,342
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$2,840.12(2)
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(1)
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Estimated solely for the purpose of computing the registration
fee pursuant to Rule 457(o) under the Securities Act.
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(2)
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Previously paid.
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The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED APRIL 13, 2010
3,333,334 Shares
Common Stock
$ per share
SPS Commerce, Inc.
is selling 2,500,000 shares of our common stock and the
selling stockholders identified in this prospectus are selling
an additional 833,334 shares. We will not receive any of
the proceeds from the sale of the shares sold by selling
stockholders. We have granted the underwriters a
30-day
option to purchase up to an additional 500,000 shares from
us to cover over-allotments, if any.
This is an initial
public offering of our common stock. We currently expect the
initial public offering price to be between $11.00 and $13.00
per share. We have applied for approval for listing of our
common stock on the Nasdaq Global Market under the symbol
SPSC.
INVESTING
IN OUR COMMON STOCK INVOLVES RISKS.
SEE RISK FACTORS BEGINNING ON PAGE 8.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
Thomas
Weisel Partners LLC
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William
Blair & Company |
Needham & Company, LLC |
JMP
Securities
The
date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with information
different from that contained in this prospectus. This
prospectus is not an offer to sell, nor is it seeking an offer
to buy, these securities in any state where the offer or sale is
not permitted. The information in this prospectus speaks only as
of the date of this prospectus unless the information
specifically indicates that another date applies, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
SPS
Commerce®,
SPSCommerce.net, the SPS Commerce logo and other trademarks or
service marks of SPS Commerce appearing in this prospectus are
the property of SPS Commerce. Trade names, trademarks and
service marks of other companies appearing in this prospectus
are the property of the respective owners.
In this prospectus, company, we, our, and us refer to SPS
Commerce, Inc., except where the context otherwise requires.
We obtained industry and market data used throughout this
prospectus through our research, surveys and studies conducted
by third parties and industry and general publications. We have
not independently verified market and industry data from
third-party sources.
The Gartner Report described herein represents data, research
opinion or viewpoints published, as part of a syndicated
subscription service, by Gartner, Inc., and is not a
representation of fact. The Gartner Report speaks as of its
original publication date (and not as of the date of this
prospectus) and the opinions expressed in the Gartner Report are
subject to change without notice.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. You should read this entire prospectus
carefully, including the sections titled Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our financial statements and the notes thereto accompanying
this prospectus, before making an investment in our common
stock.
Our
Business
Overview
We are a leading provider of on-demand supply chain management
solutions, providing integration, collaboration, connectivity,
visibility and data analytics to thousands of customers
worldwide. We provide our solutions through SPSCommerce.net, a
hosted software suite that uses pre-built integrations to enable
our supplier customers to shorten supply cycle times, optimize
inventory levels, reduce costs and satisfy retailer
requirements. As of December 31, 2009, we had over 11,000
customers with contracts to pay us monthly fees, which we refer
to as recurring revenue customers. We have also generated
revenues by providing supply chain management solutions to an
additional 24,000 organizations that, together with our
recurring revenue customers, we refer to as our customers. Once
connected to our platform, our customers often require
integrations to new organizations that allow us to expand our
platform and generate additional revenues.
We deliver our solutions to our customers over the Internet
using a Software-as-a-Service model. Our delivery model enables
us to offer greater functionality, integration and reliability
with less cost and risk than traditional solutions. Our platform
features pre-built integrations with 2,700 order management
models and over 100 accounting, warehouse management, enterprise
resource planning, and packing and shipping applications. Our
delivery model leverages our existing integrations across
current and new customers. As a result, each integration that we
add to SPSCommerce.net makes our platform more appealing to
potential customers by increasing the number of pre-built
integrations we offer.
For 2007, 2008 and 2009, we generated revenues of
$25.2 million, $30.7 million and $37.7 million.
Our fiscal quarter ended December 31, 2009 represented our
36th consecutive quarter of increased revenues. Recurring
revenues from recurring revenue customers accounted for 83%, 84%
and 80% of our total revenues for 2007, 2008 and 2009. No
customer represented over 1% of our revenues for 2007, 2008 or
2009.
Our
Industry
The supply chain management industry serves thousands of
retailers around the world supplied with goods from tens of
thousands of suppliers. Additional participants in this market
include distributors, third-party logistics providers,
manufacturers, fulfillment and warehousing providers and
sourcing companies. Supply chain management involves
communicating data related to the exchange of goods among these
trading partners.
Our target market of supply chain integration solutions is
categorized by Gartner within the broader Integration Services
market, which Gartner estimates was $1.5 billion in 2008
(Magic Quadrant for Integration Service Providers, report by
Benoit Lheureux, November 2009). As familiarity and acceptance
of on-demand solutions continues to accelerate, we believe
customers will continue to turn to on-demand delivery methods
like ours for their supply chain integration needs.
Retailers impose non-standardized, specific work-flow rules and
processes on their trading partners for electronically
communicating supply chain information through rule
books. The responsibility for creating information
maps, which are integration connections between the
retailer and the supplier that comply with the retailers
rule books, resides primarily with the supplier. Noncompliance
with rule books can lead to refusal of delivered goods, fines
and termination of the suppliers relationship with the
retailer.
1
A number of key trends are impacting the supply chain management
industry and increasing demand for supply chain management
solutions. These include:
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increasing retailer service and performance demands;
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globalization of the supply chain ecosystem;
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increasing complexity of the supply chain ecosystem; and
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increasing use of outsourcing by small- and medium-sized
suppliers.
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Trading partners are demanding better supply chain management
solutions than traditional methods, which include
non-automated
paper or fax solutions and electronic solutions implemented
using
on-premise
licensed software. These software solutions primarily link
retailers and suppliers through the Electronic Data Interchange
protocol and typically have significant setup and maintenance
requirements. Software-as-a-Service solutions such as ours allow
organizations to connect across the supply chain ecosystem,
addressing increased retailer demands, globalization and
increased complexity affecting the supply chain. The enhanced
integration with trading partners and into organizations
other business systems increases the reliance of customers on
the solutions provided by their Software-as-a-Service vendors.
SPSCommerce.net:
Our Platform
We operate one of the largest trading partner integration
centers through SPSCommerce.net. More than 35,000 customers
across more than 40 countries have used our platform to enhance
their trading relationships. A single integration to
SPSCommerce.net allows an organization to connect seamlessly to
the entire SPSCommerce.net network of trading partners. By
maintaining current integrations with retailers such as
Wal-Mart, Target, Macys and Safeway, SPSCommerce.net
eliminates the need for suppliers to continually stay up-to-date
with the rule book changes required by large retailers.
Suppliers, distributors, third-party logistics providers,
outsourced manufacturers, fulfillment and warehousing providers
and sourcing companies that use our platform realize benefits
through more reliable and faster integration with retailers as
well as reduced costs and improved efficiency in the order
fulfillment process. These participants also realize increased
sales through enhanced supply chain visibility into
retailers inventory and point-of-sale information. Buying
organizations, such as retailers, grocers and distributors, use
our solutions to establish more comprehensive and advanced
integrations with a broader set of suppliers. Our platform helps
buying organizations reduce expenses, enhance quality of
inventory and more effectively reconcile shipments, orders and
payments.
Our platform delivers suppliers and retailers the following
solutions:
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Trading Partner Integration. Our Trading Partner
Integration solution enables suppliers to comply with
retailers rule books and allows for the electronic
exchange of information among numerous trading partners through
various protocols.
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Trading Partner Enablement. Our Trading Partner
Enablement solution helps organizations, typically large
retailers, implement new integrations with trading partners,
typically suppliers, to drive automation and electronic
communication across their supply chains.
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Trading Partner Intelligence. In 2009, we introduced our
Trading Partner Intelligence solution, which consists of six
data analytics applications and allows our supplier customers to
improve their visibility across, and analysis of, their supply
chains. Retailers improve their visibility into supplier
performance and their understanding of product sell-through.
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Other Trading Partner Solutions. We provide a number of
peripheral solutions such as barcode labeling and our scan and
pack application, which helps trading partners process
information to streamline the picking and packaging process.
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2
Our
Go-to-Market Approach
We enable trading partner relationships among our retailer,
supplier and fulfillment customers that naturally lead to new
customer acquisition opportunities. The addition of each new
customer to our platform allows the customer to communicate with
our existing customers and allows our existing customers to
route orders to the new customer. This network
effect of adding customers to our platform creates
opportunities for existing customers to make incremental sales
by working with new trading partners and vice versa.
Our
Growth Strategy
We seek to be the leading global provider of supply chain
management solutions. Key elements of our strategy include:
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further penetrating our current market;
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increasing revenues from our customer base;
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expanding our distribution channels;
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expanding our international presence;
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enhancing and expanding our platform; and
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selectively pursuing strategic acquisitions.
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Corporate
Information
We were originally incorporated as St. Paul Software, Inc., a
Minnesota corporation, on January 28, 1987. On May 30,
2001, we reincorporated in Delaware under our current name, SPS
Commerce, Inc. Our principal executive offices are located at
333 South Seventh Street, Suite 1000, Minneapolis,
Minnesota 55402, and our telephone number is
(612) 435-9400.
Our website address is www.spscommerce.com. Information
contained on our website is not a part of this prospectus and
the inclusion of our website address in this prospectus is an
inactive textual reference only.
3
THE
OFFERING
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Common stock offered by us |
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2,500,000 shares |
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Common stock offered by selling stockholders |
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833,334 shares |
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Common stock to be outstanding after this offering |
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10,920,939 shares |
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Over-allotment option |
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500,000 shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering,
after deducting estimated underwriting discounts and offering
expenses, will be approximately $26.1 million, assuming the
shares are offered at $12.00 per share, which is the mid-point
of the estimated offering price range set forth on the cover
page of this prospectus. We will not receive any of the proceeds
from the sale of shares by the selling stockholders. See
Principal and Selling Stockholders. |
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We intend to use $594,000 of our net proceeds from this offering
to repay indebtedness under our equipment term loans. We intend
to use any remaining proceeds for working capital and general
corporate purposes, including potential acquisitions. See
Use of Proceeds. |
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Proposed Nasdaq Global Market symbol |
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SPSC |
The number of shares of our common stock outstanding after this
offering is based on 8,420,939 shares outstanding as of
March 31, 2010. As of March 31, 2010, we had
8,420,939 shares outstanding, excluding
(a) 1,247,726 shares of common stock issuable upon the
exercise of outstanding options to purchase our common stock at
a weighted average exercise price of $1.57 per share,
(b) 68,201 shares of common stock issuable upon the
exercise of outstanding warrants at a weighted average exercise
price of $3.67 per share and (c) 694,200 shares of
common stock reserved for issuance under our 2010 Equity
Incentive Plan, subject to increase on an annual basis and
subject to increase for shares subject to awards under our prior
equity plans that expire unexercised or otherwise do not result
in the issuance of shares, up to 431,271 of which we intend to
use for stock option grants to our employees and directors
effective upon completion of the offering with an exercise price
equal to the offering price.
Except as otherwise indicated, information in this prospectus
assumes no exercise of the underwriters overallotment
option to purchase up to 500,000 additional shares of our
common stock from us. Except as otherwise indicated, all share
and per share information referenced throughout this prospectus
have been adjusted to reflect the conversion of all of our
preferred stock into common stock immediately prior to
consummation of this offering and a 0.267 for 1 reverse stock
split of our common stock that occurred on April 13, 2010.
4
SUMMARY
FINANCIAL DATA
(In thousands, except per share and recurring revenue customer
data)
The following tables summarize the financial data for our
business. You should read this summary financial data in
conjunction with Selected Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and related notes, all included elsewhere in this
prospectus.
The summary financial data under the heading Balance Sheet
Data as of December 31, 2008 and 2009, under the
heading Statement of Operations Data for each of the
years ended December 31, 2007, 2008 and 2009 and under the
heading Operating Data relating to Adjusted EBITDA
for each of the three years ended December 31, 2007, 2008
and 2009 have been derived from our audited annual financial
statements, which are included elsewhere in this prospectus. The
unaudited summary financial data under the heading
Operating Data relating to recurring revenue
customers have been derived from our internal records of our
operations.
The pro forma balance sheet data as of December 31, 2009 is
unaudited and gives effect to the conversion of all of our
preferred stock into our common stock immediately prior to the
consummation of this offering. The pro forma as adjusted balance
sheet data as of December 31, 2009 is unaudited and gives
effect to (1) the pro forma adjustment above; (2) our
receipt of estimated net proceeds of $26.1 million from
this offering, based on an assumed initial public offering price
of $12.00 per share, which is the mid-point of our filing range,
after deducting estimated underwriting discounts and offering
expenses payable by us and (3) the application of
$594,000 of our net proceeds from this offering to repay
indebtedness under our equipment term loans, as if each had
occurred as of December 31, 2009. The pro forma as adjusted
summary financial data are not necessarily indicative of what
our financial position or results of operations would have been
if this offering had been completed as of the date indicated,
nor are these data necessarily indicative of our financial
position or results of operations for any future date or period.
5
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Year Ended December 31,
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2007
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2008
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2009
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Statement of Operations Data:
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Revenues
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$
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25,198
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$
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30,697
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$
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37,746
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Cost of revenues (1)
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6,379
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9,258
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11,715
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Gross profit
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18,819
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21,439
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26,031
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Operating expenses
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Sales and marketing (1)
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11,636
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12,493
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13,506
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Research and development (1)
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3,546
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3,640
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4,305
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General and administrative (1)
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5,458
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6,716
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6,339
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Total operating expenses
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20,640
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22,849
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24,150
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Income (loss) from operations
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(1,821
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(1,410
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1,881
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Other income (expense)
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Interest expense
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(439
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(419
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(270
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Other income
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120
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28
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(358
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Total other expense
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(319
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(391
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(628
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Income tax expense
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(16
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(94
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(91
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Net income (loss)
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$
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(2,156
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$
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(1,895
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$
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1,162
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Net income (loss) per share
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Basic
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$
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(11.65
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$
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(6.45
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$
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3.53
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Fully diluted
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$
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(11.65
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$
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(6.45
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$
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0.13
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Weighted average shares outstanding
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Basic
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185
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294
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329
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Fully diluted
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185
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294
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9,268
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Pro forma net income per share (unaudited) (2)
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Basic
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$
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0.14
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Fully diluted
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$
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0.13
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Pro forma weighted average shares outstanding (unaudited) (2)
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Basic
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8,476
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Fully diluted
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9,268
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Year Ended December 31,
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2007
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2008
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2009
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(Unaudited)
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Operating Data:
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Adjusted EBITDA (3)
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$
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103
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$
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763
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$
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3,206
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Recurring revenue customers (4)
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9,496
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|
10,076
|
|
|
|
11,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2009
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
3,715
|
|
|
$
|
5,931
|
|
|
$
|
5,931
|
|
|
$
|
31,437
|
|
Working capital
|
|
|
3,995
|
|
|
|
4,973
|
|
|
|
4,973
|
|
|
|
30,927
|
|
Total debt (5)
|
|
|
4,471
|
|
|
|
2,694
|
|
|
|
2,694
|
|
|
|
2,100
|
|
Total redeemable convertible preferred stock
|
|
|
65,964
|
|
|
|
65,778
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(61,844
|
)
|
|
|
(60,466
|
)
|
|
|
5,312
|
|
|
|
31,412
|
|
|
|
|
(1)
|
|
Includes stock-based compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cost of revenues
|
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
53
|
|
Sales and marketing
|
|
|
33
|
|
|
|
60
|
|
|
|
91
|
|
Research and development
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
General and administrative
|
|
|
9
|
|
|
|
74
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46
|
|
|
$
|
157
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
(2)
|
|
Reflects the conversion of all of
our preferred stock into common stock that will occur
immediately prior to the consummation of this offering and the
0.267 for 1 reverse stock split that occurred on April 13,
2010. The calculation of the basic pro forma weighted average
shares outstanding (unaudited) consists of the basic weighted
average shares outstanding plus the weighted average preferred
shares outstanding, which will convert to common stock in
connection with this offering.
|
|
|
|
(3)
|
|
EBITDA consists of net income
(loss) plus depreciation and amortization, interest expense and
income tax expense. Adjusted EBITDA consists of EBITDA plus our
non-cash, share-based compensation expense. We use Adjusted
EBITDA as a measure of operating performance because it assists
us in comparing performance on a consistent basis, as it removes
from our operating results the impact of our capital structure.
We believe Adjusted EBITDA is useful to an investor in
evaluating our operating performance because it is widely used
to measure a companys operating performance without regard
to items such as depreciation and amortization, which can vary
depending upon accounting methods and the book value of assets,
and to present a meaningful measure of corporate performance
exclusive of our capital structure and the method by which
assets were acquired. The following table provides a
reconciliation of net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
Net income (loss)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
Depreciation and amortization
|
|
|
1,758
|
|
|
|
1,988
|
|
|
|
1,455
|
|
Interest expense
|
|
|
439
|
|
|
|
419
|
|
|
|
270
|
|
Income tax expense
|
|
|
16
|
|
|
|
94
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
57
|
|
|
|
606
|
|
|
|
2,978
|
|
Non-cash, share-based compensation expense
|
|
|
46
|
|
|
|
157
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
103
|
|
|
$
|
763
|
|
|
$
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
This reflects the number of
recurring revenue customers at the end of the period. Recurring
revenue customers are customers with contracts to pay us monthly
fees. A minority portion of our recurring revenue customers
consists of separate units within a larger organization. We
treat each of these units, which may include divisions,
departments, affiliates and franchises, as distinct customers.
Our contracts with our recurring revenue customers typically
allow the customer to cancel the contract for any reason with
30 days prior notice.
|
|
(5)
|
|
Total debt consists of our current
and long-term capital lease obligations, current and long-term
equipment and term loans, line of credit and interest payable.
|
7
RISK
FACTORS
You should carefully consider the risks described below
before making an investment decision. Our business could be
harmed by any of these risks. The trading price of our common
stock could decline due to any of these risks, and you may lose
all or part of your investment. In assessing these risks, you
should also refer to the other information contained in this
prospectus, including our financial statements and related
notes.
Risks
Related to Our Business and Industry
The
market for on-demand supply chain management solutions is at an
early stage of development. If this market does not develop or
develops more slowly than we expect, our revenues may decline
or fail to grow and we may incur operating losses.
We derive, and expect to continue to derive, substantially all
of our revenues from providing on-demand supply chain management
solutions to suppliers. The market for on-demand supply chain
management solutions is in an early stage of development, and it
is uncertain whether these solutions will achieve and sustain
high levels of demand and market acceptance. Our success will
depend on the willingness of suppliers to accept our on-demand
supply chain management solutions as an alternative to
traditional licensed hardware and software solutions.
Some suppliers may be reluctant or unwilling to use our
on-demand supply chain management solutions for a number of
reasons, including existing investments in supply chain
management technology. Supply chain management functions
traditionally have been performed using purchased or licensed
hardware and software implemented by each supplier. Because this
traditional approach often requires significant initial
investments to purchase the necessary technology and to
establish systems that comply with retailers unique
requirements, suppliers may be unwilling to abandon their
current solutions for our on-demand supply chain management
solutions.
Other factors that may limit market acceptance of our on-demand
supply chain management solutions include:
|
|
|
|
|
our ability to maintain high levels of customer satisfaction;
|
|
|
|
our ability to maintain continuity of service for all users of
our platform;
|
|
|
|
the price, performance and availability of competing
solutions; and
|
|
|
|
our ability to assuage suppliers confidentiality concerns
about information stored outside of their controlled computing
environments.
|
If suppliers do not perceive the benefits of our on-demand
supply chain management solutions, or if suppliers are unwilling
to accept our platform as an alternative to the traditional
approach, the market for our solutions might not continue to
develop or might develop more slowly than we expect, either of
which would significantly adversely affect our revenues and
growth prospects.
We do not
have long-term contracts with our recurring revenue customers,
and our success therefore depends on our ability to maintain a
high level of customer satisfaction and a strong reputation in
the supply chain management industry.
Our contracts with our recurring revenue customers typically
allow the customer to cancel the contract for any reason with
30 days prior notice. Our continued success therefore
depends significantly on our ability to meet or exceed our
recurring revenue customers expectations because most
recurring revenue customers do not make long-term commitments to
use our solutions. In addition, if our reputation in the supply
chain management industry is harmed or diminished for any
reason, our recurring revenue customers have the ability to
terminate their relationship with us on short notice and seek
alternative supply chain management solutions. If a significant
number of recurring revenue customers seek to terminate their
relationship with us, our business, results of operations and
financial condition can be adversely affected in a short period
of time.
8
Continued
economic weakness and uncertainty could adversely affect our
revenue, lengthen
our sales cycles and make it difficult for us to forecast
operating results accurately.
Our revenues depend significantly on general economic conditions
and the health of retailers. Economic weakness and constrained
retail spending adversely affected revenue growth rates in late
2008 and similar circumstances may result in slower growth, or
reductions, in revenues and gross profits in the future. We have
experienced, and may experience in the future, reduced spending
in our business due to the current financial turmoil affecting
the U.S. and global economy, and other macroeconomic
factors affecting spending behavior. Uncertainty about future
economic conditions makes it difficult for us to forecast
operating results and to make decisions about future
investments. In addition, economic conditions or uncertainty may
cause customers and potential customers to reduce or delay
technology purchases, including purchases of our solutions. Our
sales cycle may lengthen if purchasing decisions are delayed as
a result of uncertain information technology or development
budgets or contract negotiations become more protracted or
difficult as customers institute additional internal approvals
for information technology purchases. Delays or reductions in
information technology spending could have a material adverse
effect on demand for our solutions, and consequently our results
of operations, prospects and stock price.
If we are
unable to attract new customers, or sell additional solutions,
or if our customers do not increase their use of our solutions,
our revenue growth and profitability will be adversely
affected.
To increase our revenues and achieve and maintain profitability,
we must regularly add new customers, sell additional solutions
and our customers must increase their use of the solutions for
which they currently subscribe. We intend to grow our business
by hiring additional inside sales personnel, developing
strategic relationships with resellers, including resellers that
incorporate our applications in their offerings, and increasing
our marketing activities. In addition, we derived more than 90%
of our revenues from sales of our Trading Partner Integration
solution in 2007, 2008 and 2009 and have not yet received
significant revenues from solutions and applications that we
introduced in 2009. If we are unable to hire or retain quality
sales personnel, convert companies that have been referred to us
by our existing network into paying customers, ensure the
effectiveness of our marketing programs, or if our existing or
new customers do not perceive our solutions to be of
sufficiently high value and quality, we might not be able to
increase sales and our operating results will be adversely
affected. In addition, if we fail to sell our new solutions to
existing or new customers, we will not generate anticipated
revenues from these solutions, our operating results will suffer
and we might be unable to grow our revenues or achieve or
maintain profitability.
Our
quarterly results of operations may fluctuate in the future,
which could result in volatility in our stock price.
Our quarterly revenues and results of operations have varied in
the past and may fluctuate as a result of a variety of factors,
including the success of our new offerings such as our Trading
Partner Intelligence solution. If our quarterly revenues or
results of operations fluctuate, the price of our common stock
could decline substantially. Fluctuations in our results of
operations may be due to a number of factors, including, but not
limited to, those listed below and identified throughout this
Risk Factors section in this prospectus:
|
|
|
|
|
our ability to retain and increase sales to customers and
attract new customers, including our ability to maintain and
increase our number of recurring revenue customers;
|
|
|
|
the timing and success of introductions of new solutions or
upgrades by us or our competitors;
|
|
|
|
the strength of the economy, in particular as it affects the
retail sector;
|
|
|
|
changes in our pricing policies or those of our competitors;
|
|
|
|
competition, including entry into the industry by new
competitors and new offerings by existing competitors;
|
9
|
|
|
|
|
the amount and timing of expenditures related to expanding our
operations, research and development, or introducing new
solutions; and
|
|
|
|
changes in the payment terms for our solutions.
|
Due to the foregoing factors, and the other risks discussed in
this prospectus, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our
future performance.
We have
incurred operating losses in the past and may incur operating
losses in the future.
We began operating our supply chain management solution business
in 1997. Throughout most of our history, we have experienced net
losses and negative cash flows from operations. As of
December 31, 2009, we had an accumulated deficit of
$65.7 million. We expect our operating expenses to increase
in the future as we expand our operations. Furthermore, as a
public company, we will incur significant legal, accounting and
other expenses that we did not incur as a private company. If
our revenues do not grow to offset these increased expenses, we
may not be profitable. We cannot assure you that we will be able
to achieve or maintain profitability. You should not consider
recent revenue growth as indicative of our future performance.
In fact, in future periods, we may not have any revenue growth,
or our revenues could decline.
Our inability to adapt to rapid technological change could
impair our ability to remain competitive.
The industry in which we compete is characterized by rapid
technological change, frequent introductions of new products and
evolving industry standards. Our ability to attract new
customers and increase revenues from customers will depend in
significant part on our ability to anticipate industry standards
and to continue to enhance existing solutions or introduce or
acquire new solutions on a timely basis to keep pace with
technological developments. The success of any enhancement or
new solution depends on several factors, including the timely
completion, introduction and market acceptance of the
enhancement or solution. Any new solution we develop or acquire
might not be introduced in a timely or cost-effective manner and
might not achieve the broad market acceptance necessary to
generate significant revenues. For example, we introduced our
Trading Partner Intelligence solution during 2009, but we have
not yet received significant revenues from this solution. If any
of our competitors implements new technologies before we are
able to implement them, those competitors may be able to provide
more effective solutions than ours at lower prices. Any delay or
failure in the introduction of new or enhanced solutions could
adversely affect our business, results of operations and
financial condition.
We may experience service failures or interruptions due to
defects in the hardware, software, infrastructure, third party
components or processes that comprise our existing or new
solutions, any of which could adversely affect our business.
Technology solutions as complex as ours may contain undetected
defects in the hardware, software, infrastructure, third party
components or processes that are part of the solutions we
provide. If these defects lead to service failures after
introduction of a solution or an upgrade to the solution, we
could experience delays or lost revenues during the period
required to correct the cause of the defects. We cannot be
certain that defects will not be found in new solutions or
upgraded solutions, resulting in loss of, or delay in, market
acceptance, which could have an adverse effect on our business,
results of operations and financial condition.
Because customers use our on-demand supply chain management
solutions for critical business processes, any defect in our
solutions, any disruption to our solutions or any error in
execution could cause recurring revenue customers to cancel
their contracts with us, prevent potential customers from
joining our network and harm our reputation. Although most of
our contracts with our customers limit our liability to our
customers for these defects, disruptions or errors, we
nonetheless could be subject to litigation for actual or alleged
losses to our customers businesses, which may require us
to spend significant time and money in litigation or arbitration
or to pay significant settlements or damages. We do not
currently maintain any warranty reserves. Defending a lawsuit,
regardless of its merit, could be costly and divert
managements attention and could cause our business to
suffer.
10
The insurers under our existing liability insurance policy could
deny coverage of a future claim that results from an error or
defect in our technology or a resulting disruption in our
solutions, or our existing liability insurance might not be
adequate to cover all of the damages and other costs of such a
claim. Moreover, we cannot assure you that our current liability
insurance coverage will continue to be available to us on
acceptable terms or at all. The successful assertion against us
of one or more large claims that exceeds our insurance coverage,
or the occurrence of changes in our liability insurance policy,
including an increase in premiums or imposition of large
deductible or co-insurance requirements, could have an adverse
effect on our business, financial condition and operating
results. Even if we succeed in litigation with respect to a
claim, we are likely to incur substantial costs and our
managements attention will be diverted from our operations.
Interruptions or delays from third-party data centers could
impair the delivery of our solutions and our business could
suffer.
We use two third-party data centers, located in Minneapolis and
Saint Paul, Minnesota, to conduct our operations. All of our
solutions reside on hardware that we own or lease and operate in
these locations. Our operations depend on the protection of the
equipment and information we store in these third-party centers
against damage or service interruptions that may be caused by
fire, flood, severe storm, power loss, telecommunications
failures, unauthorized intrusion, computer viruses and disabling
devices, natural disasters, war, criminal act, military action,
terrorist attack and other similar events beyond our control. A
prolonged service disruption affecting our solutions for any of
the foregoing reasons could damage our reputation with current
and potential customers, expose us to liability, cause us to
lose recurring revenue customers or otherwise adversely affect
our business. We may also incur significant costs for using
alternative equipment or taking other actions in preparation
for, or in reaction to, events that damage the data centers we
use.
Our on-demand supply chain management solutions are accessed by
a large number of customers at the same time. As we continue to
expand the number of our customers and solutions available to
our customers, we may not be able to scale our technology to
accommodate the increased capacity requirements, which may
result in interruptions or delays in service. In addition, the
failure of our third-party data centers to meet our capacity
requirements could result in interruptions or delays in our
solutions or impede our ability to scale our operations. In the
event that our data center arrangements are terminated, or there
is a lapse of service or damage to such facilities, we could
experience interruptions in our solutions as well as delays and
additional expense in arranging new facilities and services.
A failure to protect the integrity and security of our
customers information could expose us to litigation,
materially damage our reputation and harm our business, and the
costs of preventing such a failure could adversely affect our
results of operations.
Our business involves the collection and use of confidential
information of our customers and their trading partners. We
cannot assure you that our efforts to protect this confidential
information will be successful. If any compromise of this
information security were to occur, we could be subject to legal
claims and government action, experience an adverse effect on
our reputation and need to incur significant additional costs to
protect against similar information security breaches in the
future, each of which could adversely affect our financial
condition, results of operations and growth prospects. In
addition, because of the critical nature of data security, any
perceived breach of our security measures could cause existing
or potential customers not to use our solutions and could harm
our reputation.
Evolving regulation of the Internet may increase our
expenditures related to compliance efforts, which may adversely
affect our financial condition.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign agencies becomes more likely. We
are particularly sensitive to these risks because the Internet
is a critical component of our on-demand business model. For
example, we believe that increased regulation is likely in the
area of data privacy, and laws and regulations applying to the
solicitation, collection, processing or use of personal or
consumer information could affect our customers ability to
use and share data, potentially reducing demand for solutions
accessed via the Internet and restricting our ability to store,
process and share data with our clients via the Internet.
11
In addition, taxation of services provided over the Internet or
other charges imposed by government agencies or by private
organizations for accessing the Internet may be imposed. Any
regulation imposing greater fees for Internet use or restricting
information exchange over the Internet could result in a decline
in the use of the Internet and the viability of Internet-based
services, which could harm our business.
If we fail to protect our intellectual property and
proprietary rights adequately, our business could be adversely
affected.
We believe that proprietary technology is essential to
establishing and maintaining our leadership position. We seek to
protect our intellectual property through trade secrets,
copyrights, confidentiality, non-compete and nondisclosure
agreements, trademarks, domain names and other measures, some of
which afford only limited protection. We do not have any
patents, patent applications or registered copyrights. Despite
our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our technology or to
obtain and use information that we regard as proprietary. We
cannot assure you that our means of protecting our proprietary
rights will be adequate or that our competitors will not
independently develop similar or superior technology or design
around our intellectual property. In addition, the laws of some
foreign countries do not protect our proprietary rights to as
great an extent as the laws of the United States. Intellectual
property protections may also be unavailable, limited or
difficult to enforce in some countries, which could make it
easier for competitors to capture market share. Our failure to
protect adequately our intellectual property and proprietary
rights could adversely affect our business, financial condition
and results of operations.
An assertion by a third party that we are infringing its
intellectual property could subject us to costly and
time-consuming litigation or expensive licenses and our business
might be harmed.
The Internet supply chain management and technology industries
are characterized by the existence of a large number of patents,
copyrights, trademarks and trade secrets and by frequent
litigation based on allegations of infringement or other
violations of intellectual property rights. As we seek to extend
our solutions, we could be constrained by the intellectual
property rights of others.
We might not prevail in any intellectual property infringement
litigation given the complex technical issues and inherent
uncertainties in such litigation. Defending such claims,
regardless of their merit, could be time-consuming and
distracting to management, result in costly litigation or
settlement, cause development delays, or require us to enter
into royalty or licensing agreements. If our solutions violate
any third-party proprietary rights, we could be required to
withdraw those solutions from the market, re-develop those
solutions or seek to obtain licenses from third parties, which
might not be available on reasonable terms or at all. Any
efforts to re-develop our solutions, obtain licenses from third
parties on favorable terms or license a substitute technology
might not be successful and, in any case, might substantially
increase our costs and harm our business, financial condition
and operating results. Withdrawal of any of our solutions from
the market might harm our business, financial condition and
operating results.
In addition, we incorporate open source software into our
platform. Given the nature of open source software, third
parties might assert copyright and other intellectual property
infringement claims against us based on our use of certain open
source software programs. The terms of many open source licenses
to which we are subject have not been interpreted by
U.S. or foreign courts, and there is a risk that those
licenses could be construed in a manner that imposes
unanticipated conditions or restrictions on our ability to
commercialize our solutions. In that event, we could be required
to seek licenses from third parties in order to continue
offering our solutions, to re-develop our solutions or to
discontinue sales of our solutions, or to release our
proprietary software code under the terms of an open source
license, any of which could adversely affect our business.
We rely on third party hardware and software that could take
a significant time to replace or upgrade.
We rely on hardware and software licensed from third parties to
offer our on-demand supply chain management solutions. This
hardware and software, as well as maintenance rights for this
hardware and software, may not continue to be available to us on
commercially reasonable terms, or at all. If we lose the
12
right to use or upgrade any of these licenses, our customers
could experience delays or be unable to access our solutions
until we can obtain and integrate equivalent technology. There
might not always be commercially reasonable hardware or software
alternatives to the third-party hardware and software that we
currently license. Any such alternatives could be more difficult
or costly to replace than the third-party hardware and software
we currently license, and integration of the alternatives into
our platform could require significant work and substantial time
and resources. Any delays or failures associated with our
platform could injure our reputation with customers and
potential customers and result in an adverse effect on our
business, results of operations and financial condition.
Our strategy includes pursuing acquisitions and our potential
inability to successfully integrate newly-acquired companies or
businesses may adversely affect our financial results.
We believe part of our growth will be driven by acquisitions of
other companies or their businesses. If we complete
acquisitions, we face many risks commonly encountered with
growth through acquisitions. These risks include:
|
|
|
|
|
incurring significantly higher than anticipated capital
expenditures and operating expenses;
|
|
|
|
failing to assimilate the operations and personnel of the
acquired company or business;
|
|
|
|
disrupting our ongoing business;
|
|
|
|
dissipating our management resources;
|
|
|
|
failing to maintain uniform standards, controls and
policies; and
|
|
|
|
impairing relationships with employees and customers as a result
of changes in management.
|
Fully integrating an acquired company or business into our
operations may take a significant amount of time. We cannot
assure you that we will be successful in overcoming these risks
or any other problems encountered with acquisitions. To the
extent we do not successfully avoid or overcome the risks or
problems related to any acquisitions, our results of operations
and financial condition could be adversely affected. Future
acquisitions also could impact our financial position and
capital needs, and could cause substantial fluctuations in our
quarterly and yearly results of operations. Acquisitions could
include significant goodwill and intangible assets, which may
result in future impairment charges that would reduce our stated
earnings.
Our
ability to use U.S. net operating loss carryforwards might be
limited.
As of December 31, 2009, we had net operating loss
carryforwards of $53.4 million for U.S. federal tax
purposes. These loss carryforwards expire between 2010 and 2029.
To the extent these net operating loss carryforwards are
available, we intend to use them to reduce the corporate income
tax liability associated with our operations. Section 382
of the U.S. Internal Revenue Code generally imposes an
annual limitation on the amount of net operating loss
carryforwards that might be used to offset taxable income when a
corporation has undergone significant changes in stock
ownership. Due to changes in ownership, some of our net
operating loss carryforwards will be limited. In addition,
future changes in ownership could further limit the availability
of our net operating loss carryforwards. Our ability to utilize
the current net operating loss carryforwards also might be
limited by the issuance of common stock in this offering. To the
extent our use of net operating loss carryforwards is
significantly limited, our income could be subject to corporate
income tax earlier than it would if we were able to use net
operating loss carryforwards, which could result in lower
profits.
The markets in which we participate are highly competitive,
and our failure to compete successfully would make it difficult
for us to add and retain customers and would reduce or impede
the growth of our business.
The markets for supply chain management solutions are
increasingly competitive and global. We expect competition to
increase in the future both from existing competitors and new
companies that may enter our
13
markets. Increased competition could result in pricing pressure,
reduced sales, lower margins or the failure of our solutions to
achieve or maintain broad market acceptance. We face competition
from:
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Software-as-a-Service providers that deliver
business-to-business information systems using a multi-tenant
approach;
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traditional on-premise software providers; and
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managed service providers that combine traditional on-premise
software with professional information technology services.
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To remain competitive, we will need to invest continuously in
software development, marketing, customer service and support
and product delivery infrastructure. However, we cannot assure
you that new or established competitors will not offer solutions
that are superior to or lower in price than ours. We may not
have sufficient resources to continue the investments in all
areas of software development and marketing needed to maintain
our competitive position. In addition, some of our competitors
are better capitalized than us, which may provide them with an
advantage in developing, marketing or servicing new solutions.
Increased competition could reduce our market share, revenues
and operating margins, increase our costs of operations and
otherwise adversely affect our business.
Mergers or other strategic transactions involving our
competitors could weaken our competitive position, which could
harm our operating results.
Our industry is highly fragmented, and we believe it is likely
that some of our existing competitors will consolidate or will
be acquired. In addition, some of our competitors may enter into
new alliances with each other or may establish or strengthen
cooperative relationships with systems integrators, third-party
consulting firms or other parties. Any such consolidation,
acquisition, alliance or cooperative relationship could lead to
pricing pressure and our loss of market share and could result
in a competitor with greater financial, technical, marketing,
service and other resources, all of which could have a material
adverse effect on our business, operating results and financial
condition.
If we fail to retain our Chief Executive Officer and other
key personnel, our business would be harmed and we might not be
able to implement our business plan successfully.
Given the complex nature of the technology on which our business
is based and the speed with which such technology advances, our
future success is dependent, in large part, upon our ability to
attract and retain highly qualified managerial, technical and
sales personnel. In particular, Archie C. Black, our Chief
Executive Officer and President, Kimberly K. Nelson, our
Executive Vice President and Chief Financial Officer, James J.
Frome, our Executive Vice President and Chief Strategy Officer,
Michael J. Gray, our Executive Vice President of Operations, and
David J. Novak, Jr., our Executive Vice President of
Business Development, are critical to the management of our
business and operations. Competition for talented personnel is
intense, and we cannot be certain that we can retain our
managerial, technical and sales personnel or that we can
attract, assimilate or retain such personnel in the future. Our
inability to attract and retain such personnel could have an
adverse effect on our business, results of operations and
financial condition.
Our continued growth could strain our personnel resources and
infrastructure, and if we are unable to implement appropriate
controls and procedures to manage our growth, we will not be
able to implement our business plan successfully.
We have experienced a period of rapid growth in our headcount
and operations. To the extent that we are able to sustain such
growth, it will place a significant strain on our management,
administrative, operational and financial infrastructure. Our
success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. If
our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees,
or if we are not successful in retaining our existing employees,
our business would be harmed. To manage the expected growth of
our operations and personnel, we will need to continue to
improve our operational, financial and management controls and
our reporting systems and
14
procedures. The additional headcount we are adding will increase
our cost base, which will make it more difficult for us to
offset any future revenue shortfalls by reducing expenses in the
short term. If we fail to successfully manage our growth, we
will be unable to execute our business plan.
Our failure to maintain adequate internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 or to prevent or detect material
misstatements in our annual or interim financial statements in
the future could result in inaccurate financial reporting, or
could otherwise harm our business.
We are required to comply with the internal control evaluation
and certification requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 by no later than the end of our 2011
fiscal year. We are in the process of determining whether our
existing internal controls over financial reporting systems are
compliant with Section 404. This process may divert
internal resources and will take a significant amount of time
and effort to complete. To the extent that we are not currently
in compliance with Section 404, we may be required to
implement new internal control procedures and re-evaluate our
financial reporting. We may experience higher than anticipated
operating expenses as well as increased independent auditor fees
during the implementation of these changes and thereafter.
Further, we may need to hire additional qualified personnel in
order for us to comply with Section 404. If we are unable
to implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results
and could result in our being unable to obtain an unqualified
report on internal controls from our independent auditors, which
could have a negative impact on our stock price.
In connection with preparing the registration statement of which
this prospectus is a part, we identified an error in our prior
years financial statements. This error related to
accounting for the preferred stock warrants at fair value in
2006, 2007 and 2008. This error resulted in the restatement of
our previously issued 2006, 2007 and 2008 financial statements.
This error was determined to be a deficiency. Although we have
taken measures to remediate the deficiency, we cannot assure you
that we have identified all or that we will not in the future
have additional, material weaknesses, significant deficiencies
or control deficiencies. Any failure to maintain or implement
required new or improved controls, or any difficulties we
encounter in implementation, could cause us to fail to meet our
periodic reporting obligations or result in material
misstatements in our financial statements.
Our failure to raise additional capital or generate cash
flows necessary to expand our operations and invest in new
technologies could reduce our ability to compete successfully
and adversely affect our results of operations.
We may need to raise additional funds, and we may not be able to
obtain additional debt or equity financing on favorable terms,
if at all. If we raise additional equity financing, our security
holders may experience significant dilution of their ownership
interests and the value of shares of our common stock could
decline. If we engage in debt financing, we may be required to
accept terms that restrict our ability to incur additional
indebtedness, force us to maintain specified liquidity or other
ratios or restrict our ability to pay dividends or make
acquisitions. If we need additional capital and cannot raise it
on acceptable terms, we may not be able to, among other things:
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develop and enhance our solutions;
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continue to expand our technology development, sales and
marketing organizations;
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hire, train and retain employees; or
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respond to competitive pressures or unanticipated working
capital requirements.
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Our inability to do any of the foregoing could reduce our
ability to compete successfully and adversely affect our results
of operations.
15
Because our long-term success depends, in part, on our
ability to expand the sales of our solutions to customers
located outside of the United States, our business will be
susceptible to risks associated with international
operations.
We have limited experience operating in foreign jurisdictions.
Customers in countries outside of North America accounted
for 2% of our revenues for 2008 and 2009, and, in February 2010,
we opened sales and support offices in the United Kingdom
and France. Our inexperience in operating our business outside
of North America increases the risk that our current and any
future international expansion efforts will not be successful.
Conducting international operations subjects us to new risks
that, generally, we have not faced in the United States,
including:
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fluctuations in currency exchange rates;
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unexpected changes in foreign regulatory requirements;
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longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
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difficulties in managing and staffing international operations;
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potentially adverse tax consequences, including the complexities
of foreign value added tax systems and restrictions on the
repatriation of earnings;
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localization of our solutions, including translation into
foreign languages and associated expenses;
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the burdens of complying with a wide variety of foreign laws and
different legal standards, including laws and regulations
related to privacy;
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increased financial accounting and reporting burdens and
complexities;
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political, social and economic instability abroad, terrorist
attacks and security concerns in general; and
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reduced or varied protection for intellectual property rights in
some countries.
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The occurrence of any one of these risks could negatively affect
our international business and, consequently, our results of
operations generally. Additionally, operating in international
markets also requires significant management attention and
financial resources. We cannot be certain that the investment
and additional resources required in establishing, acquiring or
integrating operations in other countries will produce desired
levels of revenues or profitability.
Risks
Relating to this Offering and Ownership of Our Common
Stock
Because there has not been a public market for our common
stock and our stock price may be volatile, you may not be able
to resell your shares at or above the initial public offering
price.
Prior to this offering, you could not buy or sell our common
stock publicly. We cannot predict the extent to which
investors interests will lead to an active trading market
for our common stock or whether the market price of our common
stock will be volatile following this offering. If an active
trading market does not develop, you may have difficulty selling
any of our common stock that you buy. The initial public
offering price for our common stock was determined by
negotiations between representatives of the underwriters and us
and may not be indicative of prices that will prevail in the
open market following this offering. Consequently, you may not
be able to sell our common stock at prices equal to or greater
than the price you paid in this offering. In addition to the
factors discussed elsewhere in this section, many factors, most
of which are outside of our control, could cause the market
price of our common stock to decrease significantly from the
price you pay in this offering, including:
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variations in our quarterly operating results;
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decreases in market valuations of similar companies;
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the failure of securities analysts to cover our common stock
after this offering or changes in financial estimates by
analysts who cover us, our competitors or our industry;
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16
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failure by us or our competitors to meet analysts
projections or guidance that we or our competitors may give to
the market; and
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fluctuations in stock market prices and volumes.
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In addition, securities class action litigation often has often
been initiated when a companys stock price has fallen
below the companys initial public offering price soon
after the offering closes or following a period of volatility in
the market price of a companys securities. If class action
litigation is initiated against us, we would incur substantial
costs and our managements attention would be diverted from
our operations. All of these factors could cause the market
price of our stock to decline, and you may lose some or all of
your investment.
Future sales of our common stock by our existing stockholders
could cause our stock price to decline.
If our stockholders sell substantial amounts of our common stock
in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that
our stockholders might sell shares of our common stock could
also depress the market price of our common stock. Upon the
closing of this offering, we intend to file registration
statements with the SEC covering any shares of our common stock
acquired upon option exercises prior to the closing of this
offering and all of the 1,600,411 shares subject to options
outstanding, but not exercised, as of the closing of this
offering. 7,496,627 shares of our common stock that will be
outstanding immediately after completion of this offering will
become eligible for sale in the public markets from time to
time, subject to restrictions under the Securities Act of 1933
following the expiration of
lock-up
agreements entered into for the benefit of the underwriters by
the holders of the common stock, including our directors and
executive officers. Furthermore, immediately after completion of
this offering, the holders of 7,463,669 shares of our
common stock will have the right to demand that we file
registration statements, or request that their shares be covered
by a registration statement that we are otherwise filing, with
respect to the shares of our common stock held by them, and will
have the right to include those shares in any registration
statement that we file with the SEC, subject to exceptions,
which would enable those shares to be sold in the public market,
subject to the restrictions under the
lock-up
agreements referred to above.
The underwriters may, in their sole discretion and at any time
or from time to time, without notice, release all or any portion
of the shares of common stock subject to the
lock-up
agreements for sale in the public and private markets prior to
the expiration of the
lock-up. The
market price for shares of our common stock may drop
significantly when the restrictions on resale by our existing
stockholders lapse or if those restrictions on resale are
waived. A decline in the price of shares of our common stock
might impede our ability to raise capital through the issuance
of additional shares of our common stock or other equity
securities.
We have broad discretion in the use of the proceeds of this
offering and may apply the proceeds in ways with which you do
not agree.
We intend to use $594,000 of our net proceeds from this offering
to repay indebtedness under our equipment term loans. We intend
to use any remaining proceeds for working capital and general
corporate purposes. We have not determined the allocation of the
net proceeds in excess of the indebtedness we intend to repay
with the net proceeds we will receive in this offering. Our
management will have broad discretion over the use and
investment of these net proceeds, and, accordingly, you will
have to rely upon the judgment of our management with respect to
our use of these net proceeds, with only limited information
concerning managements specific intentions. You will not
have the opportunity, as part of your investment decision, to
assess whether we use these net proceeds appropriately. We may
place the net proceeds in investments that do not produce income
or that lose value, which may cause our stock price to decline.
Our charter documents, Delaware law and our credit agreement
may inhibit a takeover that stockholders consider favorable.
Upon the closing of this offering, provisions of our amended and
restated certificate of incorporation and amended and restated
bylaws and applicable provisions of Delaware law may delay or
discourage transactions involving an actual or potential change
in our control or change in our management,
17
including transactions in which stockholders might otherwise
receive a premium for their shares, or transactions that our
stockholders might otherwise deem to be in their best interests.
These provisions:
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permit our board of directors to issue up to
5,000,000 shares of preferred stock, with any rights,
preferences and privileges as our board may designate, including
the right to approve an acquisition or other change in our
control;
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provide that the authorized number of directors may be changed
by resolution of the board of directors;
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divide our board of directors into three classes;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice; and
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do not provide for cumulative voting rights.
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In addition, Section 203 of the Delaware General
Corporation Law generally limits our ability to engage in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirers at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of
our common stock.
Our credit agreement also prohibits us from entering into a
transaction whereby a person becomes the beneficial owner of
more than 30% of the total voting power of our capital stock or
a majority of the members of our board changes. These
restrictions may prevent us from entering into transactions in
which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise
deem to be in their best interests.
We do not
intend to declare dividends on our stock after this
offering.
We currently intend to retain all future earnings for the
operation and expansion of our business and, therefore, do not
anticipate declaring or paying cash dividends on our common
stock in the foreseeable future. Our credit agreement also
restricts our ability to pay cash dividends. Any payment of cash
dividends on our common stock will be at the discretion of our
board of directors and will depend upon our results of
operations, earnings, capital requirements, financial condition,
future prospects, contractual restrictions and other factors
deemed relevant by our board of directors. Therefore, you should
not expect to receive dividend income from shares of our common
stock.
Our
directors, executive officers and principal stockholders will
continue to have substantial control over us after this offering
and could delay or prevent a change in corporate
control.
After this offering, our directors, executive officers and
holders of more than 5% of our common stock, together with their
affiliates, will beneficially own, in the aggregate,
approximately 59.7% of our outstanding common stock, assuming no
exercise of the underwriters option to purchase additional
shares of our common stock in this offering. As a result, these
stockholders, acting together, would have the ability to control
the outcome of matters submitted to our stockholders for
approval, including the election of directors and any merger,
consolidation or sale of all or substantially all of our assets.
In addition, these stockholders, acting together, would have the
ability to control the management and affairs of our company.
Accordingly, this concentration of ownership might harm the
market price of our common stock by:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business
combination involving us; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
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18
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. In some
cases, you can identify forward-looking statements by the
following words: anticipate, believe,
continue, could, estimate,
expect, intend, may,
ongoing, plan, potential,
predict, project, should,
will, would, or the negative of these
terms or other comparable terminology, although not all
forward-looking statements contain these words. Forward-looking
statements are not a guarantee of future performance or results,
and will not necessarily be accurate indications of the times
at, or by, which such performance or results will be achieved.
Forward-looking statements are based on information available at
the time the statements are made and involve known and unknown
risks, uncertainties and other factors that may cause our
results, levels of activity, performance or achievements to be
materially different from the information expressed or implied
by the forward-looking statements in this prospectus. These
factors include:
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less than expected growth in the supply chain management
industry, especially for Software-as-a-Service solutions within
this industry;
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lack of acceptance of new solutions we offer;
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an inability to continue increasing our number of customers or
the revenues we derive from our recurring revenue customers;
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continued economic weakness and constrained retail sales;
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an inability to effectively develop new solutions that compete
effectively with the solutions our current and future
competitors offer;
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risk of increased regulation of the Internet;
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an inability to identify attractive acquisition opportunities,
successfully negotiate acquisition terms or effectively
integrate acquired companies or businesses;
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unexpected changes in our anticipated capital expenditures
resulting from unforeseen required maintenance or repairs,
upgrades or capital asset additions;
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an inability to effectively manage our growth;
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lack of capital available on acceptable terms to finance our
continued growth;
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risks of conducting international commerce, including foreign
currency exchange rate fluctuations, changes in government
policies or regulations, longer payment cycles, trade
restrictions, economic or political instability in foreign
countries where we may increase our business and reduced
protection of our intellectual property;
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an inability to add sales and marketing, research and
development or other key personnel who are able to successfully
sell or develop our solutions; and
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other risk factors included under Risk Factors in
this prospectus.
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You should read the matters described in Risk
Factors and the other cautionary statements made in this
prospectus as being applicable to all related forward-looking
statements wherever they appear in this prospectus. We cannot
assure you that the forward-looking statements in this
prospectus will prove to be accurate and therefore prospective
investors are encouraged not to place undue reliance on
forward-looking statements. You should read this prospectus
completely. Other than as required by law, we undertake no
obligation to update or revise these forward-looking statements,
even though our situation may change in the future.
19
USE OF
PROCEEDS
We estimate that the net proceeds from our sale of shares of
common stock in this offering will be approximately
$26.1 million, or approximately $31.7 million if the
underwriters exercise their over-allotment option in full. This
estimate is based upon an assumed initial public offering price
of $12.00 per share, the
mid-point of
our filing range, less estimated underwriting discounts and
commissions and offering expenses payable by us.
Based on amounts we owed as of March 29, 2010, we intend to
use these net proceeds to:
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repay approximately $69,000 of indebtedness under equipment term
loans that bear interest at a rate of 12.0% per annum and mature
in the year ending December 31, 2010;
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repay approximately $346,000 of indebtedness under equipment
term loans that bear interest at rates between 11.9% and 12.5%
per annum and mature in the year ending December 31,
2011; and
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repay approximately $179,000 of indebtedness under equipment
term loans that bear interest at a rate of 11.8% per annum and
mature on January 1, 2012.
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We intend to use any remaining net proceeds for working capital
and general corporate purposes, including potential
acquisitions. We are not currently in negotiations for any
acquisitions for which we intend to use the net proceeds of this
offering. By establishing a public market for our common stock,
this offering is also intended to facilitate our future access
to public markets.
Pending the uses described above, we intend to invest the net
proceeds of this offering in short- to medium-term,
investment-grade, interest-bearing securities.
DIVIDEND
POLICY
We have not historically paid dividends on our common stock.
Following the completion of this offering, we intend to retain
our future earnings, if any, to finance the expansion and growth
of our business. We do not expect to pay cash dividends on our
common stock in the foreseeable future. Our credit agreement
also currently limits our ability to pay cash dividends. Payment
of future cash dividends, if any, will be at the discretion of
our board of directors after taking into account various
factors, including our financial condition, operating results,
current and anticipated cash needs, outstanding indebtedness and
plans for expansion and restrictions imposed by lenders, if any.
20
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2009:
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on an actual basis giving effect to the 0.267 for 1 reverse
stock split of our common stock that occurred on April 13,
2010;
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on a pro forma basis to also reflect the conversion of all
outstanding preferred stock into common stock immediately prior
to the completion of this offering, as if the conversion
occurred as of December 31, 2009; and
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on a pro forma as adjusted basis to also reflect the conversion
described above, as well as our sale of shares in this offering
at an assumed initial public offering price of $12.00 per share,
which is the mid-point of our filing range, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us, and the application of the net proceeds
from our sale of common stock in this offering to repay $594,000
of indebtedness under our equipment term loans, as if each had
occurred as of December 31, 2009.
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You should read this information in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and the related notes appearing elsewhere in this
prospectus.
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As of December 31, 2009
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Pro Forma
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Actual
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Pro Forma
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As Adjusted
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(In thousands, except share data)
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Cash and cash equivalents
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$
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5,931
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$
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5,931
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$
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31,437
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Current liabilities
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11,290
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11,290
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10,842
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Long-term liabilities
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5,317
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5,317
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5,171
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Redeemable convertible preferred stock:
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Series A redeemable convertible preferred stock,
$0.001 par value, 1,182,217 shares authorized,
1,154,151 shares issued and outstanding, actual, and no
shares authorized, issued or outstanding, pro forma and pro
forma as adjusted
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37,676
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Series B redeemable convertible preferred stock,
$0.001 par value, 6,274,329 shares authorized,
5,688,116 shares issued and outstanding, actual, and no
shares authorized, issued or outstanding, pro forma and pro
forma as adjusted
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20,658
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Series C redeemable convertible preferred stock,
$0.001 par value, 1,602,000 shares authorized,
1,251,559 shares issued and outstanding, actual, and no
shares authorized, issued or outstanding, pro forma and pro
forma as adjusted
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7,444
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Total redeemable convertible preferred stock
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65,778
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Stockholders deficit:
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Common stock $0.001 par value, 13,442,303 shares
authorized, 327,113 shares issued and outstanding, actual,
55,000,000 authorized, 8,420,939 shares issued and outstanding
pro forma, and 55,000,000 authorized, 10,920,939 shares issued
and outstanding pro forma as adjusted
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|
8
|
|
|
|
11
|
|
Undesignated preferred stock, $0.001 par value, no shares
authorized, issued or outstanding, actual, 5,000,000 shares
authorized, no shares issued or outstanding pro forma and pro
forma as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
5,186
|
|
|
|
70,956
|
|
|
|
97,053
|
|
Accumulated deficit
|
|
|
(65,652
|
)
|
|
|
(65,652)
|
|
|
|
(65,652)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(60,466
|
)
|
|
|
5,312
|
|
|
|
31,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
21,919
|
|
|
$
|
21,919
|
|
|
$
|
47,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The table and calculations above are based on the number of
shares of common stock outstanding as of December 31, 2009
and exclude:
|
|
|
|
|
an aggregate of 1,248,205 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $1.65 per share;
|
|
|
|
an aggregate of 68,201 shares issuable upon the exercise of
then outstanding warrants at a weighted average exercise price
of $3.67 per share;
|
|
|
|
an aggregate of 694,200 shares reserved for issuance under
our 2010 Equity Incentive Plan, subject to increase on an annual
basis and subject to increase for shares subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares, up to 431,271 of which we
intend to use for grants of stock options to our employees and
directors effective upon completion of this offering with an
exercise price equal to the offering price; and
|
|
|
|
the 500,000 shares of common stock subject to the
underwriters over-allotment option.
|
22
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock and the
adjusted net tangible book value per share of our common stock
immediately after completion of this offering. Pro forma net
tangible book value per share represents total tangible assets
less total liabilities, divided by the number of shares of
common stock outstanding, after giving effect to the conversion
of all of our outstanding preferred stock into an aggregate of
8,420,939 shares of our common stock. As of
December 31, 2009, the pro forma net tangible book value of
our common stock was approximately $3.9 million, or
approximately $0.46 per share.
After giving effect to our sale of shares at an assumed initial
public offering price of $12.00 per share, which is the
mid-point of our filing range, deducting estimated underwriting
discounts and commissions and offering expenses payable by us,
and applying the net proceeds from this sale, the pro forma as
adjusted net tangible book value of our common stock, as of
December 31, 2009, would have been approximately
$30.0 million, or $2.74 per share. This amount represents
an immediate increase in net tangible book value to our existing
stockholders of $2.28 per share and an immediate dilution to new
investors of $9.26 per share. The following table illustrates
this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
12.00
|
|
Pro forma net tangible book value per share as of
December 31, 2009
|
|
$
|
0.46
|
|
|
|
|
|
Pro forma as adjusted increase per share attributable to new
investors
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
9.26
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, there will be an increase in pro forma as adjusted net
tangible book value to existing stockholders of $2.65 per share
and an immediate dilution in pro forma as adjusted net tangible
book value to new investors of $8.89 per share based on the
assumed initial public offering price per share. A $1.00
increase or decrease in the assumed initial public offering
price per share would increase or decrease, respectively, the
pro forma as adjusted net tangible book value per share of
common stock after this offering by $0.22 per share and increase
or decrease, respectively, the pro forma as adjusted dilution
per share of common stock to new investors in this offering by
$0.78 per share, in each case calculated as described above and
assuming that the number of shares offered by us and the selling
stockholders, as set forth on the cover page of this prospectus,
remains the same.
The following table summarizes, as of December 31, 2009, on
a pro forma as adjusted basis, the number of shares of common
stock purchased from us, the total consideration paid to us and
the average price per share paid by our existing stockholders
and by new investors, based upon an assumed initial public
offering price of $12.00 per share and before deducting
estimated underwriting discounts and commissions and offering
expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
8,420,939
|
|
|
|
77.1%
|
|
|
$
|
70,964,000
|
|
|
|
70.3%
|
|
|
$
|
8.43
|
|
New investors
|
|
|
2,500,000
|
|
|
|
22.9%
|
|
|
$
|
30,000,000
|
|
|
|
29.7%
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,920,939
|
|
|
|
100%
|
|
|
$
|
100,964,000
|
|
|
|
100%
|
|
|
|
|
|
The discussion and tables above are based on
8,420,939 shares of common stock outstanding as of
December 31, 2009 and exclude:
|
|
|
|
|
an aggregate of 1,248,205 shares issuable upon the exercise
of then outstanding options at a weighted average exercise price
of $1.65 per share;
|
|
|
|
an aggregate of 68,201 shares issuable upon the exercise of
then outstanding warrants at a weighted average exercise price
of $3.67 per share;
|
23
|
|
|
|
|
an aggregate of 694,200 shares reserved for issuance under
our 2010 Equity Incentive Plan, subject to increase on an annual
basis and subject to increase for shares subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares, up to 431,271 of which we
intend to use for grants of stock options to our employees and
directors effective upon completion of this offering with an
exercise price equal to the offering price; and
|
|
|
|
the 500,000 shares of common stock subject to the
underwriters over-allotment option.
|
Sales by the selling stockholders in this offering will cause
the number of shares held by existing stockholders to be reduced
to 7,657,696 shares or 70.1% of the total number of shares
of our common stock outstanding after this offering. If the
underwriters overallotment option is exercised in full,
the number of shares held by the existing stockholders after
this offering would be reduced to 67.0% of the total number of
shares of our common stock outstanding after this offering, and
the number of shares held by new investors would increase to
33.6% of the total number of shares of our common stock
outstanding after this offering.
Because the exercise prices of certain of our outstanding
options and warrants are below the assumed initial public
offering price of $12.00 per share, investors purchasing common
stock in this offering will suffer additional dilution when and
if these options and warrants are exercised.
24
SELECTED
FINANCIAL DATA
You should read the following selected financial data together
with our financial statements and the related notes appearing at
the end of this prospectus and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which follows immediately after this section.
The selected financial data under the heading Balance
Sheet Data as of December 31, 2008 and 2009, under
the heading Statement of Operations Data for each of
the years ended December 31, 2007, 2008 and 2009 and under
the heading Operating Data relating to Adjusted
EBITDA for each of the years ended December 31, 2007, 2008
and 2009 have been derived from our audited annual financial
statements, which are included elsewhere in this prospectus. The
selected financial data under the heading Balance Sheet
Data as of December 31, 2005, 2006 and 2007, under
the heading Statement of Operations Data for each of
the years ended December 31, 2005 and 2006 and under the
heading Operating Data relating to Adjusted EBITDA
for each of the years ended December 31, 2005 and 2006 have
been derived from our audited annual financial statements, which
have not been included in this prospectus. The unaudited summary
financial data under the heading Operating Data
relating to recurring revenue customers have been derived from
our internal records of our operations.
The pro forma balance sheet data as of December 31, 2009 is
unaudited and gives effect to the conversion of all of our
preferred stock into our common stock immediately prior to the
consummation of this offering. The pro forma as adjusted balance
sheet data as of December 31, 2009 is unaudited and gives
effect to (1) the pro forma adjustment above; (2) our
receipt of estimated net proceeds of $26.1 million from
this offering, based on an assumed initial public offering price
of $12.00 per share, which is the mid-point of our filing
range, after deducting estimated underwriting discounts and
offering expenses payable by us and (3) the application of
$594,000 of our net proceeds from this offering to repay
indebtedness under our equipment term loans, as if each had
occurred as of December 31, 2009. The pro forma as adjusted
summary financial data are not necessarily indicative of what
our financial position or results of operations would have been
if this offering had been completed as of the date indicated,
nor are these data necessarily indicative of our financial
position or results of operations for any future date or period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,827
|
|
|
$
|
19,859
|
|
|
$
|
25,198
|
|
|
$
|
30,697
|
|
|
$
|
37,746
|
|
Cost of revenues (1)
|
|
|
3,823
|
|
|
|
5,219
|
|
|
|
6,379
|
|
|
|
9,258
|
|
|
|
11,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,004
|
|
|
|
14,640
|
|
|
|
18,819
|
|
|
|
21,439
|
|
|
|
26,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (1)
|
|
|
5,034
|
|
|
|
8,098
|
|
|
|
11,636
|
|
|
|
12,493
|
|
|
|
13,506
|
|
Research and development (1)
|
|
|
2,129
|
|
|
|
3,190
|
|
|
|
3,546
|
|
|
|
3,640
|
|
|
|
4,305
|
|
General and administrative (1)
|
|
|
3,180
|
|
|
|
4,199
|
|
|
|
5,458
|
|
|
|
6,716
|
|
|
|
6,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,343
|
|
|
|
15,487
|
|
|
|
20,640
|
|
|
|
22,849
|
|
|
|
24,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(339
|
)
|
|
|
(847
|
)
|
|
|
(1,821
|
)
|
|
|
(1,410
|
)
|
|
|
1,881
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(299
|
)
|
|
|
(558
|
)
|
|
|
(439
|
)
|
|
|
(419
|
)
|
|
|
(270
|
)
|
Other income (expense)
|
|
|
(15
|
)
|
|
|
108
|
|
|
|
120
|
|
|
|
28
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(314
|
)
|
|
|
(450
|
)
|
|
|
(319
|
)
|
|
|
(391
|
)
|
|
|
(628
|
)
|
Income tax expense
|
|
|
(23
|
)
|
|
|
(4
|
)
|
|
|
(16
|
)
|
|
|
(94
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(676
|
)
|
|
$
|
(1,301
|
)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(6.69
|
)
|
|
$
|
(10.93
|
)
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
3.53
|
|
Fully diluted
|
|
$
|
(6.69
|
)
|
|
$
|
(10.93
|
)
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
0.13
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
101
|
|
|
|
119
|
|
|
|
185
|
|
|
|
294
|
|
|
|
329
|
|
Fully diluted
|
|
|
101
|
|
|
|
119
|
|
|
|
185
|
|
|
|
294
|
|
|
|
9,268
|
|
Pro forma net income per share (unaudited) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.14
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
Pro forma weighted average shares outstanding (unaudited) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,476
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,268
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
As of December 31,
|
|
|
Pro
|
|
|
Pro Forma
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
1,609
|
|
|
$
|
1,942
|
|
|
$
|
6,117
|
|
|
$
|
3,715
|
|
|
$
|
5,931
|
|
|
$
|
5,931
|
|
|
$
|
31,437
|
|
|
|
|
|
Working capital
|
|
|
(234)
|
|
|
|
(647)
|
|
|
|
4,535
|
|
|
|
3,995
|
|
|
|
4,973
|
|
|
|
4,973
|
|
|
|
30,927
|
|
|
|
|
|
Total assets
|
|
|
6,767
|
|
|
|
12,228
|
|
|
|
20,687
|
|
|
|
19,197
|
|
|
|
21,919
|
|
|
|
21,919
|
|
|
|
47,425
|
|
|
|
|
|
Long-term liabilities
|
|
|
2,719
|
|
|
|
5,167
|
|
|
|
5,550
|
|
|
|
5,950
|
|
|
|
5,317
|
|
|
|
5,317
|
|
|
|
5,171
|
|
|
|
|
|
Total debt (3)
|
|
|
2,675
|
|
|
|
5,018
|
|
|
|
4,992
|
|
|
|
4,471
|
|
|
|
2,694
|
|
|
|
2,694
|
|
|
|
2,100
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
56,072
|
|
|
|
58,520
|
|
|
|
65,964
|
|
|
|
65,964
|
|
|
|
65,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
$
|
(56,758)
|
|
|
$
|
(58,046)
|
|
|
$
|
(60,111)
|
|
|
$
|
(61,844)
|
|
|
$
|
(60,466)
|
|
|
$
|
5,312
|
|
|
$
|
31,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited; Adjusted EBITDA in thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (4)
|
|
$
|
385
|
|
|
$
|
748
|
|
|
$
|
103
|
|
|
$
|
763
|
|
|
$
|
3,206
|
|
Recurring revenue customers (5)
|
|
|
6,056
|
|
|
|
7,940
|
|
|
|
9,496
|
|
|
|
10,076
|
|
|
|
11,003
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
53
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
60
|
|
|
|
91
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
General and administrative
|
|
|
|
|
|
|
6
|
|
|
|
9
|
|
|
|
74
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
46
|
|
|
$
|
157
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Reflects the conversion of all of our preferred stock into
common stock that will occur immediately prior to the
consummation of this offering and the 0.267 for 1 reverse stock
split of our common stock that occurred on April 13, 2010.
The calculation of the basic pro forma weighted average shares
outstanding (unaudited) consists of the basic weighted average
shares outstanding plus the weighted average preferred shares
outstanding, which will convert to common stock in connection
with this offering. |
|
|
|
(3) |
|
Total debt consists of our current and long-term capital lease
obligations, current and long-term equipment and term loans,
line of credit, interest payable and, as of December 31,
2005 and 2006, mezzanine debt. |
|
(4) |
|
EBITDA consists of net income (loss) plus depreciation and
amortization, interest expense and income tax expense. Adjusted
EBITDA consists of EBITDA plus our non-cash, share-based
compensation expense. We use Adjusted EBITDA as a measure of
operating performance because it assists us in comparing
performance on a consistent basis, as it removes from our
operating results the impact of our capital structure. We
believe Adjusted EBITDA is useful to an investor in evaluating
our operating performance because it is widely used to measure a
companys operating performance without regard to items
such as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets, and to
present a meaningful measure of corporate performance exclusive
of our |
26
|
|
|
|
|
capital structure and the method by which assets were acquired.
The following table provides a reconciliation of net income
(loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income (loss)
|
|
$
|
(676
|
)
|
|
$
|
(1,301
|
)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
Depreciation and amortization
|
|
|
739
|
|
|
|
1,481
|
|
|
|
1,758
|
|
|
|
1,988
|
|
|
|
1,455
|
|
Interest expense
|
|
|
299
|
|
|
|
558
|
|
|
|
439
|
|
|
|
419
|
|
|
|
270
|
|
Income tax expense
|
|
|
23
|
|
|
|
4
|
|
|
|
16
|
|
|
|
94
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
385
|
|
|
|
742
|
|
|
|
57
|
|
|
|
606
|
|
|
|
2,978
|
|
Non-cash, share-based compensation expense
|
|
|
|
|
|
|
6
|
|
|
|
46
|
|
|
|
157
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
385
|
|
|
$
|
748
|
|
|
$
|
103
|
|
|
$
|
763
|
|
|
$
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
This reflects the number of recurring revenue customers at the
end of the period. Recurring revenue customers are customers
with contracts to pay us monthly fees. A minority portion of our
recurring revenue customers consists of separate units within a
larger organization. We treat each of these units, which may
include divisions, departments, affiliates and franchises, as
distinct customers. Our contracts with our recurring revenue
customers typically allow the customer to cancel the contract
for any reason with 30 days prior notice. |
27
MANAGEMENTS
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 the section titled Selected Financial
Data and our financial statements and related notes
appearing elsewhere in this prospectus. Our actual results could
differ materially from those anticipated in the forward-looking
statements included in this discussion as a result of certain
factors, including, but not limited to, those discussed in
Risk Factors and Special Note Regarding
Forward-Looking Statements included elsewhere in this
prospectus.
Overview
We are a leading provider of on-demand supply chain management
solutions, providing integration, collaboration, connectivity,
visibility and data analytics to thousands of trading partners
worldwide. We provide our solutions through SPSCommerce.net, a
hosted software suite that improves the way suppliers,
retailers, distributors and other trading partners manage and
fulfill orders. We deliver our solutions to our customers over
the Internet using a Software-as-a-Service model.
SPSCommerce.net fundamentally changes how organizations use
electronic communication to manage a supply chain by replacing
the collection of traditional, custom-built,
point-to-point
integrations with a
hub-and-spoke
model whereby a single integration to SPSCommerce.net allows an
organization to connect seamlessly to the entire SPSCommerce.net
network of trading partners. SPSCommerce.net combines
integrations with 2,700 order management models across 1,300
retailers, grocers and distributors through a multi-tenant
architecture and provides ancillary support applications that
deliver a comprehensive set of supply chain solutions.
The value SPSCommerce.net offers increases with the number of
trading partners connected to our platform. This network
effect creates a significant opportunity for our customers
to realize incremental sales by working with new trading
partners connected to our platform and vice versa. As a result
of this increased volume of activity amongst our customers, we
earn additional revenues. We also sell our solutions through
sales leads from retailers with whom we integrate our customers,
referrals from trading partners in our network and channel
partners, as well as our direct sales force.
We plan to grow our business by further penetrating the supply
chain management market, increasing revenues from our customers
as their businesses grow, expanding our distribution channels,
expanding our international presence and developing new
solutions and applications. We also intend to selectively pursue
acquisitions that will add customers, allow us to expand into
new regions or industries or allow us to offer new
functionalities.
For 2007, 2008 and 2009, we generated revenues of
$25.2 million, $30.7 million and $37.7 million.
Our fiscal quarter ended December 31, 2009 represented our
36th consecutive quarter of increased revenues. Recurring
revenues from recurring revenue customers accounted for 83%, 84%
and 80% of our total revenues for 2007, 2008 and 2009. No
customer represented over 1% of our revenues for 2007, 2008 or
2009. For 2008 and 2009, 2% of our revenues were generated
outside of North America.
Key
Financial Terms and Metrics
Sources
of Revenues
Trading Partner Integration. Our revenues primarily
consist of monthly revenues from our customers for our Trading
Partner Integration solution. Our revenues for this solution
consist of a monthly subscription fee and a transaction-based
fee. We also receive
set-up fees
for initial integration solutions we provide our customers. Most
of our customers have contracts with us that may be terminated
by the customer by providing 30 days prior notice. Over 90%
of our revenues for 2007, 2008 and 2009 were derived from
Trading Partner Integration.
28
Trading Partner Enablement. Our Trading Partner
Enablement solution helps organizations, typically large
retailers, to implement new integrations with trading partners.
This solution ranges from Electronic Data Interchange testing
and certification to more complex business workflow automation
and results in a one-time payment to us.
Trading Partner Intelligence. In 2009, we introduced our
Trading Partner Intelligence solution, which consists of six
data analytics applications. These applications allow our
supplier customers to improve their visibility across, and
analysis of, their supply chains. Through interactive data
analysis, our retailer customers improve their visibility into
supplier performance and their understanding of product
sell-through. Our revenues for this solution primarily consist
of a monthly subscription fee.
Other Trading Partner Solutions. The remainder of our
revenues are derived from solutions that allow our customers to
perform tasks such as barcode labeling or
picking-and-packaging
information tracking as well as purchases of miscellaneous
supplies. These revenues are primarily transaction-based.
Cost of
Revenues and Operating Expenses
Overhead Allocation. We allocate overhead expenses such
as rent, certain employee benefit costs, office supplies and
depreciation of general office assets to cost of revenues and
operating expenses categories based on headcount.
Cost of Revenues. Cost of revenues primarily consists of
personnel costs such as wages and benefits related to
implementation teams, customer support personnel and application
support personnel. Cost of revenues also includes our cost of
network services, which is primarily data center costs for the
locations where we keep the equipment that serves our customers,
and connectivity costs that facilitate electronic data
transmission between our customers and their trading partners.
We expect our cost of revenues to increase in absolute dollars.
Sales and Marketing Expenses. Sales and marketing
expenses consist primarily of personnel costs for our sales,
marketing and product management teams, commissions earned by
our sales personnel and marketing costs. In order to grow our
business, we will continue to add resources to our sales and
marketing efforts over time. We expect that sales and marketing
expenses will increase in absolute dollars.
Research and Development Expenses. Research and
development expenses consist primarily of personnel costs for
development and maintenance of existing solutions. This group
also is responsible for enhancing existing solutions and
applications as well as internal tools and developing new
information maps that integrate our customers to their trading
partners in compliance with those trading partners
requirements. We expect research and development expenses will
increase in absolute dollars as we continue to enhance and
expand our solutions and applications.
General and Administrative Expenses. General and
administrative expenses consist primarily of personnel costs for
finance, human resources and internal information technology
support, as well as legal, accounting and other fees, such as
credit card processing fees. General and administrative expenses
also include amortization of intangible assets relating to our
acquisition of substantially all of the assets of Owens Direct
LLC in February 2006. We amortized these intangible assets over
a period of three years ending in February 2009. We expect to
incur additional general and administrative expenses associated
with being a public company, including higher legal, audit and
insurance fees.
Other Income (Expense). Other income (expense) primarily
consists of interest income, interest expense and the fair
market value adjustment of preferred stock warrants using the
Black-Scholes method. Interest income represents interest
received on our cash and cash equivalents. Interest expense is
associated with our debt, which includes equipment loan payments
and payments on our term loans.
Other
Metrics
Recurring Revenue Customers. As of December 31,
2009, we had over 11,000 customers with contracts to pay us
monthly fees, which we refer to as recurring revenue customers.
We report recurring revenue
29
customers at the end of a period. A minority portion of our
recurring revenue customers consists of separate units within a
larger organization. We treat each of these units, which may
include divisions, departments, affiliates and franchises, as
distinct customers.
Average Recurring Revenues Per Recurring Revenue
Customer. We calculate average recurring revenues per
recurring revenue customer for a period by dividing the
recurring revenues from recurring customers for the period by
the average of the beginning and ending number of recurring
revenue customers for the period. We anticipate that average
recurring revenues per recurring revenue customer will continue
to increase as we increase the number of solutions we offer,
such as the Trading Partner Intelligence solution we introduced
in 2009, and increase the penetration of those solutions across
our customer base.
Monthly Subscription and Transaction-Based Fees. For
2007, 2008 and 2009, revenues from fixed monthly subscription
and transaction-based fees accounted for 83%, 84% and 80% of our
revenues, which we refer to as recurring revenues. All of these
recurring revenues in 2007 and 2008 and more than 95% of the
recurring revenues for 2009 related to our Trading Partner
Integration solution. Our revenues are not concentrated with any
customer, as no customer represented over 1% of our revenues for
2007, 2008 or 2009.
Adjusted EBITDA. EBITDA consists of net income (loss)
plus depreciation and amortization, interest expense, and income
tax expense. Adjusted EBITDA consists of EBITDA plus our
non-cash, share-based compensation expense. We use Adjusted
EBITDA as a measure of operating performance because it assists
us in comparing performance on a consistent basis, as it removes
from our operating results the impact of our capital structure.
We believe Adjusted EBITDA is useful to an investor in
evaluating our operating performance because it is widely used
to measure a companys operating performance without regard
to items such as depreciation and amortization, which can vary
depending upon accounting methods and the book value of assets,
and to present a meaningful measure of performance exclusive of
our capital structure and the method by which assets were
acquired. The following table provides a reconciliation of net
income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income (loss)
|
|
$
|
(2,156)
|
|
|
$
|
(1,895)
|
|
|
$
|
1,162
|
|
Depreciation and amortization
|
|
|
1,758
|
|
|
|
1,988
|
|
|
|
1,455
|
|
Interest expense
|
|
|
439
|
|
|
|
419
|
|
|
|
270
|
|
Income tax expense
|
|
|
16
|
|
|
|
94
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
57
|
|
|
|
606
|
|
|
|
2,978
|
|
Non-cash, share-based compensation expense
|
|
|
46
|
|
|
|
157
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
103
|
|
|
$
|
763
|
|
|
$
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our financial statements, which are
prepared in accordance with accounting principles generally
accepted in the United States, or GAAP. The preparation of these
financial statements requires us to make estimates, judgments
and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates of the carrying value of
certain assets and liabilities on historical experience and on
various other assumptions that we believe to be reasonable. Our
actual results may differ from these estimates under different
assumptions or conditions.
We believe that of our significant accounting policies, which
are described in the notes to our financial statements, the
following accounting policies involve a greater degree of
judgment, complexity and effect on materiality. A critical
accounting policy is one that is both material to the
presentation of our financial statements and requires us to make
difficult, subjective or complex judgments for uncertain matters
that could have a material effect on our financial condition and
results of operations. Accordingly, these are the policies we
believe are the most critical to aid in fully understanding and
evaluating our financial condition and results of operations.
30
Revenue
Recognition
We generate revenues by providing a number of solutions to our
customers. These solutions include Trading Partner Integration,
Trading Partner Enablement and Trading Partner Intelligence. All
of our solutions are hosted applications that allow customers to
meet their supply chain management requirements. Revenues from
our Trading Partner Integration and Trading Partner Intelligence
solutions are generated through set-up fees and a recurring
monthly hosting fee. Revenues from our Trading Partner
Enablement solutions are generally one-time service fees.
Fees related to recurring monthly hosting services and one-time
services are recognized when the services are provided. The
recurring monthly fee is comprised of both a fixed and
transaction based fee. Revenues are recorded in accordance with
Staff Accounting Bulletin (SAB) 104, Revenue Recognition in
Financial Statements, when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed and
determinable and (4) collectability is probable. If
collection is not considered probable, revenues are recognized
when the fees are collected.
Set-up fees
paid by customers in connection with our solutions, as well as
associated direct and incremental costs, such as labor and
commissions, are deferred and recognized ratably over the
expected life of the customer relationship, which is generally
two years. We continue to evaluate and adjust the length of
these amortization periods as more experience is gained with
customer renewals, contract cancellations and technology changes
requested by our customers. It is possible that, in the future,
the estimates of expected customer lives may change and, if so,
the periods over which such subscription
set-up fees
and costs are amortized will be adjusted. Any such change in
estimated expected customer lives will affect our future results
of operations.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated
losses resulting from our customers inability to pay us.
The provision is based on our historical experience and for
specific customers that, in our opinion, are likely to default
on our receivables from them. In order to identify these
customers, we perform ongoing reviews of all customers that have
breached their payment terms, as well as those that have filed
for bankruptcy or for whom information has become available
indicating a significant risk of non-recoverability. In
addition, we have experienced significant growth in the number
of our customers, and we have less payment history to rely upon
with these customers. We rely on historical trends of bad debt
as a percentage of total revenues and apply these percentages to
the accounts receivable associated with new customers and
evaluate these customers over time. To the extent that our
future collections differ from our assumptions based on
historical experience, the amount of our bad debt and allowance
recorded may be different.
Income
Taxes
We account for income taxes in accordance with ASC 740,
Income Taxes, which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect
of temporary differences between the book and tax basis of
recorded assets and liabilities. ASC 740 also requires that
deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion of all of the deferred
tax asset will not be realized. The realization of the deferred
tax assets is evaluated quarterly by assessing the valuation
allowance and by adjusting the amount of the allowance, if
necessary.
We recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would
more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold,
the amount recognized in the financial statements is the largest
benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the relevant tax authority.
Stock-Based
Compensation
We follow ASC 718, Compensation Stock
Compensation, in accounting for our stock-based awards to
employees. ASC 718 establishes accounting for stock-based awards
exchanged for employee services. Accordingly, stock-based
compensation cost is measured at the grant date, based on the
fair value of the
31
award, and is recognized as an expense over the vesting period
of the grant. Determining the appropriate fair value model and
calculating the fair value of stock-based payment awards require
the use of highly subjective assumptions, including the expected
life of the stock-based payment awards and stock price
volatility. We use the Black-Scholes method to value our option
grants and determine the related compensation expense. The
assumptions used in calculating the fair value of stock-based
payment awards represent managements best estimates, but
the estimates involve inherent uncertainties and the application
of management judgment. As a result, if factors change and we
use different assumptions, our stock-based compensation expense
could be materially different in the future.
The fair value of each option is estimated on the date of grant
using the Black-Scholes method with the following assumptions
used for grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
4.4%
|
|
4.0%
|
|
2.7% - 4.0%
|
|
|
|
|
Expected term (2)
|
|
8
|
|
7
|
|
4-7
|
|
|
|
|
Estimated volatility (3)
|
|
52%
|
|
53%
|
|
49% - 53%
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
|
|
|
|
|
|
(1) |
|
Rates for options granted during these periods varied within the
ranges stated. |
|
(2) |
|
Expected term for options granted during these periods varied
within the ranges stated. |
|
(3) |
|
Estimated volatility for options granted during these periods
varied within the ranges stated. |
The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with a
remaining term approximately equal to the expected life of our
stock options. The estimated pre-vesting forfeiture rate is
based on our historical experience. We do not expect to declare
dividends in the foreseeable future.
The expected term of the options is based on evaluations of
historical and expected future employee exercise behavior.
As a non-public entity, historic volatility is not available for
our shares. As a result, we estimated volatility based on a peer
group of companies, which collectively provide a reasonable
basis for estimating volatility. We intend to continue to
consistently use the same group of publicly traded peer
companies to determine volatility in the future until sufficient
information regarding volatility of our share price becomes
available or the selected companies are no longer suitable for
this purpose.
We recorded non-cash, stock-based compensation expense under ASC
718 of $46,000 during 2007, $157,000 during 2008 and $228,000
during 2009. Based on stock options outstanding as of
December 31, 2009, we had unrecognized, stock-based
compensation of $459,000. We expect to continue to grant stock
options in the future, and to the extent that we do, our actual
stock-based compensation expense recognized in future periods
will likely increase.
As of December 31, 2009, we had outstanding vested options
to purchase 986,264 shares of our common stock and unvested
options to purchase 261,941 shares of our common stock with
an intrinsic value of approximately $10,481,458 and $2,431,662,
respectively, based on the assumed initial public offering price
of $12.00 per share, which is the mid-point of our filing range.
Significant
Factors Used in Determining Fair Value of Our Common
Stock
The fair value of the shares of common stock that underlie the
stock options we have granted has historically been determined
by our audit committee or board of directors based upon
information available to it at the time of grant. Because, prior
to this offering, there has been no public market for our common
stock, our audit committee or board of directors has determined
the fair value of our common stock by utilizing, among other
things, recent or contemporaneous valuation information
available as of December 31,
32
2007 and for each quarter end thereafter. The valuation
information included reviews of our business and general
economic, market and other conditions that could be reasonably
evaluated at that time, including our financial results,
business agreements, intellectual property and capital
structure. The valuation information also included a thorough
review of the conditions of the industry in which we operate and
the markets that we serve. Our audit committee or board of
directors conducted an analysis of the fair market value of our
company considering two widely accepted valuation approaches:
(1) market approach and (2) income approach. These
valuation approaches are based on a number of assumptions,
including our future revenues and industry, general economic,
market and other conditions that could reasonably be evaluated
at the time of the valuation.
Under the market approach, the guideline market multiple
methodology was applied, which involved the multiplication of
revenues by risk-adjusted multiples. Multiples were determined
through an analysis of certain publicly traded companies, which
were selected on the basis of operational and economic
similarity with our principal business operations. Revenue
multiples were calculated for the comparable companies based
upon daily trading prices. A comparative risk analysis between
our and the public companies formed the basis for the selection
of appropriate risk-adjusted multiples for our company. The risk
analysis incorporated factors that relate to, among other
things, the nature of the industry in which we and other
comparable companies are engaged. Under the income approach, we
applied the discounted cash flow methodology, which involved
estimating the present value of the projected cash flows to be
generated from the business and theoretically available to the
capital providers of our company. A discount rate was applied to
the projected future cash flows to reflect all risks of
ownership and the associated risks of realizing the stream of
projected cash flows. Since the cash flows were projected over a
limited number of years, a terminal value was computed as of the
end of the last period of projected cash flows. The terminal
value was an estimate of the value of the enterprise on a going
concern basis as of that future point in time. Discounting each
of the projected future cash flows and the terminal value back
to the present and summing the results yielded an indication of
value for the enterprise. Our board of directors and audit
committee took these two approaches into consideration when
establishing the fair value of our common stock.
Set forth below is a summary of our stock option grants from
January 1, 2009 through December 31, 2009 and our
contemporaneous valuations and Black-Scholes values for those
grants.
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Number of
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Per Share
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Fair Value(s)
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Black-Scholes
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Options
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Exercise
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Estimate
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Value(s) per
|
Period of Grant
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Granted
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Price(s)
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per Share
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Valuation Date(s)
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Share
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First Quarter 2009
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82,503
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|
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$
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3.45
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|
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$
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3.45
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|
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February 10, 2009
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|
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$
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1.84
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|
Second Quarter 2009
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|
|
99,858
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(1)
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|
$
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2.43-2.55
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|
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$
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2.43-2.55
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April 1, 2009
and April 22, 2009
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$
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1.31-1.42
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Third Quarter 2009
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238,527
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(2)
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$
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3.03
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|
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$
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3.03
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July 23, 2009
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|
|
$
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0.15-1.69
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|
Fourth Quarter 2009
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|
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801
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$
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3.71
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|
|
$
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3.71
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October 22, 2009
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$
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7.49
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(1) |
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On April 1, 2009, we unilaterally amended the terms of the
82,503 stock options granted to three employees in the first
quarter of 2009 to reduce the exercise price for all of the
shares subject to each option to $2.43 per share, which was the
fair market value of our common stock on the date of the
amendments. The amendments did not affect the vesting provisions
or the number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as being forfeited and the amendments as new option
grants; however, none of the holders of these options made any
investment decisions in connection with the amendments. |
|
(2) |
|
On July 23, 2009, we unilaterally amended the terms of
237,726 stock options granted to 17 employees and one
director to reduce the exercise price for all of the shares
subject to options previously granted to the employees and
director. The amendments did not affect the vesting provisions
or the number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as being forfeited and the amendments as new option
grants; however, none of the holders of the previously granted
options made any investment decisions in connection with the
amendments. |
33
Our audit committee and board of directors made their
determinations as to the fair value in connection with the grant
of stock options exercising their best reasonable judgment at
the time of grant. In the absence of a public market for our
common stock, numerous objective and subjective factors (the
Key Valuation Considerations) were analyzed to
determine the fair value at each grant date, including the
following:
Business
Conditions and Results:
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|
Our actual financial condition and results of operations during
the relevant period;
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The status of strategic initiatives to increase the market for
our services;
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The competitive environment that existed at the time of the
valuation;
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All important developments for our company, including the growth
of our customer base and the progress of our business model,
such as the introduction of new services; and
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The status of our efforts to build our management team to retain
and recruit the talent and size organization required to support
our anticipated growth.
|
Market
Conditions:
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The market conditions affecting the technology industry; and
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The general economic outlook in the United States and on a
global basis, including the extreme market downturn and turmoil
that was triggered in part by the September 2008 Lehman Brothers
bankruptcy filing as well as the ensuing decrease in employment,
purchasing power and consumer confidence that significantly
affected the U.S. and global economy and future outlook for
both.
|
Liquidity
and Valuation:
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The fact that the option grants involved illiquid securities in
a private company; and
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|
The likelihood of achieving a liquidity event for the shares of
common stock underlying the options such as an initial public
offering or sale of our common stock, given prevailing market
conditions and our relative financial condition at the time of
grant.
|
As noted below, the significant factors contributing to the
differences between the valuation of our common stock as
determined by our audit committee or board of directors and the
assumed initial public offering price of $12.00 per share, which
is the mid-point of our filing range, include the following:
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|
|
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|
Contemporaneous valuations that we performed through
October 22, 2009 all included a lack of marketability
discount of 30% due to the uncertainty in the feasibility and
timing of any public offering. An initial public offering price
would include a marketability discount of 0% since the stock
sold in the offering will not have restrictions on marketability;
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|
Recent market performance of the Nasdaq Stock Market and other
software as a service companies have improved. Specifically, the
Nasdaq Stock Market increased 7% from September 30, 2009 to
December 31, 2009 and the Nasdaq Stock Market has increased
13% from September 30, 2009 to March 22, 2010. In
addition, software as a service companies have seen improved
valuations and market prices, which we believe increases the
value of our common stock;
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2009 was the first year our revenues reached a sufficient level
to provide us with sustainable, positive cash flow, which
provides support to our stockholders that we have obtained
revenue levels that will allow us to leverage our infrastructure
and achieve greater profitability as we increase our business.
We believe the ability to generate positive cash flow validates
our business model. Our business involves selling our solution
to thousands of recurring revenue customers who pay low monthly
fees to us; therefore, it is critical that we reach a critical
customer count to cover our infrastructure costs. Once
sufficient revenue levels are met, our margins improve and we
produce positive cash flow that can be used for working capital
or potential, strategic acquisitions. We believe reaching this
milestone significantly increases our value and, accordingly,
the value of our common stock; and
|
34
|
|
|
|
|
Financial projections that were used in 2009 by the audit
committee and board of directors in valuing the common stock
were based in part on estimates of 2009 and future performance.
The projections assumed that we would begin to demonstrate
improved scalability and leverage of our infrastructure costs in
2009. Our actual performance in 2009 exceeded our
managements expectations and led to improved scalability
and leverage of our infrastructure costs; therefore, we believe
that the value of our common stock has increased substantially
from the value determined early in the fourth quarter of 2009.
|
Specifics related to grants from January 1, 2009 to
December 31, 2009 are as follows:
First
Quarter 2009
During the first quarter of 2009, we granted 82,503 stock
options with an exercise price of $3.45 per share. In the
absence of a public trading market for our common stock, our
board of directors, with input from management, considered the
Key Valuation Considerations and factors described below and
determined the fair market value of our common stock in good
faith to be $3.45 per share.
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|
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Results of Operations: Our cash and cash
equivalents and short-term investment balances of
$3.7 million as of December 31, 2008 were not
sufficient to sustain long term growth and provide cash to
invest in operations. Our revenues grew from $6.9 million
for the three months ended December 31, 2007 to
$8.1 million for the three months ended December 31,
2008. At the same time, our losses for each of the last three
quarters of 2008 were $(555,000), $(134,000) and $(287,000).
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Preferred Stock Preferences: During this
period our audit committee also considered the rights,
preferences and privileges of the preferred stock relative to
the common stock. As of December 31, 2008, our preferred
stock possessed an aggregate liquidation preference of
$38.6 million. The participation rights of our preferred
stock also provide that the preferred stock participates with
the common stock pro rata in our remaining assets. Our audit
committee did not believe at that time we were a candidate for a
liquidity event, such as an initial public offering or sale of
the company at a premium whereby our preferred stock would
convert to common thereby eliminating the liquidation
preferences of the preferred stock.
|
As indicated above, we performed a contemporaneous valuation of
the fair value of our common stock as of February 10, 2009.
In our valuation analysis, we utilized the market approach and
the income approach. The discounted cash flow used in the income
approach applied (i) the appropriate risk-adjusted discount
rate, which in this case was 19.5%, to estimated debt-free cash
flows, based on forecasted revenues and (ii) multiples to
revenues to determine a terminal value, which in this case was
1.5 times revenues. The projections used in connection with the
income approach were based on our expected operating performance
over the forecast period. There is inherent uncertainty in these
estimates; if different discount rates or assumptions had been
used, the valuation would have been different.
The values of our company calculated under each methodology were
given equal weight based upon our audit committees
estimate as of the valuation date, of the meaningfulness of each
methodology to our companys valuation. Based on these
inputs, our marketable minority equity value was determined to
be $63.0 million. The Black-Scholes option pricing model
was then used to perform an equity allocation of the marketable
minority value of $63.0 million to each of the series and
classes of equity capital to derive a common stock value. The
resulting valuation determined a per share value of $3.45 after
considering a lack of marketability discount of 30%.
Second
Quarter 2009
During the second quarter of 2009, we granted 17,355 stock
options with a per share exercise price of $2.55 on
April 22, 2009 and on April 1, 2009 amended the
exercise price of 82,503 stock options previously granted to
three employees to lower the exercise price to $2.43 per
share. We treat the amended options as newly granted options for
financial statement reporting purposes. In the absence of a
public trading market for our common stock, our audit committee,
with input from management, considered the Key Valuation
35
Considerations and factors described below and determined the
fair market value of our common stock in good faith to be $2.43
per share on April 1, 2009 and $2.55 per share on
April 22, 2009.
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|
|
|
|
Results of Operations: Our cash and cash
equivalents and short-term investment balances of
$4.3 million as of March 31, 2009, which were not
sufficient to sustain long-term growth and provide cash to
invest in operations. Our revenues grew from $7.0 million
for the three months ended March 31, 2008 to
$8.5 million for the three months ended March 31,
2009. At the same time, our losses for each of the three most
recently completed quarters were $(134,000), $(287,000) and
$(54,000).
|
|
|
|
Preferred Stock Preferences: During this
period our audit committee also considered the rights,
preferences and privileges of our preferred stock relative to
the common stock. As of March 31, 2009, our preferred stock
possessed an aggregate liquidation preference of
$38.6 million. The participation rights of our preferred
stock also provide that the preferred stock participates with
the common stock pro rata in our remaining assets. Our audit
committee did not believe at that time we were a candidate for a
liquidity event, such as an initial public offering or sale of
our company at a premium whereby our preferred stock would
convert to common thereby eliminating the liquidation
preferences of the preferred stock.
|
As indicated above, we performed a contemporaneous valuation of
the fair value of our common stock as of April 1, 2009 for
the amended options and as of April 22, 2009 for the
options granted on that date. In our valuation analysis, we
utilized the market approach and the income approach. The
discounted cash flow used in the income approach applied
(i) the appropriate risk-adjusted discount rate, which in
this case was 19.5%, to estimated debt-free cash flows, based on
forecasted revenues and (ii) multiples to revenues to
determine a terminal value, which in this case was 1.5 times
revenues. The projections used in connection with the income
approach were based on our expected operating performance over
the forecast period. There is inherent uncertainty in these
estimates; if different discount rates or assumptions had been
used, the valuation would have been different.
The values of our company calculated under each methodology were
given equal weight based upon our audit committees
estimate as of the valuation date, of the meaningfulness of each
methodology to our companys valuation. Based on these
inputs, our marketable minority equity value was determined to
be $64.0 million as of April 1, 2009. The
Black-Scholes option pricing model was then used to perform an
equity allocation of the marketable minority value of
$64.0 million to each of the series and classes of equity
capital to derive a common stock value as of that date. The
resulting valuation determined a per share value of $2.43 on
April 1, 2009 after considering a lack of marketability
discount of 30%. Our marketable minority equity value was
determined to be $64.6 million as of April 22, 2009.
The Black-Scholes option pricing model was then used to perform
an equity allocation of the marketable minority value of
$64.6 million to each of the series and classes of equity
capital to derive a common stock value as of that date. The
resulting valuation determined a per share value of $2.55 after
considering a lack of marketability discount of 30%.
The decrease in the per share value of our common stock during
the first and second quarters of 2009 compared to
October 31, 2008 primarily was the result of a decrease in
the value of the publicly traded companies used in our market
analysis as well as revised company projections that reduced our
expected revenues and cash flows in light of the general
economic downturn that continued during that time.
Third
Quarter 2009
During the third quarter of 2009, on July 23, 2009, we granted
801 stock options and amended 237,726 stock options such that
all options granted or amended during the period had a per share
exercise price of $3.03. We treat the amended options as newly
granted options for financial statement reporting purposes. In
the absence of a public trading market for our common stock, our
audit committee, with input from management, considered the Key
Valuation Considerations and factors described below and
determined the fair market value of our common stock in good
faith to be $3.03 per share.
|
|
|
|
|
Results of Operations: Our cash and cash
equivalents and short-term investments balances of
$5.4 million as of June 30, 2009 were not sufficient
to sustain long-term growth and provide cash to
|
36
|
|
|
|
|
invest in operations. Our revenues grew from $7.6 million
for the three months ended June 30, 2008 to
$9.6 million for the three months ended June 30, 2009.
At the same time, our income (loss) for each of the three most
recently completed quarters were $(287,000), $(54,000) and
$657,000.
|
|
|
|
|
|
Preferred Stock Preferences: During this
period our audit committee also considered the rights,
preferences and privileges of our preferred stock relative to
the common stock. As of June 30, 2009, our preferred stock
possessed an aggregate liquidation preference of
$38.6 million. The participation rights of our preferred
stock also provide that the preferred stock participates with
the common stock pro rata in our remaining assets. At that time,
our audit committee believed we could become a candidate for a
liquidity event, such as an initial public offering or sale of
our company at a premium whereby our preferred stock would
convert to common thereby eliminating the liquidation
preferences of the preferred stock. However, the audit committee
was unsure if there was any interest by potential underwriters
for an initial public offering or by potential acquirers of the
Company, as neither the audit committee nor the board of
directors had held any substantive discussions with potential
underwriters or acquirers during the preceding 12 months.
If there was interest by a potential underwriter or acquirer,
the audit committee also was unsure of when an offering or
acquisition would occur and believed any offering or acquisition
could occur well in the future.
|
As indicated above, we performed a contemporaneous valuation of
the fair value of our common stock as of July 23, 2009. In
our valuation analysis, we utilized the market approach and the
income approach. The discounted cash flow used in the income
approach applied (i) the appropriate risk-adjusted discount
rate, which in this case was 19.5%, to estimated debt-free cash
flows, based on forecasted revenues and (ii) multiples to
revenues to determine a terminal value, which in this case was
1.5 times revenues. The projections used in connection with the
income approach were based on our expected operating performance
over the forecast period. There is inherent uncertainty in these
estimates; if different discount rates or assumptions had been
used, the valuation would have been different.
The values of our company calculated under each methodology were
given equal weight based upon our audit committees
estimate as of the valuation date, of the meaningfulness of each
methodology to our companys valuation. Based on these
inputs, our marketable minority equity value was determined to
be $71.8 million. The Black-Scholes option pricing model
was then used to perform an equity allocation of the marketable
minority value of $71.8 million to each of the series and
classes of equity capital to derive a common stock value. The
resulting valuation determined a per share value of $3.03 after
considering a lack of marketability discount of 30%.
Fourth
Quarter 2009
During the fourth quarter of 2009, we granted 801 stock options
on October 22, 2009 with a per share exercise price of
$3.71. In the absence of a public trading market for our common
stock, our audit committee, with input from management,
considered the Key Valuation Considerations and factors
described below and determined the fair market value of our
common stock in good faith to be $3.71 per share.
|
|
|
|
|
Results of Operations: Our cash and cash
equivalents and short-term investments balances of
$5.8 million as of September 30, 2009 were not
sufficient to sustain long-term growth and provide cash to
invest in operations. Our revenues grew from $8.1 million
for the three months ended September 30, 2008 to
$9.6 million for the three months ended September 30,
2009. At the same time, our income (loss) for each of the three
most recently completed quarters was $(54,000), $657,000 and
$346,000.
|
|
|
|
Preferred Stock Preferences: During this
period our audit committee also considered the rights,
preferences and privileges of our preferred stock relative to
the common stock. As of September 30, 2009, our preferred
stock possessed an aggregate liquidation preference of
$38.6 million. The participation rights of our preferred
stock also provide that the preferred stock participates with
the common stock pro rata in our remaining assets. At that time,
our audit committee believed we could become a candidate for a
liquidity event, such as an initial public offering or sale of
our company at a
|
37
|
|
|
|
|
premium whereby our preferred stock would convert to common
thereby eliminating the liquidation preferences of the preferred
stock. In early October 2009, the board of directors received
feedback from potential underwriters that we were a potentially
viable candidate for an initial public offering, but the board
was unsure if it would proceed with such an offering and
therefore did not change any of the Key Valuation Considerations
at that time.
|
As indicated above, we performed a contemporaneous valuation of
the fair value of our common stock as of October 22, 2009.
In our valuation analysis, we utilized the market approach and
the income approach. The discounted cash flow used in the income
approach applied (i) the appropriate risk-adjusted discount
rate, which in this case was 19.5%, to estimated debt-free cash
flows, based on forecasted revenues and (ii) multiples to
revenues to determine a terminal value, which in this case was
1.5 times revenues. The projections used in connection with the
income approach were based on our expected operating performance
over the forecast period. There is inherent uncertainty in these
estimates; if different discount rates or assumptions had been
used, the valuation would have been different.
The values of our company calculated under each methodology were
given equal weight based upon our audit committees
estimate as of the valuation date, of the meaningfulness of each
methodology to our companys valuation. Based on these
inputs, our marketable minority equity value was determined to
be $82.2 million. The Black-Scholes option pricing model
was then used to perform an equity allocation of the marketable
minority value of $82.2 million to each of the series and
classes of equity capital to derive a common stock value. The
resulting valuation determined a per share value of $3.71 after
considering a lack of marketability discount of 30%.
Research
and Development
We account for the costs incurred to develop our software
solution in accordance with ASC
350-40,
Intangibles Goodwill and Other. Capitalizable
costs consists of (a) certain external direct costs of
materials and services incurred in developing or obtaining
internal-use computer software and (b) payroll and
payroll-related costs for employees who are directly associated
with, and who devote time to, the project. These costs generally
consist of internal labor during configuration, coding and
testing activities. Research and development costs incurred
during the preliminary project stage or costs incurred for data
conversion activities, training, maintenance and general and
administrative or overhead costs are expensed as incurred. Costs
that cannot be separated between maintenance of, and relatively
minor upgrades and enhancements to, internal-use software are
also expensed as incurred. Capitalization begins when the
preliminary project stage is complete, management with the
relevant authority authorizes and commits to the funding of the
software project, it is probable the project will be completed,
the software will be used to perform the functions intended and
certain functional and quality standards have been met.
Our research and development expenses primarily consist of
personnel costs for development and maintenance of our existing
solutions. Historically, we therefore have expensed all research
and development expenditures as incurred.
Valuation
of Goodwill
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations. We test goodwill for impairment annually at
December 31, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The
impairment test is conducted by comparing the fair value of the
net assets with their carrying value. Fair value is determined
using the future cash flows expected to be generated. If the
carrying value exceeds the fair value, goodwill may be impaired.
If this occurs, the fair value is then allocated to its assets
and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of
goodwill. This implied fair value is then compared to the
carrying amount of goodwill and, if it is less, we would
recognize an impairment loss. There has been no impairment of
these assets to date.
The valuation of goodwill requires the use of discounted cash
flow valuation models. Those models require estimates of future
revenue, profits, capital expenditures and working capital.
These estimates will be
38
determined by evaluating historical trends, current budgets,
operating plans and industry data. Determining the fair value of
goodwill includes significant judgment by management and
different judgments could yield different results.
We have reviewed our operations and determined that to date we
have had one reporting unit. We based our conclusion primarily
on the fact that we do not prepare separate financial
information for distinct units, we do not have segment or unit
managers that are responsible for specific solutions we provide
and our management and board of directors use only one set of
financial information to make decisions about resources to be
allocated among our company.
Results
of Operations
The following table sets forth, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
25,198
|
|
|
$
|
30,697
|
|
|
$
|
37,746
|
|
Cost of revenues
|
|
|
6,379
|
|
|
|
9,258
|
|
|
|
11,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
18,819
|
|
|
|
21,439
|
|
|
|
26,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
11,636
|
|
|
|
12,493
|
|
|
|
13,506
|
|
Research and development
|
|
|
3,546
|
|
|
|
3,640
|
|
|
|
4,305
|
|
General and administrative
|
|
|
5,458
|
|
|
|
6,716
|
|
|
|
6,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,640
|
|
|
|
22,849
|
|
|
|
24,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,821
|
)
|
|
|
(1,410
|
)
|
|
|
1,881
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(439
|
)
|
|
|
(419
|
)
|
|
|
(270
|
)
|
Other income
|
|
|
120
|
|
|
|
28
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(319
|
)
|
|
|
(391
|
)
|
|
|
(628
|
)
|
Income tax expense
|
|
|
(16
|
)
|
|
|
(94
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The following table sets forth, for the periods indicated, our
results of operations expressed as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
Cost of revenues
|
|
|
25
|
|
|
|
30
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75
|
|
|
|
70
|
|
|
|
69
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
46
|
|
|
|
41
|
|
|
|
36
|
|
Research and development
|
|
|
14
|
|
|
|
12
|
|
|
|
11
|
|
General and administrative
|
|
|
22
|
|
|
|
22
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
82
|
|
|
|
75
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(7)
|
|
|
|
(5)
|
|
|
|
5
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2)
|
|
|
|
(1)
|
|
|
|
(1)
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(2)
|
|
|
|
(1)
|
|
|
|
(2)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(9)%
|
|
|
|
(6)%
|
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Revenues. Revenues for 2009 increased $7.0 million,
or 23%, to $37.7 million from $30.7 million for 2008.
The increase in revenues resulted primarily from a 9% increase
in recurring revenue customers to 11,003 from 10,076 as well as
a 10% increase in average recurring revenues per recurring
revenue customer to $2,879 from $2,622. The increase in average
recurring revenues per recurring revenue customer was primarily
attributable to increased fees resulting from increased usage of
our solutions by our recurring revenue customers. In addition,
$1.2 million of the increase in revenues was due to higher
testing and certification revenues due to a greater number of
enablement campaigns for 2009. In 2009, we had our highest level
of revenues from Trading Partner Enablement due to significant
increased demand for enablement from our retailers in the year.
As a result, in 2010, we anticipate a smaller number of
enablement campaigns and a corresponding decrease in testing and
certification revenues, in absolute dollars and as a percentage
of revenues.
Cost of Revenues. Cost of revenues for 2009 increased
$2.4 million, or 27%, to $11.7 million from
$9.3 million for 2008. Of the increase in costs,
approximately $2.1 million resulted from an increase in
personnel costs, which was primarily attributable to the
additional employees we hired for our implementation groups and
customer support team. The remaining $300,000 increase was
primarily due to higher costs of network services and
depreciation. As a percentage of revenues, cost of revenues was
31% for 2009 compared to 30% for 2008.
Sales and Marketing Expenses. Sales and marketing
expenses for 2009 increased $1.0 million, or 8%, to
$13.5 million from $12.5 million for 2008. The
increase in the dollar amount is due to higher commissions
earned by sales personnel from new business. As a percentage of
revenues, sales and marketing expenses were 36% for 2009
compared to 41% for 2008. Increased revenues for 2009 compared
to 2008 allowed us to leverage our fixed sales and marketing
expenses and caused the decrease in sales and marketing expenses
as a percentage of revenues.
Research and Development Expenses. Research and
development expenses for 2009 increased $665,000, or 18%, to
$4.3 million from $3.6 million for 2008. The increase
in the dollar amount was primarily related to
40
increased personnel costs of $502,000 due to increased salaries
and wages for 2009 as well as costs for employees added during
2009. We also had additional consulting fees of $147,000 during
2009 compared to 2008, as consultants supplemented development
work on new solutions. As a percentage of revenues, research and
development expenses were 11% for 2009 compared to 12% for 2008.
General and Administrative Expenses. General and
administrative expenses for 2009 decreased $377,000, or 6%, to
$6.3 million from $6.7 million for 2008. As a
percentage of revenues, general and administrative expenses were
17% for 2009 compared to 22% for 2008. In February 2009, the
subscriber relationships from our 2006 Owens Direct acquisition
became fully amortized, causing a decrease in amortization costs
included in general and administrative expenses for the
remainder of 2009 and driving the decrease in general and
administrative expenses in absolute dollars and as a percentage
of revenues.
Other Income (Expense). Interest expense for 2009
decreased $149,000, or 36%, to $270,000 from $419,000 for 2008.
The decrease in interest expense is principally due to reduced
equipment borrowings. Other expense for 2009 was $358,000
compared to other income of $28,000 for 2008. The other income
(expense) change was driven by updating the value of preferred
stock warrants we issued to fair market value using the
Black-Scholes method.
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Revenues. Revenues for 2008 increased $5.5 million,
or 22%, to $30.7 million from $25.2 million for 2007.
The increase in revenues resulted primarily from a 6% increase
in recurring revenue customers to 10,076 from 9,496 as well as a
10% increase in average recurring revenues per recurring revenue
customer to $2,622 from $2,385. The increase in average
recurring revenues per recurring revenue customer was primarily
attributable to increased fees resulting from increased usage of
our solutions by our recurring revenue customers.
Cost of Revenues. Cost of revenues for 2008 increased
$2.9 million, or 45%, to $9.3 million from
$6.4 million for 2007. Of the increase in costs,
$2.3 million is related to personnel costs associated with
implementation and customer and applications support based on
business growth. The principal driver of these increased
personnel costs, which we amortize over 24 months, is the
additional employees we hired during 2007 to provide
implementation services to support our focus on integrating our
solutions into our recurring revenue customers business
systems. This resulted in a larger impact in 2008 than 2007.
Additionally, $500,000 of the increase in cost of revenues from
2007 to 2008 is attributable to direct cost, which includes cost
of resale and increased depreciation. As a percentage of
revenues, cost of revenues was 30% for 2008 compared to 25% for
2007. Cost of revenues increased as a percentage of revenues
because the increased personnel costs for 2008 did not
correspond with an increase in revenues for the period.
Sales and Marketing Expenses. Sales and marketing
expenses for 2008 increased $857,000, or 7%, to
$12.5 million from $11.6 million for 2007. The
increase in sales and marketing expenses is due to the increase
in personnel costs driven by an increase to the number of
employees in sales and marketing in 2008 compared to 2007. As a
percentage of revenues, sales and marketing expenses were 41%
for 2008 compared to 46% for 2007. Sales and marketing expenses
decreased as a percentage of revenues because we effectively
leveraged these costs across the revenues generated by the
recurring revenue customers added during 2008.
Research and Development Expenses. Research and
development expenses for 2008 increased $94,000, or 3%, to
$3.6 million from $3.5 million for 2007. As a
percentage of revenues, research and development expenses were
12% for 2008 compared to 14% for 2007. Research and development
expenses decreased as a percentage of revenues because we
effectively leveraged these expenses across the revenues
generated by recurring revenue customers during 2008.
General and Administrative Expenses. General and
administrative expenses for 2008 increased $1.2 million, or
23%, to $6.7 million from $5.5 million for 2007. The
increase in the dollar amount of general and administrative
expenses is primarily due to increased personnel costs for
internal information technology support. Also contributing to
the increase were a $102,000 increase in credit card fees from
41
increased usage of our solutions as well as an increase of
$245,000 resulting from a charge for bad debt, which we believe
was attributable to the general economic downturn that continued
throughout 2008. Auditing and legal fees increased by $169,000
in 2008 compared to 2007 due to additional activities such as
quarterly common stock valuation analyses and having quarterly
reviews completed by our auditors. As a percentage of revenues,
general and administrative expenses remained constant for 2008
compared to 2007.
Other Income (Expense). Interest expense for 2008
decreased $20,000, or 5%, to $419,000 from $439,000 for 2007.
The decrease in interest expense is due to reduced equipment
borrowings. Other income for 2008 decreased $92,000, or 77%, to
$28,000 from $120,000 for 2007. In 2007, other income included
$54,000 for a sales tax refund, and higher interest income on
certificates of deposits.
Quarterly
Results of Operations
The following tables set forth our unaudited operating results
and Adjusted EBITDA for each of the eight quarters preceding and
including the period ended December 31, 2009 and the
percentage of revenues for each line item shown. The information
is derived from our unaudited financial statements. In the
opinion of management, our unaudited financial statements
include all adjustments, consisting only of normal recurring
items, except as noted in the notes to the financial statements,
necessary for a fair statement of interim periods. The financial
information presented for the interim periods has been prepared
in a manner consistent with our accounting policies described
elsewhere in this prospectus and should be read in conjunction
therewith. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a
full-year period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited; in thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,957
|
|
|
$
|
7,586
|
|
|
$
|
8,074
|
|
|
$
|
8,080
|
|
|
$
|
8,531
|
|
|
$
|
9,600
|
|
|
$
|
9,634
|
|
|
$
|
9,981
|
|
Cost of revenues (1)
|
|
|
1,986
|
|
|
|
2,199
|
|
|
|
2,435
|
|
|
|
2,638
|
|
|
|
2,837
|
|
|
|
2,896
|
|
|
|
3,009
|
|
|
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,971
|
|
|
|
5,387
|
|
|
|
5,639
|
|
|
|
5,442
|
|
|
|
5,694
|
|
|
|
6,704
|
|
|
|
6,625
|
|
|
|
7,008
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing (1)
|
|
|
3,162
|
|
|
|
3,240
|
|
|
|
3,101
|
|
|
|
2,990
|
|
|
|
3,075
|
|
|
|
3,397
|
|
|
|
3,533
|
|
|
|
3,501
|
|
Research and development (1)
|
|
|
949
|
|
|
|
954
|
|
|
|
875
|
|
|
|
862
|
|
|
|
1,044
|
|
|
|
1,059
|
|
|
|
1,123
|
|
|
|
1,079
|
|
General and administrative (1)
|
|
|
1,639
|
|
|
|
1,669
|
|
|
|
1,684
|
|
|
|
1,724
|
|
|
|
1,652
|
|
|
|
1,514
|
|
|
|
1,505
|
|
|
|
1,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,750
|
|
|
|
5,863
|
|
|
|
5,660
|
|
|
|
5,576
|
|
|
|
5,771
|
|
|
|
5,970
|
|
|
|
6,161
|
|
|
|
6,248
|
|
Income (loss) from operations
|
|
|
(779
|
)
|
|
|
(476
|
)
|
|
|
(21
|
)
|
|
|
(134
|
)
|
|
|
(77
|
)
|
|
|
734
|
|
|
|
464
|
|
|
|
760
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(112
|
)
|
|
|
(106
|
)
|
|
|
(104
|
)
|
|
|
(97
|
)
|
|
|
(89
|
)
|
|
|
(75
|
)
|
|
|
(61
|
)
|
|
|
(45
|
)
|
Other income (expense)
|
|
|
(21
|
)
|
|
|
29
|
|
|
|
(6
|
)
|
|
|
26
|
|
|
|
123
|
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(133
|
)
|
|
|
(77
|
)
|
|
|
(110
|
)
|
|
|
(71
|
)
|
|
|
34
|
|
|
|
(77
|
)
|
|
|
(69
|
)
|
|
|
(516
|
)
|
Income tax expense
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(82
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(919
|
)
|
|
$
|
(555
|
)
|
|
$
|
(134
|
)
|
|
$
|
(287
|
)
|
|
$
|
(54
|
)
|
|
$
|
657
|
|
|
$
|
346
|
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (2)
|
|
$
|
(259
|
)
|
|
$
|
76
|
|
|
$
|
504
|
|
|
$
|
442
|
|
|
$
|
536
|
|
|
$
|
1,103
|
|
|
$
|
861
|
|
|
$
|
706
|
|
42
|
|
|
(1)
|
|
Includes stock-based compensation
expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited; in thousands)
|
|
|
Cost of revenues
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
20
|
|
|
$
|
10
|
|
Sales and marketing
|
|
|
14
|
|
|
|
15
|
|
|
|
15
|
|
|
|
16
|
|
|
|
15
|
|
|
|
17
|
|
|
|
42
|
|
|
|
17
|
|
Research and development
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
General and administrative
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
23
|
|
|
|
20
|
|
|
|
21
|
|
|
|
16
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36
|
|
|
$
|
37
|
|
|
$
|
37
|
|
|
$
|
47
|
|
|
$
|
48
|
|
|
$
|
50
|
|
|
$
|
79
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
EBITDA consists of net income
(loss) plus depreciation and amortization, interest expense and
income tax expense. Adjusted EBITDA consists of EBITDA plus our
non-cash, share-based compensation expense. We use Adjusted
EBITDA as a measure of operating performance because it assists
us in comparing performance on a consistent basis, as it removes
from our operating results the impact of our capital structure.
We believe Adjusted EBITDA is useful to an investor in
evaluating our operating performance because it is widely used
to measure a companys operating performance without regard
to items such as depreciation and amortization, which can vary
depending upon accounting methods and the book value of assets,
and to present a meaningful measure of corporate performance
exclusive of our capital structure and the method by which
assets were acquired. The following table provides a
reconciliation of net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited; in thousands)
|
|
|
Net income (loss)
|
|
$
|
(919
|
)
|
|
$
|
(555
|
)
|
|
$
|
(134
|
)
|
|
$
|
(287)
|
|
|
$
|
(54
|
)
|
|
$
|
657
|
|
|
$
|
346
|
|
|
$
|
213
|
|
Depreciation and amortization
|
|
|
505
|
|
|
|
486
|
|
|
|
494
|
|
|
|
503
|
|
|
|
442
|
|
|
|
321
|
|
|
|
326
|
|
|
|
366
|
|
Interest expense
|
|
|
112
|
|
|
|
106
|
|
|
|
104
|
|
|
|
97
|
|
|
|
89
|
|
|
|
75
|
|
|
|
61
|
|
|
|
45
|
|
Income tax expense (benefit)
|
|
|
7
|
|
|
|
2
|
|
|
|
3
|
|
|
|
82
|
|
|
|
11
|
|
|
|
|
|
|
|
49
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(295
|
)
|
|
|
39
|
|
|
|
467
|
|
|
|
395
|
|
|
|
488
|
|
|
|
1,053
|
|
|
|
782
|
|
|
|
655
|
|
Non-cash, share-based compensation expense
|
|
|
36
|
|
|
|
37
|
|
|
|
37
|
|
|
|
47
|
|
|
|
48
|
|
|
|
50
|
|
|
|
79
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(259
|
)
|
|
$
|
76
|
|
|
$
|
504
|
|
|
$
|
442
|
|
|
$
|
536
|
|
|
$
|
1,103
|
|
|
$
|
861
|
|
|
$
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
|
(Unaudited)
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
29
|
|
|
|
29
|
|
|
|
30
|
|
|
|
33
|
|
|
|
33
|
|
|
|
30
|
|
|
|
31
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
71
|
|
|
|
71
|
|
|
|
70
|
|
|
|
67
|
|
|
|
67
|
|
|
|
70
|
|
|
|
69
|
|
|
|
70
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
45
|
|
|
|
43
|
|
|
|
38
|
|
|
|
37
|
|
|
|
36
|
|
|
|
35
|
|
|
|
37
|
|
|
|
35
|
|
Research and development
|
|
|
14
|
|
|
|
13
|
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
|
|
11
|
|
|
|
12
|
|
|
|
11
|
|
General and administrative
|
|
|
24
|
|
|
|
22
|
|
|
|
21
|
|
|
|
21
|
|
|
|
19
|
|
|
|
16
|
|
|
|
16
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83
|
|
|
|
77
|
|
|
|
70
|
|
|
|
69
|
|
|
|
68
|
|
|
|
62
|
|
|
|
64
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(11
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
5
|
|
|
|
7
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(13
|
)%
|
|
|
(7
|
)%
|
|
|
(2
|
)%
|
|
|
(4
|
)%
|
|
|
(1
|
)%
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues increased sequentially for all quarters presented
primarily due to increases in our recurring revenue customers
and increases in recurring revenue per recurring revenue
customer.
Gross profits have generally increased each quarter as we
continue to grow our business. Gross profit margins generally
have decreased as we have added personnel across all areas of
our business to support our growth and expected future business.
Going forward we would anticipate gross profit margins will
approximate their current level as revenue growth begins to
match the personnel costs we have added to build our business.
Operating expenses generally have been increasing because we
have added personnel across all areas of our business to support
our growth and expected future business.
44
Liquidity
and Capital Resources
Since inception, we have financed our operations primarily
through the sale of preferred stock, borrowings under credit
facilities and, prior to 2004, issuances of notes payable to
stockholders. At December 31, 2009, our principal sources
of liquidity were cash and cash equivalents totaling
$5.9 million and accounts receivable, net of allowance for
doubtful accounts, of $4.8 million compared to cash and
cash equivalents of $3.7 million and accounts receivable,
net of allowance for doubtful accounts, of $4.6 million at
December 31, 2008. Our working capital as of
December 31, 2009 was $5.0 million compared to working
capital of $4.0 million as of December 31, 2008.
During 2009, we borrowed against our revolving credit facility
and, as of December 31, 2009, we had an outstanding balance
of $1.5 million. We bill our recurring revenue customers in
arrears for monthly service fees and initial integration
set-up fees.
As a result, the amount of our accounts receivable at the end of
a period is driven significantly by our revenues from recurring
revenue customers for the last month of the period, and our cash
flows from operations are affected by our collection of amounts
due from customers for services that resulted in the recognition
of revenues in a prior period.
Net Cash
Flows from Operating Activities
Net cash provided by (used in) operating activities was
$5.2 million for 2009, $(807,000) for 2008 and $(803,000)
for 2007. For 2009, net cash provided by operating activities
was primarily a result of $1.2 million of net income, non-cash
depreciation and amortization of $1.5 million, a
$1.1 million increase in accrued compensation for bonuses
in 2009 compared to 2008 due to our improved performance in
2009, and an $844,000 increase in deferred revenue. Increases in
deferred revenue are due to continued growth in new business,
offset by the recognition of setup revenue recognized ratably
over time.
For 2008, net cash used in operating activities was primarily a
result of a $1.9 million net loss, offset by
$2.0 million in non-cash depreciation and amortization
expense, an increase in accounts receivable of $811,000 due to
business growth and an increase in deferred costs of
$1.7 million primarily related to increased personnel costs
associated with our increased implementations in the period,
offset by increased deferred revenue from growth in new business
of $1.5 million.
For 2007, net cash used in operating activities was primarily a
result of a $2.2 million net loss, offset by
$1.8 million in non-cash depreciation and amortization
expense, and an increase in deferred costs of $2.9 million
primarily related to increased personnel costs associated with
our increased implementations in the period, offset by increased
deferred revenue from growth in new business of
$1.8 million and an increase in accrued compensation of
$658,000 due to increased bonus compensation.
Net Cash
Flows from Investing Activities
For 2009, cash used in investing activities was
$1.0 million for the purchase of various capital
expenditures. In general, our various capital expenditures are
for supporting our existing customer base, growth in new
business, and internal use such as equipment for our employees.
Cash provided by investing for 2008 was $379,000, consisting of
the sale of short-term investments of $1.3 million,
partially offset by $884,000 in capital expenditures. Cash used
in investing was $2.4 million for 2007, consisting of
$1.1 million of capital expenditures and $1.3 million for
the purchase of short-term investments.
Net Cash
Flows from Financing Activities
Cash used in financing activities was $1.9 million for
2009. We used these funds to pay $1.3 million in equipment
loans and capital lease obligations and to pay $679,000 toward
the term loan from our Owens Direct acquisition. For 2008, cash
used in financing activities was $711,000. We used these funds
primarily to pay capital lease obligations as well as to pay a
portion of the term loan from our Owens Direct acquisition. For
2007, cash flows provided by financing was $6.1 million,
primarily from the issuance of Series C redeemable
convertible preferred stock in April 2007.
45
Credit
Facility
We maintain a credit facility with BlueCrest Venture Finance
Master Fund Limited. Pursuant to this facility, BlueCrest
has provided us a series of equipment term loans that are
payable in 36 equal monthly installments. In 2007, BlueCrest
agreed to make equipment loans to us from time to time until
December 31, 2007. Before its commitment expired, BlueCrest
made loans in the aggregate principal amount of
$1.2 million, of which $212,000 was outstanding as of
December 31, 2009. Each loan bears interest at a per annum
rate equal to the sum of (i) 7.20% plus (ii) the
greater of 4.84% or the yield on three-year U.S. Treasury
notes on the date the loan was made. In 2008, BlueCrest agreed
to make additional equipment loans to us from time to time until
December 31, 2008. Before its commitment expired, BlueCrest
made loans in the aggregate principal amount of $756,000, of
which $520,000 was outstanding as of December 31, 2009.
Each loan bears interest at a per annum rate equal to the sum of
(i) 9.25% plus (ii) the greater of 2.55% or the yield
on three-year U.S. Treasury notes on the date the loan was
made.
In 2009, BlueCrest established a revolving credit facility that
allowed us to borrow an amount that does not exceed the lesser
of the revolving loan commitment and the borrowing base. The
amount of the revolving loan commitment is $3.5 million.
The borrowing base was determined monthly and calculated based
on specified percentages of our domestic and Canadian accounts
receivable, less certain reserves established by BlueCrest. As
of December 31, 2009, the maximum amount we could borrow
under the revolving facility was $1.5 million, all of which
we had borrowed. The revolving facility bore interest at the
rate of 9.00% per annum and terminated on March 31, 2010.
The BlueCrest equipment loans are secured by a first lien on
substantially all of our personal property. The BlueCrest credit
facility permits BlueCrest to accelerate the loans upon the
occurrence of various events of default, including a change in
control or a material adverse change in our assets, business,
operations or condition.
Adequacy
of Capital Resources
Our future capital requirements may vary materially from those
now planned and will depend on many factors, including the costs
to develop and implement new solutions and applications, the
sales and marketing resources needed to further penetrate our
market and gain acceptance of new solutions and applications we
develop, the expansion of our operations in the United States
and internationally and the response of competitors to our
solutions and applications. Historically, we have experienced
increases in our expenditures consistent with the growth in our
operations and personnel, and we anticipate that our
expenditures will continue to increase as we grow our business.
We believe our cash and cash equivalents, the proceeds from this
offering, funds available under our equipment term loan and
revolving credit facilities and cash flows from our operations
will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months.
During the last three years, inflation and changing prices have
not had a material effect on our business and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements, investments
in special purpose entities or undisclosed borrowings or debt.
Additionally, we are not a party to any derivative contracts or
synthetic leases.
46
Contractual
and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of
December 31, 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations (1)
|
|
$
|
732
|
|
|
$
|
499
|
|
|
$
|
233
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
460
|
|
|
|
338
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
2,229
|
|
|
|
776
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities (2)
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,556
|
|
|
$
|
1,613
|
|
|
$
|
1,808
|
|
|
$
|
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(1) |
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Consists of equipment loans from BlueCrest Venture Finance
Master Fund Limited. |
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(2) |
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Consists of the long-term portion of deferred revenues and
deferred tax liability. |
Quantitative
and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity Risk. For fixed rate debt,
interest rate changes affect the fair value of financial
instruments but do not impact earnings or cash flows.
Conversely, for floating rate debt, interest rate changes
generally do not affect the fair market value but do impact
future earnings and cash flows, assuming other factors are held
constant. The principal objectives of our investment activities
are to preserve principal, provide liquidity and maximize income
consistent with minimizing risk of material loss. The recorded
carrying amounts of cash and cash equivalents approximate fair
value due to their short maturities. Due to the nature of our
short-term investments, we have concluded that we do not have
material market risk exposure. All of our outstanding debt as of
December 31, 2008 and 2009 had a fixed rate. We therefore
do not have any material risk to interest rate fluctuations.
Foreign Currency Exchange Risk. Our results of operations
and cash flows are not materially affected by fluctuations in
foreign currency exchange rates.
Seasonality
The size and breadth of our customer base mitigates the
seasonality of any particular retailer. As a result, our results
of operations are not materially affected by seasonality.
New
Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board, or
FASB, issued guidance that delayed the effective date of
ASC 820, Fair Value Measurements and Disclosures,
for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). We adopted ASC 820 for non-financial assets and
non-financial liabilities on January 1, 2009, and such
adoption did not have a material impact on our financial
condition or results of operations.
In April 2009, the FASB issued guidance that requires interim
reporting period disclosure about the fair value of certain
financial instruments, effective for interim reporting periods
ending after June 15, 2009. We have adopted these
disclosure requirements. Due to their nature, the carrying value
of our cash, receivables, payables and debt obligations
approximates fair value.
In May 2009, the FASB issued ASC 855, Subsequent Events.
ASC 855 incorporates guidance into accounting literature that
was previously addressed only in auditing standards. The
statement refers to subsequent events that provide additional
evidence about conditions that existed at the balance-sheet date
as recognized subsequent events. Subsequent events
which provide evidence about conditions that arose after the
balance sheet date but prior to the issuance of the financial
statements are referred to as non-recognized subsequent
47
events. The disclosure requirements of ASC 855 are
effective for interim and annual periods ending after
June 15, 2009. In February 2010, ASU 2010-09, Subsequent
Events (Topic 855), Amendments to Certain Recognition
and Disclosure Requirements, was issued to clarify
disclosure requirements and align with SEC subsequent event
disclosure guidelines. We have adopted this new standard.
In June 2009, the FASB issued guidance that establishes the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with generally accepted accounting
principles, or GAAP. Use of the new codification is effective
for interim and annual periods ending after September 15,
2009. We have used the new codification in reference to GAAP in
this prospectus and such use has not impacted our results.
In October 2009, the FASB issued the following ASUs:
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ASU
No. 2009-13,
Revenue Recognition (ASC Topic 605), Multiple-Deliverable
Revenue Arrangements, a consensus of the FASB Emerging Issues
Task Force; and
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ASU
No. 2009-14,
Software (ASC Topic 985), Certain Revenue Arrangements That
Include Software Elements, a consensus of the FASB Emerging
Issues Task Force.
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ASU
No. 2009-13:
This guidance modifies the fair value requirements of ASC
subtopic
605-25,
Revenue Recognition-Multiple Element Arrangements, by
allowing the use of the best estimate of selling
price in addition to VSOE and Vendor Objective Evidence
(now referred to as third-party evidence, or TPE) for
determining the selling price of a deliverable. A vendor is now
required to use its best estimate of the selling price when VSOE
or TPE of the selling price cannot be determined. In addition,
the residual method of allocating arrangement consideration is
no longer permitted.
ASU
No. 2009-14:
This guidance modifies the scope of ASC subtopic
965-605,
Software-Revenue Recognition, to exclude from its
requirements (a) non-software components of tangible
products and (b) software components of tangible products
that are sold, licensed or leased with tangible products when
the software components and non-software components of the
tangible product function together to deliver the tangible
products essential functionality.
These updates require expanded qualitative and quantitative
disclosures and are effective for fiscal years beginning on or
after June 15, 2010. However, companies may elect to adopt
as early as interim periods ended September 30, 2009. These
updates may be applied either prospectively from the beginning
of the fiscal year for new or materially modified arrangements
or retrospectively. We currently are evaluating the impact of
adopting these updates on our financial statements.
48
BUSINESS
Overview
We are a leading provider of on-demand supply chain management
solutions, providing integration, collaboration, connectivity,
visibility and data analytics to thousands of customers
worldwide. We provide our solutions through SPSCommerce.net, a
hosted software suite that improves the way suppliers,
retailers, distributors and other customers manage and fulfill
orders. Implementing and maintaining supply chain management
software is resource intensive and not a core competency for
most businesses. SPSCommerce.net uses pre-built integrations to
eliminate the need for on-premise software and support staff,
which enables our supplier customers to shorten supply cycle
times, optimize inventory levels, reduce costs and satisfy
retailer requirements. As of December 31, 2009, we had over
11,000 customers with contracts to pay us monthly fees,
which we refer to as recurring revenue customers. We have also
generated revenues by providing supply chain management
solutions to an additional 24,000 organizations that, together
with our recurring revenue customers, we refer to as our
customers. Once connected to our platform, our customers often
require integrations to new organizations that represent an
expansion of our platform and new sources of revenues for us.
We deliver our solutions to our customers over the Internet
using a Software-as-a-Service model. This model enables our
customers to easily interact with their trading partners around
the world without the local implementation and servicing of
software that traditional on-premise solutions require. Our
delivery model also enables us to offer greater functionality,
integration and reliability with less cost and risk than
traditional solutions. Our platform features pre-built
integrations with 2,700 order management models across 1,300
retailers, grocers and distributors, as well as integrations to
over 100 accounting, warehouse management, enterprise resource
planning and packing and shipping applications. Our delivery
model leverages our existing integrations across current and new
customers. As a result, each integration that we add to
SPSCommerce.net makes our platform more appealing to potential
customers by increasing the number of pre-built integrations we
offer. Furthermore, integrating trading partners to
SPSCommerce.net can generate new sales leads from the
organizations with which we integrate our customers because
those organizations typically have other trading partners who
can benefit from our solutions. We systematically pursue these
sales leads to convert them into new customers.
For 2007, 2008 and 2009, we generated revenues of
$25.2 million, $30.7 million and $37.7 million.
Our fiscal quarter ended December 31, 2009 represented our
36th consecutive quarter of increased revenues. Recurring
revenues from recurring revenue customers accounted for 83%, 84%
and 80% of our total revenues for 2007, 2008 and 2009. No
customer represented over 1% of our revenues for 2007, 2008 or
2009.
Our
Industry
Supply
Chain Management Industry Background
49
The supply chain management industry serves thousands of
retailers around the world supplied with goods from tens of
thousands of suppliers. Additional participants in this market
include distributors, third-party logistics providers,
manufacturers, fulfillment and warehousing providers and
sourcing companies. Supply chain management involves
communicating data related to the exchange of goods among these
trading partners. At every stage of the supply chain there are
inefficient, labor-intensive processes between trading partners
with significant documentation requirements, such as the
counting, sorting and verifying of goods before shipment, while
in transit and upon delivery. Supply chain management solutions
must address trading partners needs for integration,
collaboration, connectivity, visibility and data analytics to
improve the speed, accuracy and efficiency with which goods are
ordered and supplied.
Our target market of supply chain integration solutions is
categorized by Gartner within the broader Integration Services
market, which Gartner estimates was $1.5 billion in 2008
(Magic Quadrant for Integration Service Providers, report by
Benoit Lheureux, November 2009). The pervasiveness of the
Internet, along with the dramatic declines in the pricing of
computing technology and network bandwidth, have enabled
companies to adopt on-demand applications at an increasing rate.
As familiarity and acceptance of on-demand solutions continues
to accelerate, we believe customers, both large and small, will
continue to turn to on-demand delivery methods similar to ours
for their supply chain integration needs, as opposed to
traditional on-premise software deployment. International Data
Corporation, or IDC, estimates that the global on-demand
software market reached $8.8 billion in 2008 and expects it
to increase to $19.8 billion in 2012, a compound annual
growth rate of 22%.
The
Rule Books Integration Between Retailers and
Suppliers
Retailers impose specific work-flow rules and standards on their
trading partners for electronically communicating supply chain
information. These rule books include specific
business processes for suppliers to exchange data and
documentation requirements such as invoices, purchase orders and
advance shipping notices. Rule books can be hundreds of pages,
and retailers frequently have multiple rule books for
international requirements or specific fulfillment models.
Suppliers working with multiple retailers need to accommodate
different rule books for each retailer. These rule books are not
standardized between retailers, but vary based on a
retailers size, industry and technological capabilities.
The responsibility for creating information maps,
which are integration connections between the retailer and the
supplier that comply with the retailers rule books,
resides primarily with the supplier. The cost of noncompliance
can be refusal of delivered goods, fines and ultimately a
termination of the suppliers relationship with the
retailer. The complexity of retailers requirements and
consequences of noncompliance create growing demand for
specialized supply chain management solutions.
Traditional
Supply Chain Management Solutions
Traditional supply chain management solutions range from
non-automated paper or fax solutions to electronic solutions
implemented using on-premise licensed software. On-premise
licensed software provides connectivity between only one
organization and its trading partners and typically requires
significant time and technical expertise to configure, deploy
and maintain. These software providers primarily link retailers
and suppliers through the Electronic Data Interchange protocol
that enables the structured electronic transmission of data
between organizations. Because of
set-up and
maintenance costs, technical complexity and a growing volume of
requirements from retailers, the traditional software model is
not well suited for many suppliers, especially those small and
medium in size.
Key
Trends in Supply Chain Management
A number of key trends are impacting the supply chain management
industry and increasing demand for supply chain management
solutions. These include:
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Increasing Retailer Service and Performance Demands.
Within the supply chain ecosystem, retailers hold a significant
strategic position relative to their trading partners,
particularly small- and medium-sized suppliers. Retailers
maintain the direct relationship with the consumer and collect
the retail price, within which the cost of manufacture and
distribution must be covered. Given this power dynamic,
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retailers continuously demand enhanced levels of performance
from suppliers, including more frequent on-time delivery of
goods, increased availability of goods to manage inventory and
lower prices. We believe the recent economic downturn has
exacerbated these trends.
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Globalization of the Supply Chain Ecosystem.
Globalization creates the need for participants in the supply
chain ecosystem to connect across time zones with different
languages and regulatory environments. Retailers typically
demand a
10-day
turnaround upon submitting a purchase order. However, growing
physical distances between the sources of materials,
manufacturers and retailers, as well as the complexities of
connecting with trading partners worldwide, increase the time a
supplier typically needs to obtain goods to 60 days from
receipt of a purchase order. This increased time pressure to
deliver goods requires that the various trading partners in the
supply chain communicate more efficiently than current solutions
typically offer.
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Increasing Complexity of the Supply Chain Ecosystem.
Increasing cost pressures force many suppliers, especially those
of a small and medium size, to focus on product development and
business management. This specialization drives organizations to
outsource non-core business functions, including fabrication,
distribution and transportation. Outsourcing these functions
increases the number of participants in the supply chain
ecosystem. The increasing complexity from these additional
participants drives demand for a more integrated approach
allowing suppliers to communicate and track a larger volume of
information among a larger number of trading partners than
traditional solutions have supported.
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Increasing Use of Outsourcing by Small- and Medium-Sized
Suppliers. The outsourcing of non-core business functions,
including by small- and medium-sized suppliers, has helped
participants in the supply chain ecosystem become more
comfortable utilizing outsourced service providers, including
for information technology services. Limited internal expertise
and constrained budgets also drive the need for suppliers to
rely on third-party service providers to manage the complexity
of their supply chain at an affordable cost.
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Need for
Effective Analysis of Data for Intelligent Decision
Making
Integrating retailers and suppliers is a first step in
addressing the complexities in the supply chain ecosystem. As
the number and geographic dispersion of trading partners has
grown, so too has the volume of data produced by the supply
chain. As a result, trading partners want a solution to
effectively consolidate, distill and channel information to
managers and decision-makers who can use the information to
drive efficiency, revenue growth and profitability. The
abundance of data produced by these processes, including data
for fulfillment, sales and inventory levels, is often
inaccessible to trading partners for analysis. The data and
related analytics are essential for optimizing the inventory and
fulfillment process and will continue to drive demand for supply
chain management solutions.
Organizations are continuing to increase their demand for
gathering and analyzing data. For example, IDC estimates the
worldwide business analytics software market will grow from
$24.1 billion in 2008 to $34.2 billion in 2013 at a
compound annual growth rate of 7%. This broader market is
subcategorized by IDC into four segments: spatial information
analytics tools, data warehousing platform software, business
intelligence tools and analytics applications. The analytics
applications segment includes the supply chain analytics
application market. We believe our target market of analytical
applications falls within both the business intelligence
sub-segment,
which is expected to grow from $7.8 billion in 2008 to
$10.9 billion in 2013, at a compound annual growth rate of
7%, as well as the supply chain analytics application market,
which is expected to grow from $1.6 billion to
$2.0 billion at a compound annual growth rate of 5%.
Software-as-a-Service
Solutions Provide Flexibility and Effective Management Across
the Supply Chain
A Software-as-a-Service model is well suited for providing
supply chain management solutions. On-demand solutions are able
to continue utilizing standard connectivity protocols, such as
Electronic Data Interchange, but also are able to support other
protocols, such as XML, as retailers require. These on-demand
51
solutions connect suppliers and retailers more efficiently than
traditional on-premise software solutions by leveraging the
integrations created for a single supplier across all
participating suppliers.
Trading partners are demanding better supply chain management
solutions than traditional on-premise software, which does not
efficiently integrate an organization to all of its trading
partners. Software-as-a-Service solutions allow an organization
to connect across the supply chain ecosystem, addressing
increased retailer demands, globalization and increased
complexity affecting the supply chain. Also,
Software-as-a-Service solutions can integrate supply chain
management applications with organizations existing
enterprise resource planning systems. The increased integration
with trading partners and into organizations business
systems increases the reliance of customers on the solutions
their Software-as-a-Service vendors provide. We believe
suppliers will increasingly turn to Software-as-a-Service
solutions for a simple, cost-effective solution to supply chain
management problems.
SPSCommerce.net:
Our Platform
We operate one of the largest trading partner integration
centers through SPSCommerce.net, a hosted software suite that
improves the way suppliers, retailers, distributors and other
trading partners manage and fulfill orders. More than 35,000
customers across more than 40 countries have used our platform
to enhance their trading relationships. SPSCommerce.net
fundamentally changes how organizations use electronic
communication to manage their supply chains by replacing the
collection of traditional, custom-built,
point-to-point
integrations with a
hub-and-spoke
model whereby a single integration to SPSCommerce.net allows an
organization to connect seamlessly to the entire SPSCommerce.net
network of trading partners.
SPSCommerce.net combines integrations that comply with 2,700
rule books for 1,300 retailers, grocers and distributors,
through a multi-tenant architecture and provides ancillary
support services that deliver a comprehensive set of supply
chain management solutions to customers. By maintaining current
integrations with retailers such as Wal-Mart, Target,
Macys and Safeway, SPSCommerce.net obviates the need for
suppliers to continually stay
up-to-date
with the rule book changes required by these large retailers.
Moreover, by leveraging an on-demand delivery model, we
eliminate or greatly reduce the burden on suppliers to support
and maintain an on-premise software application, thereby
reducing ongoing operating costs. As the communication hub for
trading partners, we provide seamless, cost-effective
integration and connectivity as well as increased visibility and
data analytics capabilities for retailers and suppliers across
their supply chains, each of which is difficult to gain from
traditional,
point-to-point
integration solutions.
Our platform places us at the center of the supply chain
ecosystem and benefits every member of the chain.
Supplier Benefits. SPSCommerce.net provides suppliers,
distributors, third-party logistics providers, outsourced
manufacturers, fulfillment and warehousing providers and
sourcing companies the following benefits:
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More reliable and faster integration with retailers by
leveraging our expertise to comply with retailers rule
book requirements;
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Reduced costs through improved efficiency and accuracy in the
order fulfillment process through on-demand communications with
trading partners around the world, reduced manual data entry and
access to support services such as our translation application;
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Reduced deployment risk, simplified ongoing operations and lower
maintenance costs, each of which results from the ability of
SPSCommerce.net to provide a supplier with connectivity to its
trading partners without a significant upfront investment in
specialized software or ongoing investments in personnel to
maintain the software; and
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Increased sales from enhanced supply chain visibility into
retailers inventory and
point-of-sale
information, which reduces
out-of-stock
situations and improves the effectiveness of promotional
activities.
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Retailer Benefits. We enable buying organizations, such
as retailers, grocers and distributors, to establish more
comprehensive and advanced integrations with a broader set of
suppliers. Our platform also provides these buying organizations
the following benefits:
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Reduced expenses through automation of the receipt of goods at
distribution centers, more effective reconciliation of
shipments, orders and payments, and reduced manual effort and
data entry;
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Improved reliability of suppliers who are more likely to comply
with rule book requirements by leveraging our expertise
integrating trading partners;
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Decreased cost and enhanced quality of inventory by more
efficiently tracking sales and inventory information and
communicating with suppliers; and
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Growth of revenue by reducing the risk of failing to keep
products in stock and the associated reputational impact with
consumers.
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Our platform delivers suppliers and retailers the following
solutions:
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Trading Partner Integration. Our Trading Partner
Integration solution replaces or augments an organizations
existing trading partner electronic communication
infrastructure, enabling suppliers to comply with
retailers rule books and allowing for the electronic
exchange of information among numerous trading partners through
various protocols.
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Trading Partner Enablement. Our Trading Partner
Enablement solution helps organizations, typically large
retailers, implement new integrations with trading partners to
drive automation and electronic communication across their
supply chains.
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Trading Partner Intelligence. In 2009, we introduced our
Trading Partner Intelligence solution, which consists of six
data analytics applications and allows our supplier customers to
improve their visibility across, and analysis of, their supply
chains. Retailers improve their visibility into supplier
performance and their understanding of product sell-through.
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Other Trading Partner Solutions. We provide a number of
peripheral solutions such as barcode labeling and our scan and
pack application, which helps trading partners process
information to streamline the picking and packaging process.
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Our
Go-to-Market
Approach
As one of the largest on-demand supply chain management
solutions providers, the trading partner relationships that we
enable among our retailer, supplier and fulfillment customers
naturally lead to new customer acquisition opportunities.
Network
Effect of SPSCommerce.net
Once connected to our network, trading partners can exchange
electronic supply chain information with each other. Through our
platform, we helped over 35,000 customers to communicate
electronically with their trading partners. The value of our
platform increases with the number of trading partners connected
to the
53
platform. The addition of each new customer to our platform
allows that new customer to communicate with our existing
customers and allows our existing customers to route orders to
the new customer. This network effect of adding an
additional customer to our platform creates a significant
opportunity for existing customers to realize incremental sales
by working with our new trading partners and vice versa. As a
result of this increased volume of activity amongst our network
participants, we earn additional revenues from these
participants.
Customer
Acquisition Sources
Trading Partner Enablement. When a retailer decides to
change the workflow or protocol by which it interacts with its
suppliers, the retailer may engage us to work with its supplier
base to communicate and test the change in procedure. Performing
these programs on behalf of retailers often generates supplier
sales leads for us, many of which may become recurring revenue
customers.
Referrals from Trading Partners. We also receive sales
leads from customers of SPSCommerce.net seeking to communicate
electronically with their trading partners. For example, a
supplier may refer to us its third-party logistics provider or
manufacturer which is not in our network. This viral referral
effect has helped us to add thousands of customers to our
platform every year and has proven to be a significant source of
sales lead generation. This viral sales lead generation allows
us to acquire new customers at a lower cost than traditional
marketing programs. Typically, these new customers become
recurring revenue customers.
Channel Partners. In addition to the customer acquisition
sources identified above, we market our solutions through
channel partners. For example, we have contractual relationships
with a leading global logistics provider and NetSuite, through
whom we gain additional sales. In the case of the leading global
logistics provider, we private label our applications, which are
in turn sold as this companys branded services. This
company sells our applications through their sales force at no
cost to us. In our relationship with NetSuite, we refer
customers to one another to gain additional revenue sources.
Our Sales
Force
We also sell our solutions through a direct sales force of over
60 people. Our sales force is organized as follows:
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Retailer Sales. We employ a team of sales professionals
who focus on selling our Trading Partner Enablement solution to
retailers, grocers and distributors. These sales professionals
seek to establish relationships with executive managers at
existing and new retailers, through whom we generate supplier
sales leads. In addition to supplier sales leads, a portion of
these retailers purchase our solutions as well, resulting in
increased revenue generation.
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Supplier Sales. We employ a team of supplier sales
representatives based in North America. We also maintain an
office in China with sales representatives and opened direct
sales offices in the United Kingdom and France in
February 2010. Our sales professionals primarily work over
the phone to convert sales leads into customers and then
actively sell additional solutions to those customers over time.
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Business Development Efforts. Our business development
organization focuses on indirect sales channels. This group
establishes relationships with resellers, system integrators,
software providers and other partners. In the future, we expect
to forge additional indirect channel partnerships to continue to
grow this part of our business.
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Other
Marketing Initiatives
We actively engage in sales lead generation and nurturing
programs through direct mail, email and telemarketing campaigns.
Our marketing programs include public relations, web seminars,
trade shows and industry conferences and an annual user
conference. We publish white papers relating to supply chain
issues and develop customer reference programs, such as customer
case studies. We also provide marketing support and referral
programs for channel partners.
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Our
Growth Strategy
Our objective is to be the leading global provider of supply
chain management solutions. Key elements of our strategy include:
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Further Penetrate Our Current Market. We believe the
global supply chain management market is under-penetrated and,
as the supply chain ecosystem becomes more complex and
geographically dispersed, the demand for supply chain management
solutions will increase, especially among small- and
medium-sized businesses. We intend to continue leveraging our
relationships with customers and their trading partners to
obtain new sales leads. We believe our leadership in providing
supply chain management solutions favorably positions us to
convert these sales leads into customers.
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Increase Revenues from Our Customer Base. We believe our
overall customer satisfaction is strong and will lead our
customers to further utilize our current solutions as their
businesses grow, generating additional revenues for us. We also
expect to introduce new solutions to sell to our customers. We
believe our position as the incumbent supply chain management
solution provider to our customers, our integration into our
recurring revenue customers business systems and the
modular nature of our platform are conducive to deploying
additional solutions with customers.
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Expand Our Distribution Channels. We intend to grow our
business by expanding our network of direct sales
representatives to gain new customers. We also believe there are
valuable opportunities to promote and sell our solutions through
collaboration with other providers. For example, we currently
provide tracking, visibility and data analysis applications to a
leading global logistics provider. We believe there are
opportunities for us to leverage our relationship with this
company to identify sales leads that will continue to lead to
new customers. We integrated our applications with
NetSuites business software, which is another relationship
we expect will continue to provide us new sales leads.
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Expand Our International Presence. We believe our
presence in China represents a significant competitive
advantage. We plan to increase our international sales efforts
to obtain new supplier customers around the world. As part of
this plan, we opened direct sales and support offices in the
United Kingdom and France in February 2010. We intend to
leverage our current international presence to increase the
number of integrations we have with retailers in foreign markets
to make our platform more valuable to suppliers based overseas.
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Enhance and Expand Our Platform. We intend to further
improve and develop the functionality and features of our
platform, including developing new solutions and applications.
For example, in 2009, we launched our Trading Partner
Intelligence solution, which delivers data analytics
applications to suppliers and retailers to improve performance.
We also introduced a scan and pack application in 2009 that
helps trading partners process information to streamline the
picking and packaging process.
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Selectively Pursue Strategic Acquisitions. The fragmented
nature of our market provides opportunity for selective
acquisitions. To complement and accelerate our internal growth,
we may pursue acquisitions of other supply chain management
companies to add customers. We also may pursue acquisitions that
allow us to expand into regions or industries where we do not
have a significant presence or to offer new functionalities we
do not currently provide. We plan to evaluate potential
acquisitions of other supply chain management companies
primarily based on the number of customers the acquisition would
provide relative to the purchase price. We plan to evaluate
potential acquisitions to expand into new regions or industries
or offer additional functionalities primarily based on the
anticipated growth the acquisition would provide, the purchase
price and our ability to integrate and operate the acquired
business. We are not currently in negotiations for any
acquisitions.
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Technology,
Development and Operations
Technology
We were an early provider of Software-as-a-Service solutions to
the supply chain management industry, launching the first
version of our platform in 1997. We use commercially available
hardware and a
55
combination of proprietary and commercially available software,
including software from Oracle, Microsoft, Sun and EMC, as well
as open source software including Linux and Apache.
The software we license from third parties is typically licensed
to us pursuant to a multi-year or perpetual license that
includes a multi-year support services agreement with the third
party. Our ability to access upgrades to certain software is
conditioned upon our continual maintenance of a support services
agreement with the third party between the date of the initial
license and the date on which we seek or are required to upgrade
the software. Although we believe we could replace the software
we currently license from third parties with alternative
software, doing so could take time, could result in the
temporary unavailability of our platform and increase our costs
of operations.
Our scalable, on-demand platform treats all customers as
logically separate tenants in central applications and
databases. As a result, we spread the cost of delivering our
solutions across our customer base. Because we do not manage
thousands of distinct applications with their own business logic
and database schemes, we believe that we can scale our business
faster than traditional software vendors, even those that
modified their products to be accessible over the Internet.
Development
Our research and development efforts focus on improving and
enhancing our existing solutions, as well as developing new
solutions and applications. Because of our multi-tenant
architecture, we provide our customers with a single version of
our platform, which we believe allows us to maintain relatively
low research and development expenses compared to traditional
on-premise licensed software solutions that support multiple
versions.
Operations
We serve our customers from two third-party data centers located
in Minneapolis and Saint Paul, Minnesota. These facilities
provide security measures, environmental controls and
sophisticated fire systems. Additionally, redundant electrical
generators and environmental control devices are required to
keep servers running. We operate all of the hardware on which
our applications run in the data centers.
We continuously monitor the performance of our platform. We have
a site operations team that provides system management,
maintenance, monitoring and
back-up. We
have monitoring software that continually checks our platform
and key underlying components at regular intervals for
availability and performance, ensuring our platform is available
and providing adequate response.
To facilitate loss recovery, we operate a multi-tiered system
configuration with load-balanced web server pools, replicated
database servers and fault-tolerant storage devices. Databases
leverage third-party features for real-time replication across
sites. This is designed to ensure near real-time data recovery
in the event of a malfunction with a primary database or server.
Our
Customers
As of December 31, 2009, we had over 11,000 recurring
revenue customers and over 35,000 total customers. Our primary
source of revenue is from small- to mid-sized suppliers in the
consumer packaged goods industry. We also generate revenues from
other members of the supply chain ecosystem, including
retailers, grocers, distributors, third-party logistics
providers and other trading partners. No customer represented
over 1% of our revenues in 2007, 2008 or 2009.
Competition
Vendors in the supply chain management industry offer solutions
through three delivery methods: on-demand, traditional
on-premise software and managed services.
The market for on-demand supply chain management solutions is
fragmented and rapidly evolving. Software-as-a-Service vendors
compete directly with each other based on the following:
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breadth of pre-built connections to retailers, third-party
logistics providers and other trading partners;
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56
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history of establishing and maintaining reliable integration
connections with trading partners;
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reputation of the Software-as-a-Service vendor in the supply
chain management industry;
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price;
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specialization in a customer market segment;
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speed and quality with which the Software-as-a-Service vendor
can integrate its customers to their trading partners;
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functionality of the Software-as-a-Service solution, such as the
ability to integrate the solution with a customers
business systems;
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breadth of complementary supply chain management solutions the
Software-as-a-Service vendor offers; and
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training and customer support services provided during and after
a customers initial integration.
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We expect to encounter new and increased competition as this
market segment consolidates and matures. Consolidation among
Software-as-a-Service vendors could create a direct competitor
that is able to compete with us more effectively than the
numerous, smaller vendors currently offering
Software-as-a-Service supply chain management solutions.
Increased competition from Software-as-a-Service vendors could
reduce our market share, revenues and operating margins or
otherwise adversely affect our business.
Software-as-a-Service vendors also compete with traditional
on-premise software companies and managed service providers.
Traditional on-premise software companies focused on supply
chain integration management include Sterling Commerce, a
subsidiary of AT&T, GXS Corporation, Inovis, Extol
International and Seeburger. These companies offer a
do-it-yourself approach in which customers purchase,
install and manage specialized software, hardware and
value-added networks for their supply chain integration needs.
This approach requires customers to invest in staff to operate
and maintain the software. Traditional on-premise software
companies use a single-tenant approach in which information maps
to retailers are built for and used by one supplier, as compared
to Software-as-a-Service solutions that allow multiple customers
to share information maps with a retailer.
Managed service providers focused on the supply chain management
market include Sterling Commerce, GXS and Inovis. These
companies combine traditional on-premise software, hardware and
value-added networks with professional information technology
services to manage these resources. Like traditional on-premise
software companies, managed service providers use a
single-tenant approach.
Customers of traditional on-premise software companies and
managed service providers typically make significant upfront
investments in the supply chain management solutions these
competitors provide, which can decrease the customers
willingness to abandon their investments in favor of a
Software-as-a-Service solution. Software-as-a-Service supply
chain management solutions also are at a relatively early stage
of development compared to traditional
on-premise
software and managed service providers. Software-as-a-Service
vendors compete with these better established solutions based on
total cost of ownership and flexibility. If suppliers do not
perceive the benefits of Software-as-a-Service solutions, or if
suppliers are unwilling to abandon their investments in other
supply chain management solutions, our business and growth may
suffer. In addition, many traditional on-premise software
companies and managed service providers have larger customer
bases and may be better capitalized than we are, which may
provide them with an advantage in developing, marketing or
servicing solutions that compete with ours.
Intellectual
Property and Proprietary Content
We rely on a combination of copyright, trademark and trade
secret laws in the United States as well as confidentiality
procedures and contractual provisions to protect our proprietary
technology and our brand. We enter into confidentiality and
proprietary rights agreements with our employees, consultants
and other third parties and control access to software,
documentation and other proprietary information. We registered
57
the marks SPSCommerce.net and SPS Commerce in the United States.
We do not have any patents or applications for patents. Our
trade secrets consist primarily of the software we have
developed for our SPSCommerce.net integration center. Our
software is also protected under copyright law, but we do not
have any registered copyrights.
Legal
Proceedings
We are not currently subject to any material legal proceedings.
From time to time, we have been named as a defendant in legal
actions arising from our normal business activities, none of
which has had a material effect on our business, results of
operations or financial condition. We believe that we have
obtained adequate insurance coverage or rights to
indemnification in connection with potential legal proceedings
that may arise.
Facilities
Our corporate headquarters, including our principal
administrative, marketing, sales, technical support and research
and development facilities, are located in Minneapolis, where we
lease approximately 47,300 square feet under an agreement
that expires on October 31, 2012.
We believe that our current facilities are suitable and adequate
to meet our current needs, and that suitable additional or
substitute space will be available as needed to accommodate
expansion of our operations.
Employees
As of December 31, 2009, we had 292 employees. We also
employ independent contractors to support our operations. We
believe that our continued success will depend on our ability to
continue to attract and retain skilled technical and sales
personnel. We have never had a work stoppage, and none of our
employees are represented by a labor union. We believe our
relationship with our employees is good.
58
MANAGEMENT
Executive
Officers and Directors
The following table sets forth information concerning our
directors and executive officers:
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Name
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Age
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Position
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Archie C. Black
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47
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Chief Executive Officer, President and Director
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Kimberly K. Nelson
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42
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Executive Vice President and Chief Financial Officer
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James J. Frome
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45
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Executive Vice President and Chief Strategy Officer
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Michael J. Gray
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50
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Executive Vice President of Operations
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David J. Novak, Jr.
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41
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Executive Vice President of Business Development
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Steve A. Cobb
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38
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Chairman of the Board of Directors
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Michael B. Gorman
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44
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Director
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Martin J. Leestma
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52
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Director
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George H. Spencer, III
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46
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Director
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Sven A. Wehrwein
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59
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Director
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Murray R. Wilson
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48
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Director
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Executive
Officers
Archie C. Black joined us in 1998 as our Senior Vice
President and Chief Financial Officer and served in those
capacities until becoming our President and Chief Executive
Officer and a director in 2001. Prior to joining us,
Mr. Black was a Senior Vice President and Chief Financial
Officer at Investment Advisors, Inc. in Minneapolis, Minnesota.
Prior to Investment Advisors, he spent three years at Price
Waterhouse.
Kimberly K. Nelson has served as our Executive Vice
President and Chief Financial Officer since November 2007. Prior
to joining us, Ms. Nelson served as the Finance Director,
Investor Relations for Amazon.com from June 2005 through
November 2007. From April 2003 until June 2005, she served as
the Finance Director, Worldwide Application for
Amazon.coms Technology group. Ms. Nelson also served as
Amazon.coms Finance Director, Financial Planning and
Analysis from December 2000 until April 2003.
James J. Frome has served as our Executive Vice President
and Chief Strategy Officer since March 2001. Mr. Frome
served as our Vice President of Marketing from July 2000 to
March 2001. Prior to joining us, he served as a Divisional Vice
President of marketing at Sterling Software, Inc. from 1999 to
2000. Prior to joining Sterling Software, he served as a Senior
Product Manager and Director of Product Management at
Information Advantage, Inc. from 1993 to 1999.
Michael J. Gray has served as our Executive Vice
President of Operations since November 2008. Prior to joining
us, Mr. Gray served as Chief Technology Officer at IDeaS
Revenue Optimization from October 2007 to November 2008. From
2001 to October 2007, Mr. Gray served as Senior Director of
Technology at Thomson Corporation (formerly West Publishing).
Mr. Gray also served in various leadership and technical
position at Thomson Corporation prior to his promotion to Senior
Director of Technology.
David J. Novak, Jr. has served as our Executive Vice
President of Business Development since 2007. Prior to joining
us, he served as Vice President of Sales, North America-Business
Intelligence for Oracle Corporation from January 2006 to June
2007. Prior to Oracles acquisition of Siebel Systems, Inc.
in 2006, he served as Regional Vice President of
Sales Western U.S. and Asia Pacific for Siebel
Systems business intelligence division starting in 2001.
59
Board of
Directors
Steve A. Cobb was elected to our board of directors in
December 2006. He is currently a Managing Director of CID
Capital where he has served since 2001. Prior to joining CID
Capital, he was a finance manager with Procter &
Gamble.
Michael B. Gorman has served as a member of our board of
directors since March 1998. Mr. Gorman is a Managing
Director of Split Rock Partners, a venture capital firm which he
co-founded in June 2004. From 1995 until June 2004,
Mr. Gorman was a General Partner at St. Paul Venture
Capital, a venture capital firm, where he focused on early-stage
investing in software and Internet services companies.
Mr. Gormans prior work experience includes serving as
a management consultant with Bain & Company, where he
assisted clients in the development and execution of corporate
strategies.
Martin J. Leestma has served on our board of directors
since March 2006. He served as the President, Chief Executive
Officer, and was a member of the board of directors for Retek
Information Systems from 2003 to 2005, during which time Retek
was a publicly-traded company. Prior to joining Retek, he was
Global Managing Partner of Retail Technology at Accenture from
1996 to 1999 and Managing Partner of North American Consumer
Goods & Services from 1999 to 2002. He became Global
Industry Managing Partner Retail &
CG&S industries in 2002 and served in this role until his
departure in 2003. Since 2005, he has served as an independent
business consultant.
George H. Spencer, III has served on our board of
directors since February 2000. He is Senior Managing Director at
Seyen Capital, which he co-founded in October 2006, and serves
as a Senior Consultant to Adams Street Partners, LLC, which he
co-founded and where he served as a Partner from 1999 to October
2006.
Sven A. Wehrwein has served on our board of directors
since July 2008. He has been an independent financial consultant
to emerging companies since 1999. He has more than 30 years
of experience as an investment banker, chief financial officer
and certified public accountant. He currently serves on the
board of directors of Compellent Technologies, Inc., Image
Sensing Systems, Inc., Synovis Life Technologies, Inc.,
Uroplasty, Inc. and Vital Images, Inc., all of which are
publicly-traded companies. In 2005 and 2006, Mr. Wehrwein served
as a director of six mutual funds in the Van Wagoner group.
Murray R. Wilson has served on our board of directors
since April 2007. He is currently a Special Consultant to
Mayfield & Robinson, Inc., the investment management
company for River Cities Capital Funds, a family of venture
capital funds. He served as a Managing Director of
Mayfield & Robinson from 2004 until January 2010, and
as a Principal from 1995 to 2004. Prior to Mayfield &
Robinson, Mr. Wilson was an Associate with Blue Chip
Venture Company from 1992 to 1995. From 1985 through 1990, he
served as Assistant Investment Officer for Neworld Savings Bank.
Messrs. Cobb, Gorman, Wilson, Spencer and Black were
elected to our board of directors pursuant to a voting agreement
entered into in connection with the sale of our Series C
convertible preferred stock in 2007. The voting agreement
provides that the parties thereto will vote for nominees of the
venture capital funds with which Messrs. Cobb, Gorman,
Spencer and Wilson are affiliated for so long as the applicable
fund and its affiliates own a specified percentage of our
capital stock. The voting agreement also provides that our Chief
Executive Officer will be elected to serve as a director. This
voting agreement will terminate upon the closing of this
offering.
Board
Composition
Our board of directors currently consists of seven directors.
Our board of directors has determined that six of our seven
directors are independent directors, as defined under the
applicable rules of the Nasdaq stock market. The independent
directors are Messrs. Cobb, Gorman, Leestma, Spencer,
Wehrwein and Wilson.
In accordance with our amended and restated certificate of
incorporation, immediately after this offering, our board of
directors will be divided into three classes with staggered
three-year terms. At each annual general meeting of
stockholders, the successors to directors whose terms then
expire will be elected to serve
60
from the time of election and qualification until the third
annual meeting following election. Our directors will be divided
among the three classes as follows:
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The Class I directors will be Messrs. Gorman and
Wilson and their terms will expire at the annual meeting of
stockholders to be held in 2011;
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The Class II directors will be Messrs. Black and
Spencer and their terms will expire at the annual meeting of
stockholders to be held in 2012; and
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The Class III directors will be Messrs. Cobb, Leestma
and Wehrwein and their terms will expire at the annual meeting
of stockholders to be held in 2013.
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Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors.
The division of our board of directors into three classes with
staggered three-year terms may delay or prevent a change of our
management or a change in control.
There is no family relationship between any director, executive
officer or person nominated to become a director or executive
officer.
Board
Committees
The board of directors has established an audit committee and a
compensation committee and, immediately prior to this offering
will establish a nominating and governance committee. Each of
our committees will have a charter in effect upon the closing of
this offering and we expect that each charter will be posted on
our website.
The following sets forth the membership of each of our
committees upon completion of this offering.
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Nominating and Governance
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Audit Committee
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Committee
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Compensation Committee
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Sven A. Wehrwein, Chairperson
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Steve A. Cobb, Chairperson
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George H. Spencer, III, Chairperson
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Martin J. Leestma
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Sven A. Wehrwein
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Michael B. Gorman
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George H. Spencer, III
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Martin J. Leestma
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Audit
Committee
Among other matters, our audit committee will:
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evaluate the qualifications, performance and independence of our
independent auditor and review and approve both audit and
nonaudit services to be provided by the independent auditor;
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discuss with management and our independent auditors any major
issues as to the adequacy of our internal controls, any actions
to be taken in light of significant or material control
deficiencies and the adequacy of disclosures about changes in
internal control over financial reporting;
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establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or
auditing matters, including the confidential, anonymous
submission by employees of concerns regarding accounting or
auditing matters; and
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prepare the audit committee report that SEC rules require to be
included in our annual proxy statement and annual report on
Form 10-K.
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Each of the members of our audit committee upon closing of this
offering meets the requirements for financial literacy under the
applicable rules and regulations of the SEC and the Nasdaq stock
market. Our board of directors has determined that
Mr. Wehrwein is an audit committee financial expert, as
defined under the applicable rules of the SEC. Each member of
our audit committee upon the closing of this offering satisfies
the Nasdaq stock market independence standards and the
independence standards of
Rule 10A-3(b)(1)
of the Securities Exchange Act.
61
Nominating
and Governance Committee
Our nominating and governance committee will identify
individuals qualified to become members of the board of
directors, recommend individuals to the board for nomination as
members of the board and board committees, review the
compensation paid to our non-employee directors and recommend
any adjustments in director compensation and oversee the
evaluation of our board of directors.
Compensation
Committee
Our compensation committee will review and approve on an annual
basis the goals and objectives relevant to our Chief Executive
Officers compensation and annually review the evaluation
of the performance of our executive officers and approve our
executive officers annual compensation. Our compensation
committee also will administer the issuance of stock options and
other awards under our 2010 Equity Incentive Plan.
Code of
Conduct
We expect to adopt a code of business conduct and ethics upon
completion of this offering relating to the conduct of our
business by our employees, officers and directors, which will be
posted on our website.
Director
Compensation
In 2009, we did not provide any compensation to our non-employee
directors other than to reduce the exercise price of an option
to purchase 20,025 shares of common stock granted to Sven
A. Wehrwein in July 2008 from $4.72 per share to
$3.03 per share, which was the fair market value of our
common stock on the date of the amendment.
We reimburse our directors for
out-of-pocket
expenses incurred in connection with attending our board and
committee meetings.
The table below sets forth the compensation provided to our
directors during the year ended December 31, 2009.
Mr. Blacks compensation is set forth under
Summary Compensation Table because he
served as our President and Chief Executive Officer during that
year. Mr. Black did not receive any separate compensation
for his service as a director.
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Option Awards (1)
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Total
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Name
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($)
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($)
|
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Steve A. Cobb
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Michael B. Gorman
|
|
|
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Martin J. Leestma
|
|
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George H. Spencer, III
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Murray R. Wilson
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Sven A. Wehrwein
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7,110
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7,110
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(1) |
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Reflects the incremental fair value related to an amendment to
the terms of an option to purchase 20,025 shares of common
stock held by Mr. Wehrwein. The amendment decreased the
options exercise price from $4.72 per share to
$3.03 per share, which was the fair market value of our
common stock on the date of the amendment. The incremental fair
value related to the amendment is calculated as of the date of
the amendment in accordance with ASC 718 (excluding
estimates of forfeitures) and is determined based on the
assumptions in Note G to our financial statements in this
prospectus. None of our directors held any unvested options at
December 31, 2009, except for Mr. Wehrwein, who held
12,933 unvested options and Mr. Leestma, who held 1,252
unvested options. |
We adopted a new director compensation policy that will be
effective immediately prior to consummation of this offering.
The new policy will provide that each non-employee director will
receive an initial stock option grant to purchase up to
16,020 shares of our common stock upon appointment to the
board. Each grant will vest in equal monthly installments over
three years for so long as the director remains a member of
62
the board. With respect to our current non-employee directors
other than Mr. Wehrwein, each will receive a stock option
grant to purchase up to 16,020 shares of our common stock
upon consummation of this offering, with each grant vesting on
the schedule described above. Mr. Wehrwein will receive an
award to purchase additional shares of our common stock upon
consummation of this offering, which will give him unvested
options to purchase up to 16,020 shares of our common stock
upon the consummation of the offering in combination with the
July 2008 option grant we made when he joined the board.
The new director compensation policy also will provide that each
non-employee director will receive an annual stock option grant
to purchase up to 5,340 shares of our common stock on the
date of each annual meeting of stockholders at which the
director is elected to the board or continues to serve as a
director. The awards will vest in full on the earlier of one
year after the date of grant or the date of the next years
annual meeting of stockholders, provided the recipient remains a
member of the board as of the vesting date. All stock options
granted under the new policy will have an exercise price equal
to the fair market value of our common stock on the date of
grant in accordance with our 2010 Equity Incentive Plan, which,
in the case of grants made upon consummation of this offering,
will be the price to the public for shares sold in this offering.
Non-employee directors will receive cash fees in addition to the
equity awards described above. Each non-employee director will
receive an annual retainer of $20,000. In addition, the chair of
each committee will receive an annual fee as follows:
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Committee Chair
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Annual Cash Fee
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Audit
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$
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11,000
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Compensation
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$
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8,000
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Nominating and Governance
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$
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5,000
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Each committee member, other than the chair, will receive an
annual fee as follows:
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Non-Chair
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Committee Members
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Annual Cash Fee
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Audit
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$
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5,000
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Compensation
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$
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4,000
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Nominating and Governance
|
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$
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2,000
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The chairman of our board of directors will receive an
additional annual fee of $12,500.
Compensation
Discussion and Analysis
The following is a discussion and analysis of compensation
arrangements of our named executive officers for 2009. Our named
executive officers for 2009 were Archie C. Black, our President
and Chief Executive Officer, Kimberly K. Nelson, our Executive
Vice President and Chief Financial Officer, James J. Frome, our
Executive Vice President and Chief Strategy Officer, Michael J.
Gray, our Executive Vice President of Operations, and David J.
Novak, Jr., our Executive Vice President of Business
Development.
Compensation
Objectives and Process
We have designed the compensation arrangements for our named
executive officers to provide compensation in overall amounts
and in forms that attract and retain talented and experienced
individuals and motivate executives to achieve the goals that
are important to our growth. During 2009, our compensation
primarily consisted of salary and annual cash incentive awards.
We also have granted our named executive officers stock options
from time to time as part of our overall compensation package to
align incentives with the interests of our stockholders. As
further described below, in 2009 we amended the terms of certain
stock options previously granted to Ms. Nelson and
Mr. Frome as a means of providing them additional
compensation. We also granted a stock option to Mr. Gray in
early 2009 in connection with his hiring in November 2008. We
have not adopted any formal or informal policies or guidelines
for allocating compensation between the elements of compensation
we provide our named executive officers.
63
Historically, our compensation committee has established all
elements of compensation for all of our named executive
officers. Prior to this offering, our compensation committee has
never engaged a compensation consultant. Our compensation
committee engaged Compensia, Inc., a compensation consultant, in
connection with this offering to help evaluate our compensation
philosophy and provide guidance in administering our
compensation program. Following the completion of this offering,
we anticipate that our compensation committee will determine
executive compensation, at least in part, by reference to the
compensation information for the executives of a peer group of
comparable companies. In January 2010, our compensation
committee increased the base salaries of our named executive
officers based in part on a comparison of their compensation
relative to compensation paid by a peer group of companies
outlined in a report prepared by Compensia. Despite these
increases, our named executive officers remain at the low end of
compensation for this peer group. Our compensation committee
intends to annually reevaluate our named executive
officers compensation and to incrementally move their
compensation closer to the median compensation paid to
comparable executives at comparable companies.
Base
Salary
Base salaries are used to recognize the experience, skills,
knowledge and responsibilities required of all our employees,
including our named executive officers. Base salaries for each
of our named executive officers are initially established based
on arms-length negotiations between us and the executive.
The compensation committee reviews our named executive
officers salaries annually at the beginning of each year.
When negotiating or reviewing base salaries, the compensation
committee considers market competitiveness based on their market
experience, the executives expected future contribution to
our success and the relative salaries and responsibilities of
our other executives. For 2009, each named executive officer
received a salary increase of 2% compared to 2008. In January
2010, our named executive officers received salary increases
ranging from 5% to 9% compared to 2009.
Bonuses
We provide our named executive officers an opportunity to
receive two types of bonuses: a formula-based bonus and a
discretionary bonus. The formula-based bonus is intended to
motivate our executives to achieve specific financial goals that
reflect the growth and success of our business. The
discretionary bonus is designed to motivate our executive team
to achieve goals that contribute to our growth and success but
are not necessarily measurable by our results of operations.
Formula-Based Bonuses. The formula-based bonus is based
on a target bonus for each named executive officer established
by the compensation committee at the beginning of each year. The
compensation committee establishes the target based on an amount
it believes is necessary to provide a competitive overall
compensation package in light of each named executive
officers base salary and to motivate our executives to
achieve an aggressive level of growth. The amount of the
formula-based bonus, if any, actually paid to executives after
the end of each year is determined by a matrix that takes into
account our revenues and earnings before interest, taxes,
depreciation, amortization and stock-based compensation, or
Adjusted EBITDA. The formula-based bonus is based in part on
revenues because, given the scalability of our current core
business, the compensation committee believes our financial
results are driven most significantly by the revenues we
generate. The compensation committee also believes formula-based
bonuses should be based in part on Adjusted EBITDA because
Adjusted EBITDA is a useful measure of our operating performance.
The matrix provides that each executive will receive a
percentage of his or her target bonus, between 0% and 145%,
based on our revenues and Adjusted EBITDA for the year. For
example, for our executives to earn their target bonuses for
2009, we needed to generate revenues of approximately
$34.3 million and Adjusted EBITDA of approximately
$3.4 million. If we failed to have either revenues of
approximately $33.1 million or Adjusted EBITDA of
approximately $2.5 million, our named executive officers
would not receive a formula-based bonus for the year. The
percentage of the target bonus earned between the minimum and
the maximum varies in five-percentage-point increments based on
revenues and Adjusted EBITDA for the year relative to increments
established for each metric in the matrix. The effect of
acquisitions, if any, during the year are excluded for purposes
of determining the revenues and Adjusted EBITDA for the year as
applied to
64
the matrix. The compensation committee establishes the intervals
for the matrix with the intent that achieving 100% of an
executives target bonus will be a difficult but achievable
goal in light of the prior years results of operations and
anticipated growth for the year at the time the matrix is
created. For 2009, our revenues and Adjusted EBITDA resulted in
the maximum formula-based bonus being paid to our named
executive officers.
Discretionary Bonuses. At the beginning of each year, the
compensation committee also establishes a target discretionary
bonus for each named executive officer that it may pay to the
executive at the end of the year in the compensation
committees discretion. The compensation committee
establishes the target amount for each executive in an amount
the committee believes is appropriate to incentivize our
executives to strive to exceed performance expectations and
pursue activities that will not necessarily increase the
calculations of revenues or Adjusted EBITDA applied to the
formula-based bonus matrix.
For 2009, the target discretionary bonus for each named
executive officer was as follows:
Mr. Black $29,728
Ms. Nelson $23,625
Mr. Frome $24,800
Mr. Gray $15,000
Mr. Novak $23,625
The amount actually paid to each named executive officer is
based on the compensation committees subjective evaluation
of our executive teams achievement during the year. Our
compensation committee does not have any predetermined criteria
or goals that they are required to consider in connection with
payment of the discretionary bonus. For 2009, in determining
whether to pay a discretionary bonus, the compensation
committee, in January 2010, discussed our companys
performance and our executive officers performance in the
areas of general leadership, pursuit of strategic initiatives
and overall performance relative to expectations. The
compensation committee has historically evaluated achievement
for our executive team as a group and has granted each named
executive officer an award based on a percentage of the target
discretionary bonus that is the same for all named executive
officers. The compensation committee determines the amount of
the discretionary bonus actually paid to each member of our
executive team independent of the formula-based bonus earned
after considering the criteria described above. For 2009, the
compensation committee awarded each named executive officer 100%
of the executives target discretionary bonus.
Equity
Awards
Historically, we have granted our named executive officers stock
options in connection with our hiring of the executive. When
determining the size of the award, the compensation committee
considers the executives title and responsibilities, the
equity position of our other executives and the anticipated
future contribution the executive will make to our success. We
believe stock options are an important element of compensation
because they provide our executives a potential ownership
interest in our company, which helps align executives
interests with those of other stockholders. We believe stock
options further align the interest of our executives and
stockholders because executives profit from stock options only
if our stock price increases relative to the options
exercise price. We believe options also help retain our
executives because the awards vest over several years, and
vesting depends on the executives continued employment
with us. The typical vesting provisions for stock option grants
made to our executives provide that one-quarter of the options
vest on the first anniversary of the grant date, with the
remaining shares vesting in 36 successive equal monthly
installments thereafter upon completion of each additional month
of service. In February 2009, we granted Mr. Gray an option
to purchase 80,100 shares of our common stock with a per
share exercise price of $3.45 in connection with his hiring in
November 2008. As described below, we subsequently amended this
option to lower the per share exercise price to $2.43.
65
We do not have a formal policy for making additional option
grants after we hire an executive and we have not historically
made annual or other periodic option grants to our executives.
We anticipate that equity compensation, whether in the form of
restricted stock, stock options, restricted stock units, or
other stock-based awards, will be a more significant part of our
executive compensation as a public company. We also expect to
make more regular equity grants to our executives as a public
company, although the form and frequency of our equity
compensation as a public company has not yet been determined.
Our policy is to grant stock options with an exercise price
equal to the fair market value of our common stock on the date
of grant. As a private company during 2009, the fair market
value of our common stock was determined by our audit committee.
Throughout the first quarter of 2009, the fair value of our
common stock declined significantly in connection with the
general economic downturn at that time. On April 1, 2009, our
compensation committee amended the terms of stock options
granted to three employees, including Mr. Gray, on February 10,
2009. The amendment lowered the exercise price for all shares
subject to the option awards from $3.45 per share to $2.43 per
share, which was the fair value of our common stock on the date
of the amendment, and did not affect the vesting provisions or
number of shares subject to any award. Our compensation
committee believed that the exercise price of the options should
be amended to account for the extraordinary market turmoil that
occurred in the short time since the grant date, which caused
the options granted on February 10 to be significantly
underwater without regard to the performance of the award
recipients.
In July 2009, we amended the terms of certain stock options
granted to 17 employees and one director, including
Mr. Frome and Ms. Nelson, to reduce the exercise price
for all of the shares subject to each option to $3.03 per share,
which was the fair market value of our common stock on the date
of the amendment. The amendments did not affect the vesting
provisions or the number of shares subject to any of the option
awards. Ms. Nelsons amended option award was
originally granted in November 2007 when we hired her and had an
exercise price of $3.71 per share. Two of Mr. Fromes
option awards were amended; one was granted in October 2001 and
one was granted in July 2002, and each had an exercise price of
$7.49 per share. During 2008 and first half of 2009, the fair
market value of our common stock as determined by our audit
committee declined in connection with the general economic
downturn as the comparable companies utilized in the valuation
determination had a decrease in their stock prices. Our
compensation committee, however, believed that Ms. Nelson
and Mr. Frome performed well during that time. The
compensation committee therefore reduced the exercise prices of
Ms. Nelsons and Mr. Fromes stock options
to our then fair market value as determined by our audit
committee to provide them additional compensation without
requiring our company to use any cash to compensate them for
their strong contributions in a difficult economic environment.
The compensation committee did not amend any of the outstanding
option awards held by Messrs. Black, Gray or Novak because
all of their outstanding options had exercise prices less than
the fair market value of our common stock at the time of the
amendments.
Other
Compensation
Perquisites are not a material aspect of our executive
compensation plan. All of our full-time employees, including our
named executive officers, are eligible to participate in our
401(k) plan. Pursuant to our 401(k) plan, employees may elect to
reduce their current compensation by up to the statutorily
prescribed annual limit and to have the amount of this reduction
contributed to our 401(k) plan. Our 401(k) plan provides that we
will match eligible employees 401(k) contributions equal
to 25% of the employees elective deferrals, up to an
amount not to exceed 6% of the employees compensation.
We entered into agreements with our named executive officers
that provide for payments to them under certain circumstances
involving a termination of their employment with us or upon a
change in control of our company. These agreements are described
in more detail below under Potential Payments
Upon Termination or Change in Control.
66
Summary
Compensation Table
The following table provides information regarding the
compensation earned during 2009 by our named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Archie C. Black
|
|
|
2009
|
|
|
|
276,000
|
|
|
|
29,728
|
|
|
|
|
|
|
|
100,579
|
|
|
|
2,827
|
|
|
|
409,134
|
|
Chief Executive Officer and President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kimberly K. Nelson
|
|
|
2009
|
|
|
|
215,000
|
|
|
|
23,625
|
|
|
|
22,550
|
(2)
|
|
|
79,931
|
|
|
|
3,110
|
|
|
|
344,216
|
|
Executive Vice President and Chief Financial Officer
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Frome
|
|
|
2009
|
|
|
|
215,000
|
|
|
|
24,800
|
|
|
|
28,431
|
(2)
|
|
|
83,908
|
|
|
|
3,123
|
|
|
|
355,262
|
|
Executive Vice President and Chief Strategy Officer
|
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|
|
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|
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|
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|
|
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|
|
|
|
|
|
|
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Michael J. Gray
|
|
|
2009
|
|
|
|
184,000
|
|
|
|
15,000
|
|
|
|
113,790
|
(3)
|
|
|
50,750
|
|
|
|
|
|
|
|
363,540
|
|
Executive Vice President of Operations
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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David J. Novak, Jr.
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2009
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|
|
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215,000
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|
|
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23,625
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|
|
|
|
|
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79,931
|
|
|
|
1,745
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|
|
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320,301
|
|
Executive Vice President of Business Development
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|
|
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents matching 401(k) contributions. |
|
(2) |
|
Reflects the incremental fair value related to an amendment to
the terms of an option granted to the named executive officer
prior to 2009. See Compensation Discussion and
Analysis Equity Awards. The incremental fair
value is calculated as of the date of the amendment in
accordance with ASC 718 (excluding estimates of
forfeitures) and is determined based on the assumptions in
Note G to the financial statements in this prospectus. |
|
(3) |
|
Represents the grant date fair value of an award granted to
Mr. Gray on February 10, 2009 computed in accordance
with ASC 718 (excluding estimates of forfeitures) and the
incremental fair value related to an amendment to that award on
April 1, 2009, in each case based on the assumptions in
Note G to the financial statements in this prospectus. |
67
Grants of
Plan-Based Awards
The following table sets forth certain information regarding
grants of plan-based awards to our named executive officers in
2009.
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|
|
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|
|
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All Other
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
Grant Date
|
|
|
|
|
Estimated Future Payouts
|
|
Number
|
|
Exercise or
|
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Fair Value
|
|
|
|
|
Under Non-Equity Incentive
|
|
Securities
|
|
Base Price
|
|
of Stock
|
|
|
|
|
Plans
|
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Underlying
|
|
of Option
|
|
and Option
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Options
|
|
Awards
|
|
Awards
|
Name
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
($/Sh)
|
|
($)
|
|
Archie C. Black
|
|
January 30, 2009
|
|
|
38,151
|
|
|
|
99,093
|
|
|
|
130,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kimberly K. Nelson
|
|
January 30, 2009
|
|
|
30,319
|
|
|
|
78,750
|
|
|
|
103,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 23, 2009
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
133,500
|
(1)
|
|
|
3.03
|
|
|
|
22,500
|
|
James J. Frome
|
|
January 30, 2009
|
|
|
31,827
|
|
|
|
82,668
|
|
|
|
108,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 23, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,477
|
(1)
|
|
|
3.03
|
|
|
|
28,431
|
|
Michael J. Gray
|
|
January 30, 2009
|
|
|
19,250
|
|
|
|
50,000
|
|
|
|
65,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 10, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,100
|
(2)
|
|
|
3.45
|
|
|
|
103,620
|
|
|
|
April 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,100
|
(2)
|
|
|
2.43
|
|
|
|
10,170
|
|
David J. Novak, Jr.
|
|
January 30, 2009
|
|
|
30,319
|
|
|
|
78,750
|
|
|
|
103,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amendments to the per share exercise price of stock
options granted to the named executive officer prior to 2009.
See Compensation Discussion and Analysis. |
|
(2) |
|
The April 1, 2009 grant to Mr. Gray represents an
amendment to the per share exercise price of stock options
granted to him on February 10, 2009. See
Compensation Discussion and Analysis. |
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding
equity awards granted to our named executive officers
outstanding as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
|
Options (#)
|
|
Options (#)
|
|
Exercise
|
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price ($/Sh)
|
|
Option Expiration Date
|
|
Archie C. Black
|
|
|
43,387
|
|
|
|
|
|
|
|
0.37
|
|
|
October 5, 2011(1)
|
|
|
|
4,032
|
|
|
|
|
|
|
|
0.37
|
|
|
June 30, 2012(2)
|
|
|
|
97,390
|
|
|
|
|
|
|
|
0.37
|
|
|
November 12, 2013(3)
|
|
|
|
43,387
|
|
|
|
|
|
|
|
0.37
|
|
|
June 30, 2014(4)
|
|
|
|
38,448
|
|
|
|
|
|
|
|
0.37
|
|
|
December 31, 2014(5)
|
|
|
|
108,118
|
|
|
|
9,834
|
|
|
|
0.37
|
|
|
March 31, 2016(6)
|
Kimberly K. Nelson
|
|
|
66,750
|
|
|
|
66,750
|
|
|
|
3.03
|
|
|
November 27, 2017(7)
|
James J. Frome
|
|
|
801
|
|
|
|
|
|
|
|
2.06
|
|
|
July 5, 2010(8)
|
|
|
|
33,375
|
|
|
|
|
|
|
|
3.03
|
|
|
October 5, 2011(9)
|
|
|
|
4,102
|
|
|
|
|
|
|
|
3.03
|
|
|
June 30, 2012(2)
|
|
|
|
141,510
|
|
|
|
|
|
|
|
0.37
|
|
|
August 17, 2013(10)
|
|
|
|
33,375
|
|
|
|
|
|
|
|
0.37
|
|
|
June 30, 2014(11)
|
|
|
|
6,111
|
|
|
|
563
|
|
|
|
0.37
|
|
|
March 31, 2016(12)
|
Michael J. Gray
|
|
|
|
|
|
|
80,100
|
|
|
|
2.43
|
|
|
March 31, 2019(13)
|
David J. Novak, Jr.
|
|
|
80,848
|
|
|
|
52,651
|
|
|
|
2.92
|
|
|
June 30, 2017(14)
|
68
|
|
|
(1) |
|
This option vested as to one-fourth of the shares on
May 26, 2002, with the remaining shares vesting in 36 equal
monthly installments thereafter beginning June 26, 2002 and
continuing to and including May 26, 2005. |
|
(2) |
|
This option vested in full on July 25, 2002. |
|
(3) |
|
This option vested as to 30,434 shares on August 18,
2003, with the remaining shares vesting in equal monthly
installments of 2,028 shares thereafter beginning
September 1, 2003. |
|
(4) |
|
This option vested as to 23,504 shares on July 1,
2004, with the remaining shares vesting in equal monthly
installments of 903 shares thereafter beginning
August 1, 2004. |
|
(5) |
|
This option vested as to 25,025 shares on December 24,
2005, with the remaining shares vesting in equal monthly
installments of 2,275 shares thereafter beginning
January 1, 2006 for each additional month of service. |
|
(6) |
|
This option vested as to 29,488 shares on April 1,
2007, with the remaining shares vesting in equal monthly
installments of 2,457 shares thereafter beginning
May 1, 2007 for each additional month of service. |
|
(7) |
|
This option vested as to one-fourth of the shares on
December 1, 2008, with the remaining shares vesting in 36
equal monthly installments on the first day of each month
thereafter beginning January 1, 2009 for each additional
month of service. |
|
(8) |
|
This option vested as to one-fourth of the shares on each of
July 5, 2000, July 5, 2001, July 5, 2002 and
July 5, 2003. |
|
(9) |
|
This option vested as to one-fourth of the shares on
May 26, 2002, with the remaining shares vesting in 36 equal
monthly installments thereafter beginning June 26, 2002. |
|
(10) |
|
This option vested as to 44,221 shares on August 18,
2003, with the remaining shares vesting in equal installments of
2,948 shares on the first day of each month thereafter
beginning September 1, 2003. |
|
(11) |
|
This option vested as to 18,079 shares on July 1,
2004, with the remaining shares vesting in equal monthly
installments of 695 shares thereafter beginning
August 1, 2004. |
|
(12) |
|
This option vested as to 1,668 shares on April 1,
2007, with the remaining shares vesting in equal monthly
installments of 138 shares on the first day of each month
thereafter beginning May 1, 2007 for each additional month
of service. |
|
(13) |
|
This option vests as to one-fourth of the shares on
January 1, 2010, with the remaining shares vesting in
36 equal monthly installments on the first day of each
month thereafter beginning February 1, 2010 for each
additional month of service. |
|
(14) |
|
This option vested as to 33,375 shares on July 1,
2008, with the remaining shares vesting in 36 equal monthly
installments on the first day of each month thereafter beginning
August 1, 2008 for each additional month of service. |
Option
Exercises and Stock Vested in 2009
The following table sets forth certain information regarding
stock option exercises by our named executive officers during
2009. We have never granted any restricted stock, restricted
stock units or similar instruments to our named executive
officers.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of Shares
|
|
Value Realized
|
Name
|
|
Acquired on Exercise (#)
|
|
on Exercise ($)
|
|
Archie C. Black
|
|
|
6,675
|
|
|
|
22,250(1
|
)
|
69
|
|
|
(1) |
|
The value realized on exercise represents (1) the
difference between (a) the value of our common stock (as
most recently determined by our audit committee prior to
exercise) and (b) the per share exercise price
(2) multiplied by the number of shares acquired on exercise. |
Pension
Benefits
We do not offer pension benefits to our named executive officers.
Non-Qualified
Deferred Compensation
We do not offer non-qualified deferred compensation to our named
executive officers.
Employment
Agreements
We entered into an employment agreement with Archie C. Black,
our Chief Executive Officer. The initial term of the agreement
expired on December 31, 2009, but the agreement
automatically renews for additional one-year terms unless
terminated by us or Mr. Black. This agreement renewed for
an additional year on January 1, 2010. Pursuant to the
agreement, Mr. Blacks salary is reviewed annually by
our compensation committee and may be maintained or increased,
but not decreased, in the compensation committees
discretion. Mr. Blacks employment agreement requires
him not disclose our confidential information or disparage us or
our officers or employees at any time during the term of the
agreement or thereafter.
We entered into confidentiality and non-competition agreements
with our named executive officers other than Mr. Black.
These agreements require the executives to not to disclose our
confidential information at any time. The agreements also
require the executives not to compete with us or solicit our
employees to engage in other employment during the term of the
executives employment with us and for one year thereafter.
We do not have a non-competition agreement with Mr. Black.
The employment and confidentiality and non-competition
agreements with our named executive officers address various
termination of employment scenarios. No severance payments are
made to executives who are terminated for cause. The terms of
potential payments under these agreements upon termination are
summarized below under Potential Payments Upon
Termination or
Change-in-Control.
We entered into management incentive agreements with each of
Archie C. Black and James J. Frome that provide for a bonus to
be paid to them upon a sale of our company. A sale
includes (1) the disposition of all or substantially all of
our assets; (2) the sale of at least 70% of our voting
stock to a person who was not a stockholder of our company on
July 1, 2002 and (3) a merger or consolidation of our
company resulting in 70% or more of the voting power of the
surviving company following the transaction being held by
persons who were not a stockholder of our company on
July 1, 2002. The payment to Mr. Black would be equal
to 0.114% of the amount of the purchase price, as defined,
exceeding $25 million but less than $65 million,
subject to a maximum of $45,600. The payment to Mr. Frome
would be equal to 0.115% of the amount of the purchase price, as
defined, exceeding $25 million but less than
$65 million, subject to a maximum of $46,000. These
agreements terminate on June 30, 2012.
Potential
Payments Upon Termination or
Change-in-Control
We have entered into agreements that will require us to provide
compensation to our named executive officers in the event of a
termination of employment or a change in control of our company.
Our employment agreement with Archie C. Black, our Chief
Executive Officer, provides that, if we terminate his employment
without cause, or if he terminates his employment with us for
good reason, we will (1) pay his salary for 12 months
in accordance with our regular payroll practices and any unused
vacation accrued as of the date of termination and
(2) provide health care benefits to him and his family for
12 months after the date of termination on the same terms
as they are provided as of termination. Cause for
termination exists upon (a) conviction of a felony;
(b) dishonesty or gross misconduct in the performance of
the agreement; or (c) failure by Mr. Black to cure his
material breach of the agreement within 30 days of
receiving written notice of breach from us. Mr. Black may
terminate his employment for good reason (a) by
providing us with notice
70
of his intent to terminate his employment within 10 days of
his annual performance review; (b) our failure to cure our
material breach of the agreement within 30 days of
receiving written notice of breach from him; or (c) upon a
change in control, which includes removal of Mr. Black as
our Chief Executive Officer by our board of directors or the
occurrence of a transaction that results in the holders of our
stock immediately prior to the transaction ceasing to hold the
voting power necessary to elect a majority of our board
following the transaction. Also, if we terminate
Mr. Blacks employment if he suffers a permanent
disability, we will maintain for his benefit for 12 months
after termination all health benefit plans in which he was
entitled to participate immediately prior to termination.
We have entered into agreements with each of our named executive
officers other than Mr. Black that provide that, if we
terminate the named executive officers employment without
cause, and provided the termination does not occur upon or
within 12 months of a change in control of our company, we
will pay the named executive officer six months of his or her
then-current base salary over a six-month period in accordance
with our normal payroll practices. If we terminate the named
executive officers employment without cause upon or within
12 months after a change in control, or if the named
executive officer terminates his or her employment for good
reason upon or within 12 months after a change in control,
we will pay the named executive officer 12 months of his or
her then-current base salary over a
12-month
period in accordance with our normal payroll practices. Payment
of these amounts is subject to certain conditions and
limitations, including that the named executive officer execute
a release of claims against us. A change in control
and the reasons for which a named executive officer may
terminate without cause are defined in accordance
with our 2001 Stock Option Plan and described below. A named
executive officer may terminate his or her employment for
good reason if there is a material reduction in the
officers salary at the time of the change in control or a
material reduction in responsibilities following the change in
control.
Generally, option agreements executed pursuant to our 2001 Stock
Option Plan provide that, in the event of a change in control of
our company, outstanding stock options granted to senior
management, including our named executive officers, immediately
become exercisable as to 50% of the unvested shares subject to
option. Our option agreements with our named executive officers
also provide that if the named executive officers
employment with us is terminated, or the named executive
officers employment responsibilities or base salary are
materially reduced, other than for cause, prior to the first
anniversary of the change in control, all remaining unvested
shares subject to the option immediately become fully
exercisable. A change in control includes
(1) any persons acquisition of beneficial ownership
of 50% or more of our outstanding common stock; (2) a
failure to have a majority of our board of directors be people
for whose election our board solicited proxies;
(3) approval by our stockholders of a reorganization,
merger or consolidation, unless our stockholders immediately
prior to the transaction own more than 50% of the voting power
of the corporation resulting from the transaction; or
(4) approval by our stockholders of the disposition of all
or substantially all of our assets. Cause for
termination exists upon (a) failure by the named executive
officer to cure his or her material breach of the terms of a non
competition/non solicitation agreement between us and the
officer within 30 days of receipt of written notice of
breach from us; (b) gross negligence or willful misconduct
by the officer; (c) conviction of the officer of a crime
involving moral turpitude or any felony; (d) willful
violation of instructions from our board of directors or Chief
Executive Officer; or (e) fraud, embezzlement, theft or
proven dishonesty against us.
We entered into the management incentive agreements with each of
Archie C. Black and James J. Frome described above under
Employment Agreements that provide for a
bonus to be paid to them upon a sale of our company. The payment
to Mr. Black would be equal to 0.114% of the amount of the
purchase price, as defined, exceeding $25 million but less
than $65 million, subject to a maximum of $45,600. The
payment to Mr. Frome would be equal to 0.115% of the amount
of the purchase price, as defined, exceeding $25 million
but less than $65 million, subject to a maximum of $46,000.
The following tables list the potential payments and benefits
upon termination of employment or change in control of our
company for our named executive officers. The tables assume the
triggering event for the payments or provision of benefits
occurred on December 31, 2009. Amounts in the tables for
the vesting of unvested stock options are calculated based on
the number of accelerated stock options multiplied by the
71
difference between $0.99, the fair market value of our common
stock as most recently determined by our audit committee prior
to the end of our most recently completed fiscal year, and the
exercise price.
Archie C.
Black
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary, Bonus &
|
|
Health
|
|
Vesting of Unvested
|
Triggering Event
|
|
Unused Vacation
|
|
Benefits(1)
|
|
Stock Options
|
|
Termination Without Cause or for Good Reason
|
|
$
|
302,538
|
|
|
$
|
6,212
|
|
|
|
|
|
Permanent Disability
|
|
|
|
|
|
$
|
6,212
|
|
|
|
|
|
Change in Control Without Related Termination
|
|
$
|
45,600
|
|
|
|
|
|
|
$
|
16,390
|
|
Change in Control With Related Termination
|
|
$
|
45,600
|
|
|
|
|
|
|
$
|
32,780
|
|
|
|
|
(1) |
|
The amounts for health benefits were calculated by multiplying
our standard monthly rates for family health and dental benefits
by 12. |
Kimberly
K. Nelson
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
Triggering Event
|
|
Salary
|
|
Stock Options
|
|
Termination Without Cause or for Good Reason Unrelated to Change
in Control
|
|
$
|
107,500
|
|
|
|
|
|
Termination Without Cause or for Good Reason Related to Change
in Control
|
|
$
|
215,000
|
|
|
|
|
|
Change in Control Without Related Termination
|
|
|
|
|
|
$
|
22,500
|
|
Change in Control With Related Termination
|
|
|
|
|
|
$
|
45,000
|
|
James J.
Frome
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
Triggering Event
|
|
Salary & Bonus
|
|
Stock Options
|
|
Termination Without Cause or for Good Reason
|
|
$
|
107,500
|
|
|
|
|
|
Termination Without Cause or for Good Reason Related to Change
in Control
|
|
$
|
215,000
|
|
|
|
|
|
Change in Control Without Related Termination
|
|
$
|
46,000
|
|
|
$
|
939
|
|
Change in Control With Related Termination
|
|
$
|
46,000
|
|
|
$
|
1,878
|
|
Michael
J. Gray
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
Triggering Event
|
|
Salary
|
|
Stock Options
|
|
Termination Without Cause or for Good Reason
|
|
$
|
92,000
|
|
|
|
|
|
Termination Without Cause or for Good Reason Related to Change
in Control
|
|
$
|
184,000
|
|
|
|
|
|
Change in Control Without Related Termination
|
|
|
|
|
|
$
|
51,000
|
|
Change in Control With Related Termination
|
|
|
|
|
|
$
|
102,000
|
|
David J.
Novak
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Unvested
|
Triggering Event
|
|
Salary
|
|
Stock Options
|
|
Termination Without Cause or for Good Reason
|
|
$
|
107,500
|
|
|
|
|
|
Termination Without Cause or for Good Reason Related to Change
in Control
|
|
$
|
215,000
|
|
|
|
|
|
Change in Control Without Related Termination
|
|
|
|
|
|
$
|
20,706
|
|
Change in Control With Related Termination
|
|
|
|
|
|
$
|
41,412
|
|
72
Equity
and Stock Option Plans
2010
Equity Incentive Plan
In connection with this offering, we adopted our 2010 Equity
Incentive Plan, which we refer to as our 2010 Plan. The purposes
of the 2010 Plan are to attract and retain the best available
personnel, to provide them with additional incentives and to
align their interests with those of our stockholders. The
material terms of the 2010 Plan are summarized below.
Share Reserve. As of March 31, 2010, no options to
purchase shares of our common stock were outstanding under the
2010 Plan and 694,200 shares were reserved for future
issuance under the plan, up to 431,271 of which we intend to use
for grants of stock options to our employees and directors
effective upon completion of this offering with an exercise
price equal to the offering price. The number of shares reserved
under our 2010 Plan will increase on January 1 of each year
beginning in 2011 and ending on January 1, 2020 in an
amount equal to the least of: 6% of the total number of shares
outstanding as of December 31 of the immediately preceding
calendar year or a number of shares determined by our board of
directors. Shares subject to awards under the plan that expire
unexercised, are forfeited, are settled in cash or are
surrendered pursuant to an exchange program will again become
available for grant under the plan. If any award under the 2010
Plan is exercised by the tendering or withholding of shares in
payment of the exercise price or any applicable tax withholding
arising from an award under the 2010 Plan is satisfied by the
tendering or withholding of shares, the shares tendered or
withheld also will again become available for grant under the
plan. The number of shares reserved for issuance under the 2010
Plan will also increase for each share subject to an award under
our 2001 Stock Option Plan and 1999 Equity Incentive Plan, which
are described below, that expires unexercised or otherwise does
not result in the issuance of shares subject to the award under
those plans.
Administration of Plan. The compensation committee of our
board of directors administers the 2010 Plan. Subject to the
terms of the plan, the compensation committee has the authority
to, among other things, interpret the plan and determine who is
granted awards under the plan, the types of awards granted and
the terms and conditions of the awards, including the number of
shares covered by awards, the exercise price of awards and the
vesting schedule or other restrictions applicable to awards. The
committee also has the power to make any determinations and take
any action necessary or desirable for the administration of the
plan. Determinations of the committee under the plan may be made
by a majority of the committee members present at a meeting at
which at least a majority of the committee members are present.
To the extent permitted by law and stock exchange rules, the
2010 Plan permits the committee to delegate to one or more of
our executive officers or non-employee directors any or all of
the committees authority under the plan with respect to
awards made to individuals who are neither non-employee
directors nor executive officers of our company. Our full board
of directors administers the plan with respect to awards to
non-employee directors.
Eligibility. Our employees, non-employee directors and
certain consultants and advisors who provide services to us are
eligible to receive awards under the 2010 Plan. Incentive stock
options may be granted only to our employees.
Awards. The 2010 Plan allows us to grant stock options,
stock appreciation rights, or SARs, restricted stock, stock
units and other stock-based awards. Each award will be evidenced
by an agreement with the award recipient setting forth the terms
and conditions of the award, including vesting conditions.
Awards under the plan will have a maximum term of ten years from
the date of grant. The plan administrator may provide that the
vesting or payment of any award will be subject to the
attainment of certain performance measures established by the
administrator, and the administrator will determine whether such
measures have been achieved. The administrator at any time may
amend the terms of any award previously granted, except that, in
general, no amendment may be made that materially impairs the
rights of any participant with respect to an outstanding award
without the participants consent. In addition, we may
amend the plan and any award
73
agreements under the plan in order to ensure compliance with the
requirements of Section 409A of the Internal Revenue Code.
|
|
|
|
|
Stock Options. Stock options permit the holder to
purchase a specified number of shares of our common stock at a
set price. Options granted under the plan may be either
incentive or nonqualified stock options. The exercise price of
options granted under the plan generally may not be less than
the fair market value of our common stock on the date of grant.
Incentive stock options granted to employees who hold more than
10% of the total combined voting power of our stock will have an
exercise price not less than 110% of the fair market value of
our common stock on the date of grant and will have a maximum
term of five years. The plan administrator will determine the
terms and conditions of options granted under the plan,
including exercise price and vesting and exercisability terms.
The maximum number of shares subject to stock options that may
be granted during a calendar year to a participant may not
exceed 400,500. The maximum number of shares that may be issued
upon the exercise of incentive stock options under the 2010 Plan
is 1,201,500.
|
|
|
|
SARs. SARs provide for payment to the holder of all or a
portion of the excess of the fair market value of a specified
number of shares of our common stock on the date of exercise
over a specified exercise price. Payment may be made in cash or
shares of our common stock or a combination of both, as
determined by the plan administrator. The administrator will
establish the terms and conditions of exercise, including the
exercise price, of SARs granted under the plan. The maximum
number of shares subject to SARs that may be granted during a
calendar year to a participant may not exceed 400,500.
|
|
|
|
Restricted Stock. Restricted stock awards are awards of
shares of our common stock that are subject to restrictions
determined by the plan administrator, which may include vesting
conditions, forfeiture conditions and other restrictions. The
administrator will determine whether any consideration other
than services to our company must be paid for a restricted stock
award. The maximum number of shares of restricted stock that may
be granted during a calendar year to a participant may not
exceed 400,500.
|
|
|
|
Stock Units. Stock units provide the holder with the
right to receive, in cash or shares of our common stock or a
combination of both, the fair market value of a share of our
common stock and will be subject to such vesting and forfeiture
conditions and other restrictions as the plan administrator
determines. Stock unit awards may, at the discretion of the plan
administrator, provide the holder with the right to receive
dividend equivalent payments with respect to the shares subject
to the award. The administrator will determine whether any
consideration other than services to our company must be paid
for a stock unit award. The maximum number of stock units that
may be granted during a calendar year to a participant may not
exceed 400,500.
|
|
|
|
Other. The plan administrator, in its discretion, may
grant other stock-based awards under the plan. The administrator
will set the terms and conditions of such awards.
|
Substitute Awards. The plan administrator may grant
awards under the 2010 Plan in substitution for awards granted by
another entity acquired by our company or with which our company
combines. The terms and conditions of these substitute awards
will be comparable to the terms of the awards replaced, and may
therefore differ from the terms and conditions otherwise set
forth in the plan.
Exchange Program. The plan administrator may institute an
exchange program under which outstanding stock options or SARs
are surrendered or canceled in exchange for stock options or
SARs of the same type (with higher or lower exercise prices or
different terms), awards of a different type or cash. The plan
administrator also may institute a program under which the
exercise price of an outstanding stock option or SAR is reduced.
Transferability. Unless otherwise determined by the plan
administrator, awards granted under the plan generally are not
transferable except by will or the laws of descent and
distribution or to an appropriately designated beneficiary. The
plan administrator may permit the transfer of awards other than
incentive stock options pursuant to a qualified domestic
relations order or by way of gift to a family member.
74
Termination of Service. Unless otherwise provided in an
award agreement (and except with respect to terminations
following certain corporate transactions described below under
Change in Control; Corporate Transaction), upon
termination of an award recipients service with our
company, all unvested and unexercisable portions of the
recipients outstanding awards will immediately be
forfeited. If an award recipients service with our company
terminates other than for cause (as defined in the plan), death
or disability, the vested and exercisable portions of the
recipients outstanding options and SARs generally will
remain exercisable for three months after termination. If a
recipients service terminates due to death or disability
(or if a recipient dies during the three-month period after
termination of service other than for cause), the vested and
exercisable portions of the recipients outstanding options
and SARs generally will remain exercisable for one year after
termination. Upon termination for cause, all unexercised stock
options and SARs will also be forfeited.
Change in Control; Corporate Transaction. Unless
otherwise provided in an award agreement, in the event of a sale
of all or substantially all of our assets or a merger,
consolidation, or share exchange involving our company, the
surviving or successor entity may continue, assume or replace
some or all of the outstanding awards under the 2010 Plan. Our
awards agreements with our executive officers will typically
provide that if awards granted to the executive officer under
the 2010 Plan are continued, assumed or replaced in connection
with such an event and if within one year after the event the
executive officer experiences an involuntary termination of
service other than for cause, the executive officers
outstanding awards will vest in full, will immediately become
fully exercisable and will remain exercisable for one year
following termination. If awards granted to any participant are
not continued, assumed or replaced, the administrator may
provide for the surrender of any outstanding award in exchange
for payment to the holder of the amount of the consideration
that would have been received in the event for the number of
shares subject to the award less the aggregate exercise price
(if any) of the award. In the event of a change in control (as
defined in the 2010 Plan) that does not involve a merger,
consolidation, share exchange, or sale of all or substantially
all of our companys assets, the plan administrator, in its
discretion, may provide that any outstanding award will become
fully vested and exercisable upon the change in control or upon
the involuntary termination of the participant within one year
after the change in control or that any outstanding award will
be surrendered in exchange for payment to the holder of the
amount of the consideration that would have been received in the
change in control for the number of shares subject to the award
less the aggregate exercise price (if any) of the award.
Adjustment of Awards. In the event of an
equity restructuring that affects the per share value of our
common stock, including a stock dividend, stock split, spinoff,
rights offering or recapitalization through an extraordinary
dividend, the plan administrator will make appropriate
adjustment to: (1) the number and kind of securities
reserved for issuance under the plan, (2) the number and
kind of securities subject to outstanding awards under the plan,
(3) the exercise price of outstanding options and SARs, and
(4) any maximum limitations prescribed by the plan as to
grants of certain types of awards. The administrator may also
make similar adjustments in the event of any other change in our
companys capitalization, including a merger,
consolidation, reorganization or liquidation.
Amendment and Termination. The 2010 Plan will
remain in effect until terminated by our board of directors;
however we may not grant incentive stock options under the plan
more than ten years after its effective date, which we expect
will be shortly before the closing of this offering. Our board
of directors may terminate, suspend or amend the plan at any
time, but, in general, no termination, suspension or amendment
may materially impair the rights of any participant with respect
to outstanding awards without the participants consent.
Awards that are outstanding on the plans termination date
will remain in effect in accordance with the terms of the plan
and the applicable award agreements. Stockholder approval of any
amendment of the plan will be obtained if required by applicable
law or the rules of the Nasdaq stock market.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2010
Plan.
75
2001
Stock Option Plan
Our board of directors adopted our 2001 Stock Option Plan, which
we refer to as our 2001 Plan, in August 2001, and our
stockholders approved the plan in July 2002. The 2001 Plan has
been amended several times, primarily to change the number of
shares of our common stock available for issuance under the
plan, with the most recent amendment occurring in July 2008. The
2001 Plan provides for the grant of incentive and nonqualified
stock options to our employees, non-employee directors, and
other consultants who provide services to us. As of
March 31, 2010, options to purchase a total of
1,246,877 shares of our common stock with a weighted
average exercise price of $1.42 per share were outstanding under
our 2001 Plan. We do not intend to grant any additional awards
under the 2001 Plan following the completion of this offering.
All awards outstanding under the 2001 Plan will remain in effect
and will continue to be governed by their existing terms after
completion of this offering.
Administration. The compensation committee of our board
of directors administers the 2001 Plan and the awards granted
under it, except that our full board of directors administers
the plan with respect to awards to non-employee directors. The
committee has the authority to, among other things, interpret
the plan, adopt and amend rules relating to the administration
of the plan and prescribe and amend the terms of outstanding
awards, including accelerating the vesting schedule of awards.
Stock Options. The exercise price of nonqualified stock
options granted under the 2001 Plan may not be less than 85% of
the fair market value of our common stock on the date of grant.
The exercise price of incentive stock options granted under the
plan to employees who at the time of grant own more than 10% of
the total combined voting power of all classes of our stock may
not be less than 110% of the fair market value of our common
stock on the date of grant, and the exercise price of incentive
stock options granted to any other employees may not be less
than 100% of the fair market value of our common stock on the
date of grant.
The stock options that are outstanding under the 2001 Plan
generally provide for vesting over four years. Options granted
to senior management and non-employee directors generally vest
as to 25% of the shares subject to option on the first
anniversary of the vesting commencement date and in 36 equal
monthly installments thereafter. Options granted to employees
other than senior management generally vest in 48 equal monthly
installments. In addition, the administrator has the authority
to declare at any time that any or all outstanding options shall
immediately become exercisable in full.
Option Term. In general, stock options granted under the
2001 Plan have a maximum term of ten years from the date of
grant. Options awarded under the plan may be exercised while the
optionee is employed by or providing services to us, and, if an
optionees service relationship with us terminates (other
than due to death or disability or for cause (as defined in the
plan)), the optionee may exercise the vested portion of such
option for 30 days after such termination of service. If an
optionees service relationship with us terminates due to
death or disability, such option may be exercised for one year
following such termination.
Change in Control. In the event of a change in control
(as defined in the plan) of our company, (1) outstanding
incentive stock options granted to senior management generally
immediately become exercisable as to 50% of the unvested shares
subject to option and (2) outstanding nonqualified stock
options immediately become exercisable in full. Option
agreements for senior management also generally provide that if
the optionees employment with us is terminated, or the
optionees employment responsibilities or base salary are
materially reduced, other than for cause (as defined in the
plan) prior to the first anniversary of the change in control,
all remaining unvested shares subject to such option immediately
become fully exercisable. Further, upon a change in control the
administrator of the 2001 Plan may cancel some or all
outstanding stock options and pay the holders of such options
cash equal to the excess of the per share fair market value of
our common stock immediately prior to the change in control over
the exercise price per share of such options.
Corporate Event. In the event of a merger or
consolidation of our company with or into another entity, a sale
of all or substantially all of our assets or a dissolution or
liquidation of our company, the plan administrator may
(1) substitute for stock options outstanding under the plan
shares of stock or options
76
to purchase stock of the surviving company or its parent or
(2) declare that all outstanding options will be cancelled
at the time of such event and cause payment to be made to each
option holder equal to, for each share subject to the option,
the excess of the proceeds per share received in such event over
the exercise price of the option. In the event of such a
declaration by the plan administrator, all outstanding options
will immediately become exercisable in full. In addition, the
plan administrator has authority to adjust the number and kind
of securities issuable upon exercise of options under the plan,
and the exercise price thereof, in the event of a
reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split or
combination, rights offering or extraordinary dividend or other
change in our corporate structure.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2001
Plan.
1999
Equity Incentive Plan
We adopted our 1999 Equity Incentive Plan, which we refer to as
our 1999 Plan, in May 1999 and our stockholders approved the
1999 Plan in June 1999. The 1999 Plan permits the grant of
incentive and nonqualified stock options and restricted stock to
our employees, officers, directors and other consultants who
provide services to us. As of March 31, 2010, there were
outstanding under the 1999 Plan options to purchase a total of
849 shares of our common stock with a weighted average
exercise price of $224.72 per share. There are no shares of
unvested restricted stock outstanding under the 1999 Plan.
Plan Expiration. The term of the 1999 Plan was ten years
and has expired. Consequently, we are no longer authorized to
issue any awards under the 1999 Plan. All awards outstanding
under the 1999 Plan will remain in effect and will continue to
be governed by their existing terms and the terms of the plan
after completion of this offering.
Administration. Our board of directors, or a committee
appointed by our board of directors, has the authority to
administer the 1999 Plan and the awards granted under it. The
compensation committee of our board of directors currently
administers the plan. The plan administrator has the authority
to, among other things, interpret the plan, prescribe and amend
rules relating to the plan and amend the terms of outstanding
awards, including accelerating the vesting of awards.
Stock Options. In general, options granted under the 1999
Plan have a maximum term of ten years from the date of grant.
The exercise price of options granted under the 1999 Plan
generally is equal to the fair market value of our common stock
on the date of grant, unless otherwise determined by the plan
administrator. The exercise price of incentive stock options
granted under the 1999 Plan may not be less than the fair market
value of our common stock on the date of grant, and the exercise
price of incentive stock options granted to employees who at the
time of grant own more than 10% of the total combined voting
power of all classes of our stock may not be less than 110% of
the fair market value of our common stock on the date of grant.
Change in Control; Corporate Transactions. In the event
of a change in control (as defined in the 1999 Plan), the plan
administrator may determine that all outstanding awards will
immediately become fully vested and exercisable and will
terminate thirty days after the change in control. In the event
of a change in our capital structure by reason of a stock
dividend, stock split, reclassification, recapitalization,
merger, consolidation, share exchange, reorganization,
liquidation, extraordinary cash dividend or similar event, the
plan administrator has authority to adjust the number and class
of securities issuable upon exercise of options under the plan
and the terms and conditions of such options, including the
exercise price, and to provide for payment to option holders of
an amount equal to the difference between the then-current fair
market value of our common stock and the exercise prices of such
options.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 1999
Plan.
77
401(k)
Plan
We maintain a deferred savings retirement plan for our
employees. The deferred savings retirement plan is intended to
qualify as a tax-qualified plan under Section 401 of the
Internal Revenue Code. The deferred savings retirement plan
provides that each participant may contribute his or her pre-tax
compensation (up to a statutory limit, which was $16,500 in
2009). For employees 50 years of age or older, an
additional
catch-up
contribution of $5,500 is allowable. In 2009, the statutory
limit for those who qualify for
catch-up
contributions was $22,000. Under the plan, each employee is
fully vested in his or her deferred salary contributions. On the
first day of the plan quarter following an employees
one-year anniversary of employment, we contribute 25% of the
first 6% of salary contributions made by an employee.
Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has at
any time during the last completed fiscal year been an officer
or employee of ours. None of our executive officers has served
as a member of the board of directors, or as a member of the
compensation or similar committee, of any entity that has one or
more executive officers who served on our board of directors or
compensation committee during the last completed fiscal year.
78
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2006, we have entered into the following
transactions with our directors, executive officers, holders of
more than five percent of our voting securities, and affiliates
of our directors, executive officers and five percent
stockholders in addition to the matters described under
Management:
Sale of
Preferred Stock
In February 2006, we sold the following affiliated funds of our
directors shares of our Series B convertible preferred
stock at the price of $3.67 per share.
|
|
|
|
|
BVCF IV, L.P., an affiliated fund of George H.
Spencer, III, purchased 132,050 shares
|
|
|
|
River Cities SBIC III L.P., an affiliated fund of Murray R.
Wilson, purchased 383,392 shares
|
|
|
|
St. Paul Venture Capital VI, LLC, an affiliated fund of Michael
B. Gorman, purchased 123,825 shares
|
In April 2007, we sold the following affiliated funds of our
directors shares of our Series C convertible preferred
stock at the price of $5.99 per share.
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BVCF IV, L.P., an affiliated fund of George H.
Spencer, III, purchased 66,750 shares
|
|
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|
CID Mezzanine Capital, L.P., an affiliated fund of Steve A.
Cobb, purchased 240,765 shares
|
|
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|
River Cities SBIC III L.P. and River Cities Capital Fund II
L.P., affiliated funds of Murray R. Wilson, purchased an
aggregate of 627,032 shares
|
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|
St. Paul Venture Capital VI, LLC, an affiliated fund of Michael
B. Gorman, purchased 125,156 shares
|
Voting
and Co-Sale Agreement
The election of the members of our board of directors is
governed by a voting and co-sale agreement that we entered into
with certain holders of our capital stock and related provisions
of our certificate of incorporation. The voting agreement
requires these stockholders to vote in favor of nominees of CID
Capital, Inc., St. Paul Venture Capital V, LLC, BVCF IV,
L.P., River Cities SBIC III L.P., a majority of the
Series B convertible preferred stock, which nominee may not
be affiliated with any officer or director of our company, and a
majority of the Series C convertible preferred stock, which
nominee may not be affiliated with any officer or director of
our company. In addition, our chief executive officer is to be
elected to the board. CID Capital, Inc. has nominated Steve
Cobb; St. Paul Venture Capital V, LLC has nominated Michael
Gorman; BVCF IV, L.P. has nominated George Spencer; River Cities
SBIC III L.P. has nominated Murray Wilson, a majority of the
Series B convertible preferred stock has nominated Martin
J. Leestma and a majority of the Series C convertible
preferred stock has nominated Sven A. Wehrwein.
In addition, under the voting and co-sale agreement our
preferred stockholders are granted a right of first refusal to
purchase shares of our capital stock held by the stockholders
party to this agreement, rights of co-sale in the event of a
sale of our capital stock held by the stockholders party to this
agreement and drag-along rights that require the stockholders
party to this agreement to participate in a sale of the company
if the sale is approved by a certain percentage of the
stockholders party to the agreement.
Upon the closing of this offering, the voting and co-sale
agreement will terminate in its entirety and none of our
stockholders will have any special rights regarding the election
or designation of members of our board of directors or the other
rights granted under this agreement.
Registration
Rights Agreement
We are party to a registration rights agreement which generally
provides that holders of our redeemable convertible preferred
stock have the right to demand that we file a registration
statement or request that their shares be covered by a
registration statement that we are otherwise filing. After
giving effect to the 0.267 for 1 reverse stock split that
occurred on April 13, 2010 and the automatic conversion of
our preferred stock, immediately after completion of this
offering the holders of 7,463,669 shares of our common
stock will have
79
these registration rights. Certain of our directors and
executive officers and all holders of 5% of our capital stock
and all other selling stockholders are parties to this
agreement. Entities affiliated with Steve A. Cobb, Michael B.
Gorman, George H. Spencer, III and Murray R. Wilson hold shares
representing 23%, 18%, 18% and 23% of the shares subject to the
agreement. For a more detailed description of these registration
rights, see Description of Capital Stock
Registration Rights.
2009
Stock Option Amendments
On July 23, 2009, we unilaterally amended the terms of
certain stock options granted to 17 employees and one
director, including Kimberly K. Nelson, James J. Frome and Sven
A. Wehrwein, to reduce the exercise price for all of the shares
subject to each option to $3.03 per share, which was the
fair market value of our common stock on the date of the
amendments. On April 1, 2009, we unilaterally amended the
terms of certain stock options granted to three employees,
including Michael J. Gray, to reduce the exercise price for all
of the shares subject to each option from $3.45 to $2.43 per
share, which was the fair market value of our common stock on
the date of the amendments. None of these amendments affected
the vesting provisions or the number of shares subject to any of
the option awards and none of the holders of these options made
any investment decisions in connection with the amendments.
Director
Indemnification Agreements
We entered into indemnification agreements with each of our
directors that provide, in general, that we will indemnify them
to the fullest extent permitted by law in connection with their
service to us or on our behalf.
Policy
for Approval of Related Party Transactions
In connection with this offering, our board of directors adopted
a written statement of policy regarding transactions with
related persons, which we refer to as our related person policy.
Our related person policy requires that any executive officer
requesting to enter into a transaction with a related
person generally must promptly disclose to our audit
committee the related person transaction and all material facts
with respect thereto. In reviewing a transaction, our audit
committee will consider all relevant facts and circumstances,
including (1) the commercial reasonableness of the terms,
(2) the benefit and perceived benefits, or lack thereof, to
us, (3) opportunity costs of alternate transactions and
(4) the materiality and character of the related
persons interest, and the actual or apparent conflict of
interest of the related person. Our audit committee will not
approve or ratify a related person transaction unless it
determines that, upon consideration of all relevant information,
the transaction is beneficial to our company and stockholders
and the terms of the transaction are fair to our company. No
related person transaction will be consummated without the
approval or ratification of our audit committee. It will be our
policy that directors interested in a related person transaction
will recuse themselves from any vote relating to a related
person transaction in which they have an interest. Under our
related person policy, a related person includes any
of our directors, director nominees, executive officers, any
beneficial owner of more than 5% of our common stock and any
immediate family member of any of the foregoing. Related party
transactions exempt from our policy include transactions
available to all of our employees and stockholders on the same
terms and transactions between us and the related person that,
when aggregated with the amount of all other transactions
between us and the related person or its affiliates, involve
less than $120,000 in a fiscal year. We did not have a formal
review and approval policy for related party transactions at the
time of any transaction described in this Certain
Relationships and Related Party Transactions section.
80
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect
to the beneficial ownership of our outstanding common stock as
of March 31, 2010 by (i) each of our named executive
officers; (ii) each of our directors; (iii) all of our
executive officers and directors as a group; (iv) each of
those known by us to be beneficial owners of more than 5% of our
common stock; and (v) our other stockholders selling shares in
this offering. This table lists applicable percentage ownership
based on 8,420,939 shares of common stock outstanding as of
that date.
Beneficial ownership is determined in accordance with the rules
of the SEC. To our knowledge and subject to applicable community
property laws, each of the holders of stock listed below has
sole voting and investment power as to the stock owned unless
otherwise noted. The table below includes the number of shares
underlying options which are exercisable within 60 days
from the date of this offering. Except as otherwise noted below,
the address for each director, officer or 5% stockholder listed
in the table is
c/o SPS
Commerce, Inc., 333 South Seventh Street, Suite 1000,
Minneapolis, Minnesota 55402. The 5% stockholders who are
selling shares in this offering and the other selling
stockholders are parties to a registration rights agreement and
voting and co-sale agreement to which we are also a party. See
Certain Relationships and Related Party Transactions.
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Beneficial Ownership
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|
Prior to Offering
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|
Beneficial Ownership After this Offering
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Percent
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Percent
|
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|
|
|
|
|
|
|
|
Number
|
|
|
|
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|
(assuming no
|
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(assuming full
|
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|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
exercise of
|
|
|
exercise of
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
Offered
|
|
|
Number
|
|
|
over-allotment)
|
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|
over-allotment)
|
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|
Executive Officers and Directors:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Archie C. Black
|
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415,351
|
(1)
|
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4.7
|
%
|
|
|
39,464
|
|
|
|
375,887
|
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
Steve A. Cobb
|
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|
1,939,792
|
(2)
|
|
|
23.0
|
%
|
|
|
184,313
|
|
|
|
1,755,479
|
|
|
|
16.1
|
%
|
|
|
15.4
|
%
|
James J. Frome
|
|
|
219,838
|
(3)
|
|
|
2.5
|
%
|
|
|
20,888
|
|
|
|
198,950
|
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
Michael J. Gray
|
|
|
26,700
|
(4)
|
|
|
*
|
|
|
|
|
|
|
|
26,700
|
|
|
|
*
|
|
|
|
*
|
|
Michael B. Gorman
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|
|
1,454,833
|
(5)
|
|
|
17.3
|
%
|
|
|
138,233
|
|
|
|
1,316,600
|
|
|
|
12.1
|
%
|
|
|
11.5
|
%
|
Martin J. Leestma
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20,025
|
(6)
|
|
|
*
|
|
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|
|
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|
20,025
|
|
|
|
*
|
|
|
|
*
|
|
Kimberly K. Nelson
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80,656
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(7)
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|
*
|
|
|
|
7,476
|
|
|
|
73,180
|
|
|
|
*
|
|
|
|
*
|
|
David J. Novak, Jr.
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94,564
|
(8)
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1.1
|
%
|
|
|
8,985
|
|
|
|
85,579
|
|
|
|
*
|
|
|
|
*
|
|
George H. Spencer, III
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1,482,091
|
(9)
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17.6
|
%
|
|
|
140,824
|
|
|
|
1,341,267
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|
|
|
12.3
|
%
|
|
|
11.7
|
%
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Sven A. Wehrwein
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9,178
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(10)
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*
|
|
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9,178
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|
|
|
*
|
|
|
|
*
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Murray R. Wilson
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1,936,720
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(11)
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23.0
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%
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|
184,021
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|
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1,752,699
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16.0
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%
|
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|
15.3
|
%
|
Executive officers and directors as a group (11 persons)
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7,679,748
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83.3
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%
|
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724,204
|
|
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6,955,544
|
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59.7
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%
|
|
|
57.3
|
%
|
5% Stockholders:
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|
|
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|
|
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|
|
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|
|
|
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|
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BVCF IV, LP
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1,482,091
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(9)
|
|
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17.6
|
%
|
|
|
140,824
|
|
|
|
1,341,267
|
|
|
|
12.3
|
%
|
|
|
11.7
|
%
|
Funds affiliated with CID Capital
|
|
|
1,939,792
|
(2)
|
|
|
23.0
|
%
|
|
|
184,313
|
|
|
|
1,755,479
|
|
|
|
16.1
|
%
|
|
|
15.4
|
%
|
Funds affiliated with River Cities Capital Funds
|
|
|
1,936,720
|
(11)
|
|
|
23.0
|
%
|
|
|
184,021
|
|
|
|
1,752,699
|
|
|
|
16.0
|
%
|
|
|
15.3
|
%
|
Funds affiliated with Split Rock Partners
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|
|
1,454,833
|
(5)
|
|
|
17.3
|
%
|
|
|
138,233
|
|
|
|
1,316,600
|
|
|
|
12.1
|
%
|
|
|
11.5
|
%
|
Other Selling Stockholders:
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Steven Addis, trustee of the Steven Addis Trust u/d/t 7/28/92
|
|
|
294
|
|
|
|
*
|
|
|
|
27
|
|
|
|
267
|
|
|
|
*
|
|
|
|
*
|
|
PV Securities Corporation
|
|
|
2,940
|
(12)
|
|
|
*
|
|
|
|
279
|
|
|
|
2,661
|
|
|
|
*
|
|
|
|
*
|
|
Axiom Venture Partners II Limited Partnership
|
|
|
349,234
|
(13)
|
|
|
4.1
|
%
|
|
|
33,197
|
|
|
|
316,037
|
|
|
|
2.9
|
%
|
|
|
2.8
|
%
|
81
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
|
|
|
Prior to Offering
|
|
|
|
|
|
Beneficial Ownership After this Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
(assuming no
|
|
|
(assuming full
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
exercise of
|
|
|
exercise of
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
Offered
|
|
|
Number
|
|
|
over-allotment)
|
|
|
over-allotment)
|
|
|
BlueCrest Venture Finance Master Fund Limited
|
|
|
132,999
|
(14)
|
|
|
1.6
|
%
|
|
|
12,637
|
|
|
|
120,362
|
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
Barry M. Bloom
|
|
|
735
|
|
|
|
*
|
|
|
|
69
|
|
|
|
666
|
|
|
|
*
|
|
|
|
*
|
|
Thomas Domencich
|
|
|
2,940
|
|
|
|
*
|
|
|
|
279
|
|
|
|
2,661
|
|
|
|
*
|
|
|
|
*
|
|
ML Partners
|
|
|
42,343
|
(15)
|
|
|
*
|
|
|
|
4,023
|
|
|
|
38,320
|
|
|
|
*
|
|
|
|
*
|
|
Granite Private Equity II, LLC
|
|
|
392,261
|
(16)
|
|
|
4.7
|
%
|
|
|
37,271
|
|
|
|
354,990
|
|
|
|
3.3
|
%
|
|
|
3.1
|
%
|
Pacific Capital Ventures, LLC
|
|
|
204,168
|
(17)
|
|
|
2.4
|
%
|
|
|
19,399
|
|
|
|
184,769
|
|
|
|
1.7
|
%
|
|
|
1.6
|
%
|
Casimir Skrzypczak
|
|
|
5,851
|
|
|
|
*
|
|
|
|
555
|
|
|
|
5,296
|
|
|
|
*
|
|
|
|
*
|
|
JAMIT LLC
|
|
|
7,669
|
(18)
|
|
|
*
|
|
|
|
728
|
|
|
|
6,941
|
|
|
|
*
|
|
|
|
*
|
|
Ronald Karlsberg
|
|
|
7,011
|
(19)
|
|
|
*
|
|
|
|
666
|
|
|
|
6,345
|
|
|
|
*
|
|
|
|
*
|
|
Archie C. and Jane McDonald Black Charitable Trust
|
|
|
70,755
|
|
|
|
*
|
|
|
|
6,722
|
|
|
|
64,033
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
Indicates ownership of less than 1%. |
|
|
|
(1) |
|
Includes 70,755 shares owned by the Archie C. and Jane
McDonald Black Charitable Trust (the Charitable
Trust) for which Mr. Black serves as a co-trustee and
344,596 shares subject to options that are exercisable
within 60 days of the date of the table. Mr. Black may be
deemed to have shared voting and investment power over the
shares held by the Charitable Trust, but disclaims beneficial
ownership of such shares. Mr. Black will exercise stock
options in order to obtain the 32,742 shares that he will sell
in the offering. Mr. Black has served as our Chief
Executive Officer and President and a member of our board of
directors since 2001. |
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(2) |
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Includes 363,963 shares owned by CID Equity Fund V
Liquidating Trust (the CID Trust) and
1,575,829 shares owned by CID Mezzanine Capital, LP
(CID Mezzanine Capital). CID Mezzanine Partners,
L.P. is the general partner of CID Mezzanine Capital. John C.
Aplin and Robert J. OBrien, as the general partners of CID
Mezzanine Partners, L.P., share voting and investment power with
respect to the shares owned by CID Mezzanine Capital. CID Equity
Partners V is the trustee of the CID Trust. Aplin Partners, LLC
is the general partner of CID Equity Partners V. John C. Aplin,
as the sole member of Aplin Partners, LLC, has voting and
investment power with respect to the shares. Mr. Cobb is
the Chairman of our board of directors and a representative to
an advisory board that affects the voting and disposition of the
shares held by the CID Trust and CID Mezzanine Capital.
Mr. Cobb may be deemed to have shared voting and investment
power over the shares held by the CID Trust and CID Mezzanine
Capital. Messrs. Cobb, Aplin and OBrien disclaim
beneficial ownership of the shares owned by the CID Trust and
CID Mezzanine Capital, except to the extent of their pecuniary
interest therein. The address of the CID Trust and CID Mezzanine
Capital is 201 W. 103rd Street, Suite 200,
Indianapolis, IN 46290. |
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(3) |
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Includes 219,838 shares subject to options that are
exercisable within 60 days of the date of the table.
Mr. Frome will exercise stock options in order to obtain
the 20,888 shares that he will sell in the offering.
Mr. Frome has served as our Executive Vice President and
Chief Strategy Officer since 2001. |
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(4) |
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Includes 26,700 shares subject to options that are
exercisable within 60 days of the date of the table.
Mr. Gray has served as our Executive Vice President of
Operations since November 2008. |
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(5) |
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Includes 62,854 shares held by SPVC IV, LLC,
102,496 shares held by SPVC V, LLC,
1,286,472 shares held by SPVC VI, LLC and 3,011 shares
held by SPVC Affiliates Fund I, LLC. Split Rock Partners,
LLC, together with Vesbridge Partners, LLC, is the manager of
SPVC IV, LLC, SPVC V, LLC, SPVC VI, LLC and SPVC Affiliates
Fund I, LLC, however voting and investment power are
delegated solely to Split Rock Partners, LLC. Michael Gorman,
James Simons, David Stassen and Allan Will, as managing
directors of Split Rock |
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Partners, LLC, share voting and investment power with respect
to the shares. Voting and investment power over shares held by
each of the named funds above may be deemed to be shared with
each of the managing directors and Split Rock Partners, LLC due
to the affiliate relationships described above. Each of the
managing directors and Split Rock Partners, LLC disclaims any
beneficial ownership of the shares, except to the extent of any
pecuniary interest therein. Mr. Gorman is a member of our
board of directors. The address for each of these SPVC funds is
10400 Viking Drive, Suite 550, Minneapolis, MN 55344. |
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(6) |
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Includes 20,025 shares subject to options that are
exercisable within 60 days of the date of the table. |
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(7) |
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Includes 80,656 shares subject to options that are
exercisable within 60 days of the date of the table.
Ms. Nelson will exercise stock options in order to obtain
the 7,476 shares that she will sell in the offering.
Ms. Nelson has served as our Executive Vice President and
Chief Financial Officer since 2007. |
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(8) |
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Includes 94,564 shares subject to options that are
exercisable within 60 days of the date of the table.
Mr. Novak will exercise stock options in order to obtain
the 8,985 shares that he will sell in the offering.
Mr. Novak has served as our Executive Vice President of
Business Development since 2007. |
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(9) |
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Includes 1,482,091 shares held by BVCF IV, LP. Adams
Street Partners, LLC is the sole general partner of BVCF IV, LP.
Mr. Spencer is a senior consultant of Adams Street
Partners, LLC. Adams Street Partners, LLC is deemed to
have sole voting and investment power over the shares held by
BVCF IV, LP. Mr. Spencer disclaims beneficial
ownership of such shares, except to the extent of his pecuniary
interest therein. The address for BVCF IV, LP is c/o Adams
Street Partners, LLC One N. Wacker Drive, Chicago, IL 60606. |
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(10) |
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Includes 9,178 shares subject to options that are
exercisable within 60 days of the date of the table. |
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(11) |
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Includes 671,786 shares owned by River Cities Capital
Fund II Limited Partnership and 1,264,934 shares owned
by River Cities SBIC III, L.P. Mr. Wilson is a member of
our board of directors and a special consultant to the general
partner of River Cities Capital Fund II Limited Partnership
and River Cities SBIC III, L.P. Mr. Wilson may be deemed to
have shared voting and investment power over the shares held by
River Cities Capital Fund II Limited Partnership and River
Cities SBIC III, L.P. Mr. Wilson disclaims beneficial
ownership of such shares, except to the extent of his pecuniary
interest therein. RCCF Management, Inc. is the general partner
of River Cities SBIC III, L.P. R. Glen Mayfield and Edwin
T. Robinson, as the sole shareholders, officers and directors of
RCCF Management, Inc., share voting and investment power with
respect to the shares. Messrs. Mayfield and Robinson
disclaim beneficial ownership of such shares, except to the
extent of their pecuniary interest therein. Mayson II, Inc. is
the general partner of River Cities Management II, L.P., the
general partner of River Cities Capital Fund II Limited
Partnership. Messrs. Mayfield and Robinson, as the sole
shareholders, officers and directors of Mayson II, Inc., share
voting and investment power with respect to the shares.
Messrs. Mayfield and Robinson disclaim beneficial ownership
of such shares, except to the extent of their pecuniary interest
therein. The address for each of these River Cities funds is
221 East Fourth Street, Suite 2400, Cincinnati, OH
45202. |
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(12) |
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Philippe Villers, as the sole stockholder and sole director of
PV Securities Corporation, has sole voting and investment power
with respect to the shares. Mr. Villers disclaims
beneficial ownership of the shares, except to the extent of his
pecuniary interest therein. |
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(13) |
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Axiom Venture Associates II Limited Liability Company is the
general partner of Axiom Venture Partners II Limited
Partnership. Alan Mendelson and Samuel McKay, as managers of
Axiom Venture Associates II Limited Liability Company, share
voting and investment power with respect to the shares. Each
manager disclaims any beneficial ownership of the shares, except
to the extent of any pecuniary interest therein. |
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(14) |
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Includes 62,745 shares subject to currently exercisable
warrants. David DeRosa, Linburgh Martin, and Williams Reeves, as
directors of BlueCrest Venture Finance Master Fund Limited,
share voting and investment power with respect to the shares.
Each director disclaims beneficial ownership of the shares,
except to the extent of any pecuniary interest therein. |
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(15) |
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Martin A. Leibowitz, as manager of ML Partners, a joint venture
among Mr. Leibowitz and several other investors, has sole
voting and investment power and respect to the shares. |
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(16) |
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Gerry Holding Co. II, LLC is the sole member of Granite Private
Equity II, LLC. Alan Gerry has voting and investment power with
respect to the shares. |
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(17) |
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John A. Wickland, III and Roy L. Wickland, as the sole
members and managers of Pacific Capital Ventures, LLC, share
voting and investment power with respect to the shares. |
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(18) |
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Roy L. Wickland, as the sole manager of JAMIT LLC, has
voting and investment power with respect to the shares. |
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(19) |
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Includes 6,210 shares held by Ronald Karlsberg as trustee
for the benefit of R.P. Karlsberg Cardiovascular Medical Group
of Southern California 401K Profit Sharing Plan, dated 1/1/1989. |
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DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material provisions of
our capital stock, as well as other material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws as they will be in effect as of the
consummation of the offering. We refer you to the form of our
amended and restated certificate of incorporation and to the
form of our amended and restated bylaws, copies of which have
been filed as exhibits to the registration statement of which
this prospectus is a part.
Authorized
Capital
Prior to the completion of this offering, our authorized capital
stock consists of: (1) 13,442,303 shares of common
stock and (2) 9,058,546 shares of preferred stock,
including 1,182,217 shares of Series A convertible
preferred stock, 6,274,329 shares of Series B
convertible preferred stock and 1,602,000 shares of
Series C convertible preferred stock. As of
December 31, 2009, there were 183 holders of record of our
common stock, 27 holders of record of our Series A
convertible preferred stock, 15 holders of record of our
Series B convertible preferred stock and 10 holders of
record of our Series C convertible preferred stock.
Upon completion of this offering our certificate of
incorporation will provide that our authorized capital stock
will consist of (1) 55,000,000 shares of common stock and (2)
5,000,000 shares of preferred stock. Upon completion of this
offering, all currently outstanding shares of our preferred
stock will be converted into shares of a single class of common
stock. Immediately following the completion of this offering, we
expect to have 10,920,939 shares of common stock and no
shares of preferred stock outstanding (or 11,420,939 shares
of common stock and no shares of preferred stock outstanding if
the underwriters exercise in full their option to purchase
additional shares to cover overallotments, if any).
Common
Stock
Voting. Except as otherwise required by Delaware law, at
every annual or special meeting of stockholders, every holder of
common stock is entitled to one vote per share. There is no
cumulative voting in the election of directors.
Dividends Rights. Subject to preferences that may be
applicable to any outstanding series of preferred stock, the
holders of our common stock will receive ratably any dividends
declared by our board of directors out of funds legally
available for the payment of dividends. It is our present
intention not to pay dividends on our common stock for the
foreseeable future. Our board of directors may, at its
discretion, modify or repeal our dividend policy. Future
dividends, if any, with respect to shares of our common stock
will depend on, among other things, our results of operations,
cash requirements, financial condition, contractual
restrictions, provisions of applicable law and other factors
that our board of directors deems relevant. Our credit agreement
currently limits our ability to pay cash dividends. See
Dividend Policy.
Liquidation and Preemptive Rights. In the event of our
liquidation, dissolution or
winding-up,
the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive
or other subscription rights.
Preferred
Stock
Our charter provides that we may issue up to
5,000,000 shares of preferred stock in one or more series
as may be determined by our board of directors. Our board has
broad discretionary authority with respect to the rights of any
new series of preferred stock and may establish the following
with respect to the shares to be included in each series,
without any vote or action of the stockholders:
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the number of shares;
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the designations, preferences and relative rights, including
voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences; and
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any qualifications, limitations or restrictions.
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We believe that the ability of our board to issue one or more
series of preferred stock will provide us with flexibility in
structuring possible future financings and acquisitions, and in
meeting other corporate needs that may arise. The authorized
shares of preferred stock, as well as authorized and unissued
shares of common stock, will be available for issuance without
action by our stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded.
Our board may authorize, without stockholder approval, the
issuance of preferred stock with voting and conversion rights
that could adversely affect the voting power and other rights of
holders of common stock. Although our board has no current
intention of doing so, it could issue a series of preferred
stock that could, depending on the terms of such series, impede
the completion of a merger, tender offer or other takeover
attempt of our company. Our board could also issue preferred
stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition
of our board, including a tender offer or other transaction that
some, or a majority, of our stockholders might believe to be in
their best interests or in which stockholders might receive a
premium for their stock over the then-current market price. Any
issuance of preferred stock therefore could have the effect of
decreasing the market price of our common stock.
Our board will make any determination to issue such shares based
on its judgment as to our best interests of our company and
stockholders. We have no current plan to issue any preferred
stock after this offering.
Registration
Rights
After the completion of this offering, the holders of
approximately 7,463,669 shares of our common stock will be
entitled to certain registration rights.
Demand
Registration Rights
After the completion of this offering, we will be obligated to
effect up to four registrations as requested by the holders of
our common stock having registration rights, including two that
may be on
Form S-1.
A request for registration must cover at least 20% in the
aggregate of the then outstanding shares, on a fully diluted
basis, entitled to registration rights. We may delay the filing
of a registration statement in connection with a demand
registration for a period of up to 120 calendar days upon the
advice of the investment banker(s) and manager(s) that will
administer the offering.
Piggyback
Registration Rights
After the completion of this offering, in the event that we
propose to register any of our securities under the Securities
Act (except for the registration of securities to be offered
pursuant to an employee benefit plan on
Form S-8
or pursuant to a registration made on
Form S-4
or any successor forms then in effect), we will include in these
registrations all securities with respect to which we have
received written requests for inclusion under our registration
rights agreement, but subject to certain limitations.
We will not make any public sale or distribution of any of our
securities during the seven days prior to and the 90 days
after the effective date of any underwritten demand registration
or any underwritten piggyback registration unless the managing
underwriters agree otherwise. We will not register any of our
securities until at least three months has elapsed from the
effective date of the previous registration (except for the
registration of securities to be issued in connection with
employee benefit plans, to permit exercise or conversions of
previously issued options, warrants, or other convertible
securities or in connection with a demand registration). We will
pay substantially all of the registration expenses of the
holders of the shares registered pursuant to the demand and
piggyback registrations described above.
Anti-Takeover
Provisions
Delaware
Law
We are subject to Section 203 of the Delaware General
Corporation Law. Section 203 generally prohibits a public
Delaware corporation from engaging in a business
combination with an interested stockholder for
86
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
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the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
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on or subsequent to the date of the transaction, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the
interested stockholder.
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Section 203 defines a business combination to include:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person.
Certificate
of Incorporation and Bylaws
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, each of which
will become effective upon the closing of this offering, may
delay or discourage transactions involving an actual or
potential change in control of our company or change in our
management, including transactions in which stockholders might
otherwise receive a premium for their shares, or transactions
that our stockholders might otherwise deem to be in their best
interests. Therefore, these provisions could adversely affect
the price of our common stock. Among other things, our amended
and restated certificate of incorporation and amended and
restated bylaws:
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provide for our board of directors to be divided into three
classes with staggered three-year terms, with only one class of
directors being elected at each annual meeting of our
stockholders and the other classes continuing for the remainder
of their respective three-year terms;
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permit our board of directors to issue up to
5,000,000 shares of preferred stock, with any rights,
preferences and privileges as they may designate, including the
right to approve an acquisition or other change in our control;
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provide that the authorized number of directors may be changed
by resolution of the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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provide that stockholders may not act by written consent in lieu
of a meeting;
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provide that any director may be removed from office only with
cause and only by the affirmative vote of the holders of 75% or
more of the outstanding shares of capital stock then entitled to
vote at an election of directors;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice; and
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do not provide for cumulative voting rights (therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so choose).
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Limitation
on Liability of Directors and Indemnification
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, limits the liability of our directors to the fullest
extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as
directors, except for liability for any:
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breach of their duty of loyalty to us or our stockholders;
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act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
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unlawful payment of dividends or redemption of shares as
provided in Section 174 of the Delaware General Corporation
Law; or
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transaction from which the directors derived an improper
personal benefit.
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These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our amended and restated bylaws, in the form that will become
effective upon the closing of this offering, provide that we
will indemnify and advance expenses to our directors and
officers to the fullest extent permitted by law or, if
applicable, pursuant to indemnification agreements. They further
provide that we may choose to indemnify other employees or
agents of the corporation from time to time. Section 145(g)
of the Delaware General Corporation Law and our amended and
restated bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us, regardless of whether our bylaws permit
indemnification. We obtained a directors and
officers liability insurance policy.
We entered into indemnification agreements with each of our
directors that provide, in general, that we will indemnify them
to the fullest extent permitted by law in connection with their
service to us or on our behalf.
At present, there is no pending litigation or proceeding
involving any of our directors or officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Shareowner Services.
Nasdaq
Stock Market
We have applied to have our common stock listed on the Nasdaq
Global Market under the symbol SPSC.
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SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there was no public market for our
common stock, and a liquid trading market for the common stock
may not develop or be sustained after this offering. We cannot
predict the effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock
for sale will have on the market price of our common stock.
Sales of substantial amounts of our common stock in the public
market, including shares issued upon exercise of outstanding
options or in the public market after this offering, or the
anticipation of these sales, could adversely affect the market
prices of our common stock and could impair our future ability
to raise capital through the sale of our equity securities.
Upon completion of this offering, based on our outstanding
shares as of March 31, 2010, and assuming no exercise of
outstanding options or warrants, we will have outstanding an
aggregate of 10,920,939 shares of our common stock
(11,420,939 shares if the underwriters over-allotment
option is exercised in full). Of these shares, all of the shares
sold in this offering (plus any shares sold as a result of the
underwriters exercise of the over-allotment option) will
be freely tradable without restriction or further registration
under the Securities Act, unless those shares are purchased by
our affiliates as that term is defined in Rule 144 under
the Securities Act.
6,238,138 shares of common stock to be outstanding after
this offering will be restricted securities under
Rule 144. All of these restricted securities will be
subject to transfer restrictions for 180 days from the date
of this prospectus pursuant to market stand-off agreements.
Restricted securities may be sold in the public market only if
they have been registered or if they qualify for an exemption
from registration under Rules 144 or 701 under the
Securities Act.
Lock-up
Agreements
All of our officers and directors directly holding shares of our
common stock or outstanding options, holders of an additional
8,259,870 shares of our common stock, holders of an
additional 294,237 shares of our common stock issuable upon
exercise of outstanding options, and holders of
62,745 shares of our common stock issuable upon exercise of
outstanding warrants have entered into
lock-up
agreements pursuant to which they have agreed, subject to
limited exceptions, not to offer, sell or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock
or securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 180 days from
the date of this prospectus without our prior written consent
or, in some cases, the prior written consent of Thomas Weisel
Partners LLC. Thomas Weisel Partners LLC has advised us that it
has no current intent or arrangement to release any of the
shares subject to the
lock-up
agreements prior to the expiration of the
lock-up
period. There are no contractually specified conditions for the
waiver of
lock-up
restrictions and any waiver is at the sole discretion of Thomas
Weisel Partners LLC, which may be granted by Thomas Weisel
Partners LLC for any reason. The
180-day
lock-up
period will be automatically extended if (i) during the
last 17 days of the
180-day
restricted period we issue an earnings release or announce
material news or a material event or (ii) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in this
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event. After the
lock-up
period, these shares may be sold, subject to applicable
securities laws. See Underwriting.
Rule 144
In general, and beginning 90 days after the date of this
prospectus, under Rule 144 as in effect on the date of this
prospectus, a person who is not one of our affiliates at any
time during the three months preceding a sale, and who has
beneficially owned shares of our common stock for at least six
months, would be entitled to sell an unlimited number of shares
of our common stock provided current public information about us
is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of
our common stock without restriction. Beginning 90 days
after the date of this prospectus, our
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affiliates who have beneficially owned shares of our common
stock for at least six months are entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
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1% of the number of shares of our common stock then
outstanding; or
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the average weekly trading volume of our common stock on the
Nasdaq Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
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Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Upon expiration of the
lock-up
period described above, 6,238,138 additional shares of our
common stock will be eligible for sale under Rule 144,
including shares eligible for resale immediately upon the
closing of this offering as described above. We cannot estimate
the number of shares of our common stock that our existing
stockholders will elect to sell under Rule 144.
Options
and Warrants
Upon completion of this offering, stock options to purchase a
total of 1,170,475 shares of our common stock will be
outstanding with a weighted average per share exercise price of
$1.60 and expiration dates between May 2010 and
September 2019, excluding up to 431,271 of which we intend
to use for grants of stock options under our 2010 Equity
Incentive Plan to our employees and directors effective upon
completion of this offering with an exercise price equal to the
offering price. We have reserved 694,200 shares of common
stock for issuance pursuant to our 2010 Equity Incentive Plan.
This number is subject to increase on an annual basis and
subject to increase for shares of stock subject to awards under
our prior equity plans that expire unexercised or otherwise do
not result in the issuance of shares subject to the award. Upon
completion of this offering, warrants to purchase a total of
68,201 shares of our common stock will be outstanding with a
weighted average per share exercise price of $3.67 and
expiration dates between May 2011 and February 2016.
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchase shares of our common stock from us
pursuant to options granted prior to the completion of this
offering under our existing stock option plan or other written
agreement is eligible to resell those shares 90 days after
the effective date of this offering in reliance on
Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in
Rule 144. Additionally, following the consummation of this
offering, we intend to file one or more registration statements
on
Form S-8
under the Securities Act to register the sale of shares issued
or issuable upon the exercise of all these stock options. The
registration statements will become effective upon filing.
Subject to the exercise of issued and outstanding options and
contractual restrictions, shares of our directors and executive
officers to which Rule 701 is applicable or which are to be
registered under the registration statement on
Form S-8
will be available for sale into the public market after the
expiration of the
180-day
lock-up
agreements with the underwriters, subject to the vesting
requirements.
Registration
Rights
After the completion of this offering, holders of
7,463,669 shares of common stock will be entitled to
specific rights to register those shares for sale in the public
market. See Description of Capital Stock
Registration Rights. Registration of these shares under
the Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the
effectiveness of the registration statement relating to such
shares.
90
MATERIAL
U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S.
HOLDERS OF OUR COMMON STOCK
The following discussion summarizes certain material
U.S. federal income and estate tax considerations relating
to the acquisition, ownership and disposition of our common
stock purchased pursuant to this offering by a
non-U.S. holder
(as defined below). This discussion is based on the provisions
of the U.S. Internal Revenue Code of 1986, as amended,
final, temporary and proposed U.S. Treasury regulations
promulgated thereunder and current administrative rulings and
judicial decisions, all as in effect as of the date hereof. All
of these authorities may be subject to differing interpretations
or repealed, revoked or modified, possibly with retroactive
effect, which could materially alter the tax consequences to
non-U.S. holders
described in this prospectus.
There can be no assurance that the IRS will not take a contrary
position to the tax consequences described herein or that such
position will not be sustained by a court. No ruling from the
IRS or opinion of counsel has been obtained with respect to the
U.S. federal income or estate tax consequences to a
non-U.S. holder
of the purchase, ownership or disposition of our common stock.
This discussion is for general information only and is not
tax advice. All prospective
non-U.S. holders
of our common stock should consult their own tax advisors with
respect to the U.S. federal, state, local and
non-U.S. tax
consequences of the purchase, ownership and disposition of our
common stock.
As used in this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock that is not any of
the following for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United
States;
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a corporation or other entity taxable as a corporation for
U.S. federal income tax purposes that was created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source;
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a trust (a) if a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons have the authority to control all of
the trusts substantial decisions or (b) that has a
valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person; or
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an entity that is disregarded as separate from its owner if all
of its interests are owned by a single person described above.
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An individual may be treated, for U.S. federal income tax
purposes, as a resident of the United States in any calendar
year by being present in the United States on at least
31 days in that calendar year and for an aggregate of at
least 183 days during a three-year period ending in the
current calendar year. The
183-day test
is determined by counting all of the days the individual is
treated as being present in the current year, one-third of such
days in the immediately preceding year and one-sixth of such
days in the second preceding year. Residents are subject to
U.S. federal income tax as if they were U.S. citizens.
This discussion assumes that a prospective
non-U.S. holder
will hold shares of our common stock as a capital asset
(generally, property held for investment). This discussion does
not address all aspects of U.S. federal income and estate
taxation that may be relevant to a particular
non-U.S. holder
in light of that
non-U.S. holders
individual circumstances. In addition, this discussion does not
address any aspect of U.S. state or local or
non-U.S. taxes,
or the special tax rules applicable to particular
non-U.S. holders,
such as:
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insurance companies and financial institutions;
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tax-exempt organizations;
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controlled foreign corporations and passive foreign investment
companies;
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partnerships or other pass-through entities;
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regulated investment companies or real estate investment trusts;
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pension plans;
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persons who received our common stock as compensation;
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brokers and dealers in securities;
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owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
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former citizens or residents of the United States subject to tax
as expatriates.
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If a partnership or other entity treated as a partnership for
U.S. federal income tax purposes is a beneficial owner of
our common stock, the treatment of a partner in the partnership
generally will depend on the status of the partner and the
activities of the partnership. We urge any beneficial owner of
our common stock that is a partnership and partners in that
partnership to consult their tax advisors regarding the
U.S. federal income tax consequences of acquiring, owning
and disposing of our common stock.
Distributions
on Our Common Stock
Any distribution on our common stock paid to
non-U.S. holders
will generally constitute a dividend for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. Distributions in excess
of our current and accumulated earnings and profits will
generally constitute a return of capital to the extent of the
non-U.S. holders
adjusted tax basis in our common stock, and will be applied
against and reduce the
non-U.S. holders
adjusted tax basis. Any remaining excess will be treated as
capital gain, subject to the tax treatment described below in
Gain on Sale, Exchange or Other Disposition of
Our Common Stock.
Dividends paid to a
non-U.S. holder
that are not treated as effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States generally
will be subject to withholding of U.S. federal income tax
at a rate of 30% on the gross amount paid, unless the
non-U.S. holder
is entitled to an exemption from or reduced rate of withholding
under an applicable income tax treaty. In order to claim the
benefit of a tax treaty or to claim an exemption from
withholding, a
non-U.S. holder
must provide a properly executed IRS
Form W-8BEN
(or successor form) prior to the payment of dividends. A
non-U.S. holder
eligible for a reduced rate of withholding pursuant to an income
tax treaty may be eligible to obtain a refund of any excess
amounts withheld by timely filing an appropriate claim for a
refund with the IRS.
Dividends paid to a
non-U.S. holder
that are treated as effectively connected with a trade or
business conducted by the
non-U.S. holder
within the United States (and, if an applicable income tax
treaty so provides, are also attributable to a permanent
establishment or a fixed base maintained within the
United States by the
non-U.S. holder)
are generally exempt from the 30% withholding tax if the
non-U.S. holder
satisfies applicable certification and disclosure requirements.
To obtain the exemption, a
non-U.S. holder
must provide us with a properly executed IRS
Form W-8ECI
(or successor form) prior to the payment of the dividend.
Dividends received by a
non-U.S. holder
that are treated as effectively connected with a U.S. trade
or business generally are subject to U.S. federal income
tax at rates applicable to U.S. persons. A
non-U.S. holder
that is a corporation may, under certain circumstances, be
subject to an additional branch profits tax imposed
at a rate of 30%, or such lower rate as specified by an
applicable income tax treaty between the United States and such
holders country of residence.
A
non-U.S. holder
who provides us with an IRS
Form W-8BEN
or
Form W-8ECI
must update the form or submit a new form, as applicable, if
there is a change in circumstances that makes any information on
such form incorrect.
92
Gain On
Sale, Exchange or Other Disposition of Our Common
Stock
In general, a
non-U.S. holder
will not be subject to any U.S. federal income tax or
withholding on any gain realized from the
non-U.S. holders
sale, exchange or other disposition of shares of our common
stock unless:
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the gain is effectively connected with a U.S. trade or
business (and, if an applicable income tax treaty so provides,
is also attributable to a permanent establishment or a fixed
base maintained within the United States by the
non-U.S. holder),
in which case the gain will be taxed on a net income basis
generally in the same manner as if the
non-U.S. holder
were a U.S. person, and, if the
non-U.S. holder
is a corporation, the additional branch profits tax described
above in Distributions on Our Common Stock may also
apply;
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of the disposition and
certain other conditions are met, in which case the
non-U.S. holder
will be subject to a 30% tax on the net gain derived from the
disposition, which may be offset by
U.S.-source
capital losses of the
non-U.S. holder,
if any; or
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we are, or have been at any time during the five-year period
preceding such disposition (or the
non-U.S. holders
holding period, if shorter), a United States real property
holding corporation.
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Generally, we will be a United States real property
holding corporation if the fair market value of our
U.S. real property interests equals or exceeds 50% of the
sum of the fair market values of our worldwide real property
interests and other assets used or held for use in a trade or
business, all as determined under applicable U.S. Treasury
regulations. We believe that we have not been and are not
currently, and do not anticipate becoming in the future, a
United States real property holding corporation for
U.S. federal income tax purposes.
Backup
Withholding and Information Reporting
We must report annually to the IRS and to each
non-U.S. holder
the amount of distributions paid to such holder and the amount
of tax withheld, if any. Copies of the information returns filed
with the IRS to report the distributions and withholding may
also be made available to the tax authorities in a country in
which the
non-U.S. holder
is a resident under the provisions of an applicable income tax
treaty or agreement.
The United States imposes a backup withholding tax on the gross
amount of dividends and certain other types of payments
(currently at a rate of 28%). Dividends paid to a
non-U.S. holder
will not be subject to backup withholding if proper
certification of foreign status (usually on IRS
Form W-8BEN)
is provided, and we do not have actual knowledge or reason to
know that the
non-U.S. holder
is a U.S. person. In addition, no backup withholding or
information reporting will be required regarding the proceeds of
a disposition of our common stock made by a
non-U.S. holder
within the United States or conducted through certain
U.S. financial intermediaries if we receive the
certification of foreign status described in the preceding
sentence and we do not have actual knowledge or reason to know
that such
non-U.S. holder
is a U.S. person or the
non-U.S. holder
otherwise establishes an exemption.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that
certain required information is furnished to the IRS in a timely
manner.
U.S.
Federal Estate Tax
An individual
non-U.S. holder
who is treated as the owner, or who has made certain lifetime
transfers, of an interest in our common stock will be required
to include the value of the common stock in his or her gross
estate for U.S. federal estate tax purposes, and may be
subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
93
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, each of the underwriters named below has severally
agreed to purchase from us and the selling stockholders the
aggregate number of shares of common stock set forth opposite
their respective names below:
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Underwriters
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Number of Shares
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Thomas Weisel Partners LLC
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William Blair & Company, L.L.C.
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Needham & Company, LLC
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JMP Securities LLC
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Total
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3,333,334
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Thomas Weisel Partners LLC is the book-running manager and
William Blair & Company, L.L.C. and
Needham & Company, LLC are co-lead managers.
Of the 3,333,334 shares to be purchased by the
underwriters, 2,500,000 shares will be purchased from us
and 833,334 shares will be purchased from the selling
stockholders.
The underwriting agreement provides that the obligations of the
several underwriters are subject to various conditions,
including approval of legal matters by counsel. The nature of
the underwriters obligations commits them to purchase and
pay for all of the shares of common stock listed above if any
are purchased.
The underwriting agreement provides that we and the selling
stockholders will indemnify the underwriters against liabilities
specified in the underwriting agreement under the Securities
Act, or will contribute to payments that the underwriters may be
required to make relating to these liabilities.
Thomas Weisel Partners LLC expects to deliver the shares of
common stock to purchasers on or
about ,
2010.
Over-Allotment
Option
We have granted a
30-day
over-allotment option to the underwriters to purchase up to a
total of 500,000 additional shares of our common stock from us
at the initial public offering price, less the underwriting
discount payable by us, as set forth on the cover page of this
prospectus. If the underwriters exercise this option in whole or
in part, then each of the underwriters will be separately
committed, subject to the conditions described in the
underwriting agreement, to purchase the additional shares of our
common stock in proportion to their respective commitments set
forth in the table above.
Determination
of Offering Price
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations between us and the underwriters.
In addition to prevailing market conditions, the factors to be
considered in determining the initial public offering price will
include:
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the valuation multiples of publicly-traded companies that the
representatives of the underwriters believe are comparable to us;
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our financial information;
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our history and prospects and the outlook for our industry;
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an assessment of our management, our past and present
operations, and the prospects for, and timing of, our future
revenues; and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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94
We cannot assure you that an active or orderly trading market
will develop for our common stock or that our common stock will
trade in the public markets subsequent to this offering at or
above the initial offering price.
Commissions
and Discounts
The underwriters propose to offer the shares of common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus, and at this price less a
concession not in excess of $ per
share of common stock to other dealers specified in a master
agreement among underwriters who are members of the Financial
Industry Regulatory Authority, Inc. The underwriters may allow,
and the other dealers specified may reallow, concessions not in
excess of $ per share of common
stock to these other dealers. After this offering, the offering
price, concessions and other selling terms may be changed by the
underwriters. Our common stock is offered subject to receipt and
acceptance by the underwriters and to other conditions,
including the right to reject orders in whole or in part.
The following table summarizes the compensation to be paid to
the underwriters by us and the proceeds, before expenses,
payable to us and the selling stockholders:
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Total
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Without
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Without
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Per Share
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Over-Allotment
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Over-Allotment
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Public offering price
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$
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$
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$
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Underwriting discount
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Proceeds, before expenses, to us
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Proceeds, before expenses, to selling stockholders
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Indemnification
of Underwriters
We and the selling stockholders will indemnify the underwriters
against some civil liabilities, including liabilities under the
Securities Act and liabilities arising from breaches of our
representations and warranties contained in the underwriting
agreement. If we or the selling stockholders are unable to
provide this indemnification, we and the selling stockholders
will contribute to payments the underwriters may be required to
make in respect of those liabilities.
No Sales
of Similar Securities
The underwriters will require all of our directors and officers,
the selling stockholders and certain other of our stockholders
to agree not to offer, sell, agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock
or any securities convertible into or exchangeable for shares of
common stock except for the shares of common stock offered in
this offering without the prior written consent of Thomas Weisel
Partners LLC for a period of 180 days after the date of
this prospectus.
We have agreed that for a period of 180 days after the date
of this prospectus, we will not, without the prior written
consent of Thomas Weisel Partners LLC, offer, sell or otherwise
dispose of any shares of common stock, except for the shares of
common stock offered in this offering, the shares of common
stock issuable upon exercise of outstanding options on the date
of this prospectus and the shares of our common stock that are
issued under our 2010 Equity Incentive Plan.
The 180-day
restricted period described in the preceding two paragraphs will
be automatically extended if: (1) during the last
17 days of the l80-day restricted period we issue an
earnings release or announce material news or a material event
or (2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event.
95
Nasdaq
Stock Market
We have applied to have our common stock listed on the Nasdaq
Global Market under the symbol SPSC.
Short
Sales, Stabilizing Transactions and Penalty Bids
In order to facilitate this offering, persons participating in
this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of our common stock
during and after this offering. Specifically, the underwriters
may engage in the following activities in accordance with the
rules of the SEC.
Short Sales. Short sales involve the sales by the
underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short sales are
short sales made in an amount not greater than the
underwriters overallotment option to purchase additional
shares from us in this offering. The underwriters may close out
any covered short position by either exercising their
over-allotment option to purchase shares or purchasing shares in
the open market. In determining the source of shares to close
out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short
sales are any short sales in excess of such over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market after pricing that could adversely
affect investors who purchase in this offering.
Stabilizing Transactions. The underwriters may make bids
for or purchases of the shares for the purpose of pegging,
fixing or maintaining the price of the shares, so long as
stabilizing bids do not exceed a specified maximum.
Penalty Bids. If the underwriters purchase shares in the
open market in a stabilizing transaction or syndicate covering
transaction, they may reclaim a selling concession from the
underwriters and selling group members who sold those shares as
part of this offering. Stabilization and syndicate covering
transactions may cause the price of the shares to be higher than
it would be in the absence of these transactions. The imposition
of a penalty bid might also have an effect on the price of the
shares if it discourages presales of the shares.
The transactions above may occur on the Nasdaq Global Market or
otherwise. Neither we nor the underwriters make any
representation or prediction as to the effect that the
transactions described above may have on the price of the
shares. If these transactions are commenced, they may be
discontinued without notice at any time.
96
LEGAL
MATTERS
The validity of the shares of common stock offered hereby and
certain other legal matters will be passed upon for us by
Faegre & Benson
LLP, Minneapolis, Minnesota.
The underwriters have been represented in connection with this
offering by Goodwin Procter
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of SPS Commerce, Inc. as of
December 31, 2008 and 2009 and for each of the three years
in the period ended December 31, 2009 included in this
prospectus and registration statement have been so included in
reliance on the report of Grant Thornton LLP, an independent
registered public accounting firm, as set forth in its report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock offered by this prospectus. This prospectus does not
contain all of the information included in the registration
statement, portions of which are omitted as permitted by the
rules and regulations of the SEC. For further information
pertaining to us and the common stock to be sold in this
offering, you should refer to the registration statement and its
exhibits. Whenever we make reference in this prospectus to any
of our contracts, agreements or other documents, the references
are not necessarily complete, and you should refer to the
exhibits attached to the registration statement for copies of
the actual contract, agreement or other document filed as an
exhibit to the registration statement or such other document,
each such statement being qualified in all respects by such
reference. On the closing of this offering, we will be subject
to the informational requirements of the Securities Exchange Act
and will be required to file annual, quarterly and current
reports, proxy statements and other information with the SEC. We
anticipate making these documents publicly available, free of
charge, on our website (www.spscommerce.com) as soon as
reasonably practicable after filing such documents with the SEC.
You can read the registration statement and our future filings
with the SEC over the Internet at the SECs website at
www.sec.gov. You may request copies of the filing, at no cost,
by telephone at
(612) 435-9400
or by mail at SPS Commerce, Inc., 333 South Seventh Street,
Suite 1000, Minneapolis, Minnesota 55402. You may also read
and copy any document we file with the SEC at its public
reference facility at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may also obtain
copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
97
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SPS Commerce, Inc.
We have audited the accompanying balance sheets of SPS Commerce,
Inc. (the Company) as of December 31, 2008 and
2009, and the related statements of operations, redeemable
convertible preferred stock and stockholders deficit, and
cash flows for each of the three years in the period ended
December 31, 2009. Our audits of the basic financial
statements included the financial statement schedule listed in
the index. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of SPS Commerce, Inc. as of December 31, 2008 and 2009, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole presents fairly, in
all material respects, the information set forth therein.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 12, 2010 (except for Note J as to which the
date is April 13, 2010)
F-2
SPS
Commerce, Inc.
BALANCE SHEETS
(In thousands, except share amounts)
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December 31,
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2008
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2009
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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3,715
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$
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5,931
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Accounts receivable, less allowance for doubtful accounts of
$308 and $226
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4,564
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4,766
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Deferred costs, current
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4,058
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4,126
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Prepaid expenses and other current assets
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785
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1,440
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|
|
Total current assets
|
|
|
13,122
|
|
|
|
16,263
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Computer equipment and purchased software
|
|
|
7,560
|
|
|
|
8,542
|
|
Office equipment and furniture
|
|
|
1,660
|
|
|
|
1,678
|
|
Leasehold improvements
|
|
|
609
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,829
|
|
|
|
10,829
|
|
Less accumulated depreciation and amortization
|
|
|
(7,020
|
)
|
|
|
(8,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,809
|
|
|
|
2,520
|
|
GOODWILL
|
|
|
1,166
|
|
|
|
1,166
|
|
INTANGIBLE ASSETS, net
|
|
|
446
|
|
|
|
290
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Deferred costs, net of current portion
|
|
|
1,587
|
|
|
|
1,617
|
|
Other non-current assets
|
|
|
67
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,654
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,197
|
|
|
$
|
21,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
$
|
441
|
|
|
$
|
338
|
|
Equipment and term loans
|
|
|
1,409
|
|
|
|
499
|
|
Line of credit, net of discount
|
|
|
1,300
|
|
|
|
1,500
|
|
Accounts payable
|
|
|
804
|
|
|
|
1,345
|
|
Accrued compensation and benefits
|
|
|
1,884
|
|
|
|
3,005
|
|
Accrued expenses and other current liabilities
|
|
|
567
|
|
|
|
1,071
|
|
Deferred rent
|
|
|
112
|
|
|
|
123
|
|
Current portion of deferred revenue
|
|
|
2,574
|
|
|
|
3,407
|
|
Interest payable
|
|
|
36
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9.127
|
|
|
|
11.290
|
|
Deferred revenue, less current portion
|
|
|
4,014
|
|
|
|
4,025
|
|
Equipment and term loans, less current portion
|
|
|
732
|
|
|
|
233
|
|
Capital lease obligations, less current portion
|
|
|
553
|
|
|
|
122
|
|
Convertible preferred stock warrant liability
|
|
|
188
|
|
|
|
569
|
|
Deferred tax liability
|
|
|
82
|
|
|
|
110
|
|
Other long-term liabilities
|
|
|
381
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,077
|
|
|
|
16,607
|
|
REDEEMABLE CONVERTIBLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock,
$0.001 par value, 1,182,217 shares authorized,
1,154,151 shares issued and outstanding; aggregate
liquidation preference of $10,000
|
|
|
37,676
|
|
|
|
37,676
|
|
Series B redeemable convertible preferred stock,
$0.001 par value, 6,274,329 shares authorized,
5,759,246 and 5,688,116 shares issued and outstanding,
aggregate liquidation preference of $21,112
|
|
|
20,844
|
|
|
|
20,658
|
|
Series C redeemable convertible preferred stock,
$0.001 par value, 1,602,000 shares authorized,
1,251,559 shares issued and outstanding, aggregate
liquidation preference of $7,500
|
|
|
7,444
|
|
|
|
7,444
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
65,964
|
|
|
|
65,778
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 13,442,303 shares
authorized; 331,145 and 327,113 shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
4,970
|
|
|
|
5,186
|
|
Accumulated deficit
|
|
|
(66,814
|
)
|
|
|
(65,652
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(61,844
|
)
|
|
|
(60,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,197
|
|
|
$
|
21,919
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these financial statements.
F-3
SPS
Commerce, Inc.
STATEMENTS OF OPERATIONS
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues
|
|
$
|
25,198
|
|
|
$
|
30,697
|
|
|
$
|
37,746
|
|
Cost of revenues
|
|
|
6,379
|
|
|
|
9,258
|
|
|
|
11,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
18,819
|
|
|
|
21,439
|
|
|
|
26,031
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
11,636
|
|
|
|
12,493
|
|
|
|
13,506
|
|
Research and development
|
|
|
3,546
|
|
|
|
3,640
|
|
|
|
4,305
|
|
General and administrative
|
|
|
5,458
|
|
|
|
6,716
|
|
|
|
6,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,640
|
|
|
|
22,849
|
|
|
|
24,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,821
|
)
|
|
|
(1,410
|
)
|
|
|
1,881
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(439
|
)
|
|
|
(419
|
)
|
|
|
(270
|
)
|
Other income
|
|
|
120
|
|
|
|
28
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(319
|
)
|
|
|
(391
|
)
|
|
|
(628
|
)
|
Income tax expense
|
|
|
(16
|
)
|
|
|
(94
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
3.53
|
|
Fully diluted
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
0.13
|
|
Weighted average common shares used to compute net income (loss)
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
185
|
|
|
|
294
|
|
|
|
329
|
|
Fully diluted
|
|
|
185
|
|
|
|
294
|
|
|
|
9,268
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
SPS
Commerce, Inc.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS DEFICIT
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred Stock
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balances at January 1, 2007
|
|
|
1,154,151
|
|
|
$
|
37,676
|
|
|
|
5,759,246
|
|
|
$
|
20,844
|
|
|
|
|
|
|
$
|
|
|
|
$
|
58,520
|
|
|
|
|
122,169
|
|
|
$
|
|
|
|
$
|
4,717
|
|
|
$
|
(62,763
|
)
|
|
$
|
(58,046
|
)
|
Issuance of redeemable convertible preferred stock, net of
offering costs of $56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,251,559
|
|
|
|
7,444
|
|
|
|
7,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,593
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,156
|
)
|
|
|
(2,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
1,154,151
|
|
|
|
37,676
|
|
|
|
5,759,246
|
|
|
|
20,844
|
|
|
|
1,251,559
|
|
|
|
7,444
|
|
|
|
65,964
|
|
|
|
|
246,762
|
|
|
|
|
|
|
|
4,808
|
|
|
|
(64,919
|
)
|
|
|
(60,111
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,151
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,895
|
)
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
1,154,151
|
|
|
|
37,676
|
|
|
|
5,759,246
|
|
|
|
20,844
|
|
|
|
1,251,559
|
|
|
|
7,444
|
|
|
|
65,964
|
|
|
|
|
331,145
|
|
|
|
|
|
|
|
4,970
|
|
|
|
(66,814
|
)
|
|
|
(61,844
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,640
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Repurchase of common and redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(71,130
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
(186
|
)
|
|
|
|
(19,672
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
1,154,151
|
|
|
$
|
37,676
|
|
|
|
5,688,116
|
|
|
$
|
20,658
|
|
|
|
1,251,559
|
|
|
$
|
7,444
|
|
|
$
|
65,778
|
|
|
|
|
327,113
|
|
|
$
|
|
|
|
$
|
5,186
|
|
|
$
|
(65,652
|
)
|
|
$
|
(60,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these financial statements.
F-5
SPS
Commerce, Inc.
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,729
|
|
|
|
1,963
|
|
|
|
1,445
|
|
Provision for doubtful accounts
|
|
|
151
|
|
|
|
396
|
|
|
|
439
|
|
Amortization of debt issue costs
|
|
|
29
|
|
|
|
25
|
|
|
|
10
|
|
Stock-based compensation
|
|
|
46
|
|
|
|
157
|
|
|
|
228
|
|
Change in carrying value of preferred stock warrants
|
|
|
68
|
|
|
|
45
|
|
|
|
381
|
|
Non-cash interest expense
|
|
|
57
|
|
|
|
33
|
|
|
|
|
|
Changes in assets and liabilities, excluding effects of business
acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(800
|
)
|
|
|
(811
|
)
|
|
|
(641
|
)
|
Prepaid expenses and other current assets
|
|
|
54
|
|
|
|
232
|
|
|
|
(655
|
)
|
Other assets
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
(6
|
)
|
Deferred costs
|
|
|
(2,885
|
)
|
|
|
(1,659
|
)
|
|
|
(98
|
)
|
Accounts payable
|
|
|
520
|
|
|
|
(319
|
)
|
|
|
541
|
|
Interest payable
|
|
|
(101
|
)
|
|
|
(4
|
)
|
|
|
(34
|
)
|
Deferred revenue
|
|
|
1,849
|
|
|
|
1,526
|
|
|
|
844
|
|
Deferred tax liability
|
|
|
|
|
|
|
82
|
|
|
|
28
|
|
Accrued compensation and benefits
|
|
|
658
|
|
|
|
(510
|
)
|
|
|
1,121
|
|
Deferred rent
|
|
|
(65
|
)
|
|
|
27
|
|
|
|
(112
|
)
|
Accrued expenses and other current liabilities
|
|
|
49
|
|
|
|
(87
|
)
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(803
|
)
|
|
|
(807
|
)
|
|
|
5,158
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,123
|
)
|
|
|
(884
|
)
|
|
|
(1,000
|
)
|
Maturities of short-term investments
|
|
|
|
|
|
|
1,263
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(1,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities
|
|
|
(2,386
|
)
|
|
|
379
|
|
|
|
(1,000
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
3,125
|
|
|
|
10,425
|
|
|
|
16,325
|
|
Payments on line of credit
|
|
|
(2,875
|
)
|
|
|
(10,125
|
)
|
|
|
(16,125
|
)
|
Proceeds from equipment loans
|
|
|
756
|
|
|
|
855
|
|
|
|
|
|
Payments on equipment loans
|
|
|
(432
|
)
|
|
|
(721
|
)
|
|
|
(730
|
)
|
Payments on term loan
|
|
|
(553
|
)
|
|
|
(621
|
)
|
|
|
(679
|
)
|
Proceeds from exercise of stock options
|
|
|
45
|
|
|
|
5
|
|
|
|
2
|
|
Payments of capital lease obligations
|
|
|
(117
|
)
|
|
|
(529
|
)
|
|
|
(534
|
)
|
Proceeds from preferred stock
|
|
|
6,152
|
|
|
|
|
|
|
|
|
|
Purchase of preferred and common stock
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
6,101
|
|
|
|
(711
|
)
|
|
|
(1,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,912
|
|
|
|
(1,139
|
)
|
|
|
2,216
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,942
|
|
|
|
4,854
|
|
|
|
3,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,854
|
|
|
$
|
3,715
|
|
|
|
5,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
512
|
|
|
$
|
374
|
|
|
$
|
285
|
|
Supplemental schedule of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred
|
|
$
|
1,407
|
|
|
$
|
166
|
|
|
$
|
|
|
Issuance of preferred stock upon conversion of debt
|
|
$
|
1,292
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
|
|
NOTE A
|
BUSINESS
DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
|
Business
Description
SPS Commerce, Inc. (the Company) is a leading
provider of on-demand supply chain management solutions,
providing integration, collaboration, connectivity, visibility
and data analytics to thousands of customers worldwide. The
Company provides its solutions through SPSCommerce.net, a hosted
software suite that improves the way suppliers, retailers,
distributors and other customers manage and fulfill orders. The
Company derives the majority of its revenues from thousands of
monthly recurring subscriptions from businesses that utilize the
Companys solutions.
Use of
Estimates
Preparing financial statements in conformity with accounting
principles generally accepted in the United States of America
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 periods. Actual results could
differ from those estimates.
Risk and
Uncertainties
The company relies on hardware and software licensed from third
parties to offer its on-demand management solutions. Management
believes alternate sources are available; however, disruption or
termination of these relationships could adversely affect the
Companys operating results in the near term.
Cash and
Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with original maturities when purchased of less than
90 days.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary
cash investments in financial institutions in excess of
federally insured limits and trade accounts receivable.
Temporary cash investments are held with financial institutions
that the Company believes are subject to minimal risk.
Accounts
Receivable
Accounts receivable are initially recorded upon the sale of
products to customers. Credit is granted in the normal course of
business without collateral. Accounts receivable are stated net
of allowances for doubtful accounts, which represent estimated
losses resulting from the inability of customers to make the
required payments. Accounts that are outstanding longer than the
contractual terms are considered past due. When determining the
allowances for doubtful accounts, the Company takes several
factors into consideration including the overall composition of
the accounts receivable aging, the Companys prior history
of accounts receivable write-offs, the type of customers and the
Companys
day-to-day
knowledge of specific customers. The Company writes off accounts
receivable when they become uncollectible. Changes in the
allowances for doubtful accounts are recorded as bad debt
expense and are included in general and administrative expense
in the Companys statements of operations.
F-7
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
Property
and Equipment
Property and equipment, including assets acquired under capital
lease obligations, are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the shorter of the
estimated useful lives of the individual assets or the lease
term.
The estimated useful lives are:
|
|
|
|
|
Computer equipment and purchased software
|
|
|
2 5 years
|
|
Office equipment and furniture
|
|
|
5 7 years
|
|
Leasehold improvements
|
|
|
2 7 years
|
|
Significant additions or improvements extending asset lives
beyond one year are capitalized, while repairs and maintenance
are charged to expense as incurred. The assets and related
accumulated depreciation and amortization accounts are adjusted
for asset retirements and disposals with the resulting gain or
loss included in net income (loss).
Research
and Development
Costs incurred to develop software applications used in the
Companys on-demand supply chain management solution are
accounted for in accordance with ASC
350-40,
Intangibles Goodwill and Other. Capitalizable
costs consists of (a) certain external direct costs of
materials and services incurred in developing or obtaining
internal-use computer software and (b) payroll and
payroll-related costs for employees who are directly associated
with, and who devote time to, the project. These costs generally
consist of internal labor during configuration, coding and
testing activities. Research and development costs incurred
during the preliminary project stage or costs incurred for data
conversion activities, training, maintenance and general and
administrative or overhead costs are expensed as incurred. Costs
that cannot be separated between maintenance of, and relatively
minor upgrades and enhancements to, internal-use software are
also expensed as incurred. Capitalization begins when the
preliminary project stage is complete, management with the
relevant authority authorizes and commits to the funding of the
software project, it is probable the project will be completed,
the software will be used to perform the functions intended and
certain functional and quality standards have been met.
Historically, no projects have had material costs beyond the
preliminary project stage.
The Companys research and development efforts during 2007,
2008 and 2009, related to its on-demand supply chain management
solution were primarily maintenance and data conversion
activities. As such, the Company did not capitalize any research
and development costs during 2007, 2008 and 2009.
Long-Lived
Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset at the date it is tested for
recoverability, whether in use or under development. An
impairment loss is measured as the amount by which the carrying
amount of a long-lived asset exceeds its fair value. There has
been no impairment of these assets to date.
Income
Taxes
The Company provides for income taxes using the asset and
liability method, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included
F-8
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance to the extent that
utilization is not presently more likely than not.
Effective January 1, 2007, the Company adopted the
provisions of ASC
740-10,
Income Taxes. Previously, the Company had accounted for
tax contingencies in accordance with ASC
450-10,
Contingencies. As required by ASC
740-10 the
Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an
audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company
applied ASC
740-10 to
all tax positions for which the statute of limitations remained
open. The implementation of ASC
740-10 did
not have a material impact on the Companys financial
statements.
Revenue
Recognition
The Company generates revenues by providing a number of
solutions to its customers. These solutions include Trading
Partner Integration, Trading Partner Enablement and Trading
Partner Intelligence. All of the Companys solutions are
hosted applications that allow customers to meet their supply
chain management requirements. Revenues from its Trading Partner
Integration and Trading Partner Intelligence solutions are
generated through
set-up fees
and recurring monthly hosting fees. Revenues from its Trading
Partner Enablement solutions are generally one-time service fees.
Fees related to recurring monthly hosting services and one-time
services are recognized when the services are provided. The
recurring monthly fee is comprised of both a fixed and
transaction based fee. Revenue is recorded in accordance with
Staff Accounting Bulletin (SAB) 104, Revenue Recognition in
Financial Statements, when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed and
determinable and (4) collectability is probable. If
collection is not considered probable, revenues are recognized
when the fees are collected.
Set-up fees
paid by customers in connection with the Companys
solutions, as well as associated direct and incremental costs,
such as labor and commissions, are deferred and recognized
ratably over the expected life of the customer relationship,
which is generally two years. The Company continues to evaluate
and adjust the length of these amortization periods as more
experience is gained with customer renewals, contract
cancellations and technology changes requested by its customers.
It is possible that, in the future, the estimates of expected
customer lives may change and, if so, the periods over which
such subscription
set-up fees
and costs are amortized will be adjusted. Any such change in
estimated expected customer lives will affect the Companys
future operations.
In accordance with ASC
605-45,
Revenue Recognition, taxes are presented on a net-basis.
Basic and
Diluted Net Income (Loss) Per Share
Net income (loss) per share has been computed using the weighted
average number of shares of common stock outstanding during each
period. Diluted amounts per share include the impact of the
Companys outstanding potential common shares, such as
options and warrants and redeemable convertible preferred stock.
Potential common shares that are anti-dilutive are excluded from
the calculation of diluted net income (loss) per common share.
F-9
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
The following table sets forth the components of the computation
of basic and diluted net income (loss) per common share for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,156
|
)
|
|
$
|
(1,895
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
184,684
|
|
|
|
293,868
|
|
|
|
329,049
|
|
Options and warrants to purchase common and preferred stock
|
|
|
|
|
|
|
|
|
|
|
791,295
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
8,147,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, fully diluted
|
|
|
184,684
|
|
|
|
293,868
|
|
|
|
9,267,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share-basic
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
3.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share- fully diluted
|
|
$
|
(11.65
|
)
|
|
$
|
(6.45
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options, redeemable convertible
preferred stock and warrants were excluded from the computation
of diluted net loss per share for the periods indicated because
including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Options to purchase common stock
|
|
|
1,240,465
|
|
|
|
1,187,583
|
|
|
|
19,016
|
|
Redeemable convertible preferred stock
|
|
|
8,164,956
|
|
|
|
8,164,956
|
|
|
|
|
|
Preferred and common stock warrants
|
|
|
95,171
|
|
|
|
68,401
|
|
|
|
|
|
Stock-Based
Compensation
ASC 718, Compensation Stock Compensation,
requires the cost of all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on the grant date fair value of
those awards. In accordance with ASC 718, this cost is
recognized over the period for which an employee is required to
provide service in exchange for the award. ASC 718 requires that
the benefits associated with tax deductions in excess of
recognized compensation expense be reported as a financing cash
flow rather than as an operating cash flow. The compensation
cost recognized by the Company for stock options was $46, $157
and $228 at December 31, 2007, 2008 and 2009, respectively.
As of December 31, 2008 and 2009, there was $466 and $459,
respectively, of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under
the Companys stock option plans. As of December 31,
2008 and 2009, that cost is expected to be recognized on a
straight line basis over a weighted average period of
approximately 2.0 and 2.4 years.
The Company estimates the fair value of the options granted
using the Black-Scholes method. The estimation of stock awards
that will ultimately vest requires judgment, and to the extent
actual results differ from the Companys estimates, such
amounts will be recorded as an adjustment in the period
estimates are revised. In valuing share-based awards,
significant judgment is required in determining the expected
volatility of common stock and the expected term individuals
will hold their share-based awards prior to exercising. Expected
volatility of the stock is based on the Companys peer
group in the industry in which the Company does business because
the Company does not have sufficient historical volatility data
for its own
F-10
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
stock. The expected term of the options is based on evaluations
of historical and expected future employee exercise behavior.
Advertising
Costs
Advertising costs are charged to expense as incurred.
Advertising costs were approximately $655, $85 and $56 at
December 31, 2007, 2008 and 2009, respectively. Advertising
costs are included in operating expenses in the statement of
operations.
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations. The Company tests goodwill for impairment annually
at December 31, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The
impairment test is conducted by comparing the fair value of the
Company with its carrying value. Fair value is determined using
the future cash flows expected to be generated by the reporting
unit. If the carrying value exceeds the fair value, goodwill may
be impaired. If this occurs, the fair value is then allocated to
its assets and liabilities in a manner similar to a purchase
price allocation in order to determine the implied fair value of
the reporting unit with goodwill. This implied fair value is
then compared with the carrying amount of goodwill and, if it is
less, the Company would then recognize an impairment loss. There
has been no impairment of the Companys goodwill to date.
Intangible
Assets
Intangible assets include subscriber relationships and covenants
not-to-compete.
The subscriber relationship asset is being amortized on a
straight-line basis over three years, which approximates its
respective useful life. The covenants
not-to-compete
are amortized on a straight-line basis over two years upon
termination of employment of the respective employees.
The carrying amounts and accumulated amortization for intangible
assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
1,930
|
|
|
$
|
1,822
|
|
|
$
|
108
|
|
|
$
|
1,930
|
|
|
$
|
1,930
|
|
|
$
|
|
|
Covenants
not-to-compete
|
|
|
580
|
|
|
|
242
|
|
|
|
338
|
|
|
|
580
|
|
|
|
290
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,510
|
|
|
$
|
2,064
|
|
|
$
|
446
|
|
|
$
|
2,510
|
|
|
$
|
2,220
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense incurred was $740, $788 and $156
for the years ended December 31, 2007, 2008 and 2009.
Segment
Information
The Company operates in and reports on one segment, supply chain
management solutions, based upon the provisions of ASC
280-10,
Segment Reporting.
F-11
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
Fair
Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable, and other accrued expenses,
approximate their fair values due to their short maturities.
Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of debt and capital
lease obligations approximates fair value.
Fair
Value Measurements
Effective January 1, 2008, the Company adopted ASC 820,
Fair Value Measurements and Disclosures, for financial
assets and liabilities. ASC 820 defines fair value, establishes
a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures
about fair value measurements. The adoption of ASC 820 did not
have a material impact on the Companys financial condition
or results of operations.
ASC 820 defines fair value as the price that would be received
for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. ASC 820 also describes three levels of
inputs that may be used to measure fair value:
|
|
|
|
|
Level 1 quoted prices in active markets for
identical assets and liabilities.
|
|
|
|
Level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities.
|
|
|
|
Level 3 unobservable inputs in which there is
little or no market data available, which require the reporting
entity to develop its own assumptions.
|
The table below presents our assets and liabilities measured at
fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
5,931
|
|
|
$
|
5,931
|
|
|
$
|
|
|
|
$
|
|
|
Preferred stock warrants
|
|
$
|
569
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
569
|
|
The following is a reconciliation of the preferred stock
warrants, which are measured at fair value on a recurring basis
using significant unobservable inputs (Level 3 inputs):
|
|
|
|
|
Balance as of January 1, 2008
|
|
$
|
143
|
|
Total (gains) losses recognized
|
|
|
45
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
188
|
|
Total (gains) losses recognized
|
|
|
381
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
569
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In February 2008, the FASB issued guidance that delayed the
effective date of ASC 820 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company adopted ASC 820
for non-financial assets and non-financial liabilities on
January 1, 2009, and such adoption did not have a material
impact on the Companys financial condition or results of
operations.
F-12
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
In April 2009, the FASB issued guidance that requires interim
reporting period disclosure about the fair value of certain
financial instruments, effective for interim reporting periods
ending after June 15, 2009. The Company has adopted these
disclosure requirements. Due to their nature, the carrying value
of cash, receivables, payables and debt obligations approximates
fair value.
In May 2009, the FASB issued ASC 855, Subsequent Events.
ASC 855 incorporates guidance into accounting literature that
was previously addressed only in auditing standards. The
statement refers to subsequent events that provide additional
evidence about conditions that existed at the balance-sheet date
as recognized subsequent events. Subsequent events
that provide evidence about conditions that arose after the
balance-sheet date but prior to the issuance of the financial
statements are referred to as non-recognized subsequent
events. The disclosure requirements of ASC 855 are
effective for interim and annual periods ending after June 15,
2009. In February 2010, ASU 2010-09, Subsequent Events
(Topic 855), Amendments to Certain Recognition and
Disclosure Requirements, was issued to clarify disclosure
requirements and align with SEC subsequent event disclosure
guidelines. The Company has adopted this new standard.
In June 2009, the FASB issued guidance that establishes the FASB
Accounting Standards Codification (the Codification) as the
source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with generally
accepted accounting principles (GAAP). Use of the new
Codification is effective for interim and annual periods ending
after September 15, 2009. The Company has used the new
Codification in reference to GAAP in this report and such use
has not impacted the results of the Company.
In October 2009, the FASB issued the following ASUs:
|
|
|
|
|
ASU
No. 2009-13,
Revenue Recognition (ASC Topic 605), Multiple-Deliverable
Revenue Arrangements, a consensus of the FASB Emerging Issues
Task Force; and
|
|
|
|
ASU
No. 2009-14,
Software (ASC Topic 985), Certain Revenue Arrangements That
Include Software Elements, a consensus of the FASB Emerging
Issues Task Force.
|
ASU
No. 2009-13:
This guidance modifies the fair value requirements of ASC
subtopic
605-25
Revenue Recognition-Multiple Element Arrangements, by
allowing the use of the best estimate of selling
price in addition to VSOE and Vendor Objective Evidence
(now referred to as third-party evidence, or TPE) for
determining the selling price of a deliverable. A vendor is now
required to use its best estimate of the selling price when VSOE
or TPE of the selling price cannot be determined. In addition,
the residual method of allocating arrangement consideration is
no longer permitted.
ASU
No. 2009-14:
This guidance modifies the scope of ASC subtopic
965-605,
Software-Revenue Recognition, to exclude from its
requirements (a) non-software components of tangible
products and (b) software components of tangible products
that are sold, licensed, or leased with tangible products when
the software components and non-software components of the
tangible product function together to deliver the tangible
products essential functionality.
These updates require expanded qualitative and quantitative
disclosures and are effective for fiscal years beginning on or
after June 15, 2010. However, companies may elect to adopt
the updated requirements as early as interim periods ended
September 30, 2009. These updates may be applied either
prospectively from the beginning of the fiscal year for new or
materially modified arrangements or retrospectively. The Company
is currently evaluating the impact of adopting these updates on
its financial statements.
F-13
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
Reclassifications
Certain reclassifications have been made to the 2007 and 2008
financial statements to conform with the presentation used in
2009. These reclassifications had no effect on net income
(loss), stockholders deficit or net income (loss) per
share previously reported.
NOTE B
FINANCIAL STATEMENT COMPONENTS
Debt
Issue Costs
The Company capitalizes all debt issue costs and amortizes these
costs as interest expense over the term of the related debt.
Debt issue costs are included in other assets on the Balance
Sheet. Debt issue costs consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Debt issue costs
|
|
$
|
114
|
|
|
$
|
119
|
|
Accumulated amortization
|
|
|
(106
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $29, $22 and $9 for the years ended
December 31, 2007, 2008 and 2009.
Accounts
Payable
Accounts payable included the following at December 31,
2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Costs incurred for initial public offering
|
|
$
|
|
|
|
$
|
318
|
|
Other accounts payable
|
|
|
804
|
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
804
|
|
|
$
|
1,345
|
|
|
|
|
|
|
|
|
|
|
Other
expenses and other current liabilities
Other expenses and other current liabilities included the
following at December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Costs accrued for initial public offering
|
|
$
|
|
|
|
$
|
377
|
|
Other accrued expenses and other current liabilities
|
|
|
567
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
567
|
|
|
$
|
1,071
|
|
|
|
|
|
|
|
|
|
|
F-14
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
NOTE C
INCOME TAXES
The provision for income taxes at December 31, 2007, 2008
and 2009, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Current
|
|
$
|
16
|
|
|
$
|
12
|
|
|
$
|
63
|
|
Deferred
|
|
|
|
|
|
|
82
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
16
|
|
|
$
|
94
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax provision includes estimated federal alternative minimum
taxes, state taxes and deferred tax expense related to book and
income tax basis differences in goodwill created in the Owens
Direct asset acquisition.
A reconciliation of income tax expense (benefit) to the
statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Expected federal income tax at statutory rate
|
|
$
|
(728
|
)
|
|
$
|
(612
|
)
|
|
$
|
420
|
|
State income taxes, net of federal tax effect
|
|
|
(68
|
)
|
|
|
(52
|
)
|
|
|
52
|
|
Meals and entertainment
|
|
|
47
|
|
|
|
16
|
|
|
|
13
|
|
Stock compensation expense
|
|
|
16
|
|
|
|
53
|
|
|
|
67
|
|
Stock warrants
|
|
|
23
|
|
|
|
15
|
|
|
|
129
|
|
Change in valuation allowance
|
|
|
729
|
|
|
|
614
|
|
|
|
(805
|
)
|
Change in state deferred rate
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Prior year true-up
|
|
|
|
|
|
|
|
|
|
|
100
|
|
AMT expense
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Other
|
|
|
(3
|
)
|
|
|
60
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
16
|
|
|
$
|
94
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had net operating loss
carryforwards of $53,437 for U.S. federal tax purposes and
$32,491 for state tax purposes. These loss carryforwards expire
between 2010 and 2029. To the extent these net operating loss
carryforwards are available, the Company will use them to reduce
its corporate income tax liability associated with its
operations. Section 382 of the U.S. Internal Revenue
Code generally imposes an annual limitation on the amount of net
operating loss carryforwards that might be used to offset
taxable income when a corporation has undergone significant
changes in stock ownership. Due to changes in ownership, some of
the Companys net operating loss carryforwards will be
limited.
F-15
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
Significant components of the Companys deferred tax assets
and liabilities at December 31, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accounts receivable allowances
|
|
$
|
125
|
|
|
$
|
115
|
|
Accrued expenses
|
|
|
252
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
377
|
|
|
|
400
|
|
Valuation allowance
|
|
|
(377
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
19,867
|
|
|
$
|
19,096
|
|
Deferred revenue
|
|
|
530
|
|
|
|
761
|
|
Depreciation and amortization
|
|
|
789
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets
|
|
|
21,186
|
|
|
|
20,384
|
|
Valuation allowance
|
|
|
(21,268
|
)
|
|
|
(20,494
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liability
|
|
$
|
82
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
The Companys net deferred tax assets have been reduced
fully by a valuation allowance, as realization is not considered
to be likely based on an assessment of the history of losses and
the likelihood of sufficient future taxable income. The deferred
tax liability recorded at December 31, 2009 and 2008
relates to goodwill created in the Owens Direct asset
acquisition which is deductible for tax purposes.
In the event the Company realizes its deferred tax assets in the
future, approximately $29 of the NOL carry-forwards were
generated through stock option deductions and will be recorded
in additional paid-in capital rather than offset income tax
expense.
It is the Companys practice to recognize penalties
and/or
interest to income tax matters in income tax expenses. As of
December 31, 2009, the Company did not have an accrual for
interest or penalties related to unrecognized tax benefits. The
Company is no longer subject to U.S. federal tax
examinations by tax authorities for tax years before 2006. The
Company is open to state tax audits until the applicable
statutes of limitations expire.
NOTE D
LINE OF CREDIT AND LONG-TERM DEBT
On March 30, 2009, the Company agreed to terms with a
lender to provide for equipment loans in the aggregate amount
not to exceed $1,100. All loans are payable in 36 monthly
installments of principal and interest at 12.75%. The Company
entered into an equipment loan with the same lender on
March 24, 2008 to provide equipment loans in the aggregate
amount not to exceed $1,250. All loans are payable in
36 monthly installments of principal and interest at 9.25%
plus the greater of 2.55% or the yield for the three-year
U.S. Treasury note on the date of the advance.
The Company entered in to an equipment loan agreement with the
same lender on March 20, 2007 in the aggregate amount not
to exceed $1,250. All loans from the agreement dated
March 20, 2007 are payable in 36 monthly installments
of principal and interest at 7.20% plus the greater of 4.84% or
the yield for the three-year U.S. treasury note on the date
of the advance.
F-16
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
On February 3, 2006, the Company entered into a loan and
security agreement with the same lender which included a $2,000
term loan, an equipment loan not to exceed an aggregate of
$1,250, and a revolving line of credit. The revolving line of
credit was limited to the lesser of $1,250 or 85% of eligible
domestic accounts receivable plus 70% of eligible foreign
accounts receivable less any reserves. On April 8, 2009,
the Company agreed to terms for a renewal of the revolving line
of credit which provides for available borrowings up to $3,500
based on eligible receivables, and expires on March 31,
2010.
Each loan is collateralized by the assets of the Company and
contains certain nonfinancial covenants with which the Company
was in compliance at December 31, 2009. The fair value of
the preferred stock warrant issued in connection with the loan
and security agreement was $160 and was recorded as a debt
discount. This debt discount is being amortized to interest
expense over the weighted average life of the term loan,
equipment loan and the revolving line of credit.
At December 31, 2008 and 2009, the Companys
outstanding borrowings under the revolving line of credit were
$1,300 and $1,500 with effective interest rates of 9.50% and
9.00%, respectively.
The long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Term note of $2,000 payable in six monthly interest only
payments followed by 39 monthly payments of principal and
interest at 6.95% plus the greater of 4.54% or the yield for the
four-year U.S. Treasury note on the date of the loan (effective
rate of 11.60% and 0% at December 31, 2008 and
2009) through December 1, 2009
|
|
$
|
697
|
|
|
$
|
|
|
Equipment line all loans made under the equipment
line are payable in 36 monthly installments of principal
and interest.
|
|
|
|
|
|
|
|
|
Various equipment loans interest ranging from 11.49%
to 12.53% and due at dates through January 1, 2012
|
|
|
1,462
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
2,159
|
|
|
$
|
732
|
|
Less: discount
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, less discount
|
|
|
2,141
|
|
|
|
732
|
|
Less: current maturities
|
|
|
(1,409
|
)
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
732
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
Future maturities of long-term debt are as follows for the year
ended December 31, 2009:
|
|
|
|
|
2010
|
|
|
499
|
|
2011
|
|
|
224
|
|
2012
|
|
|
9
|
|
|
|
|
|
|
|
|
$
|
732
|
|
|
|
|
|
|
F-17
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
NOTE E
COMMITMENTS AND CONTINGENCIES
Capital
Leases
The Company leases certain computer equipment under capital
leases that bear interest ranging from 8.9% to 10.75%. A summary
of the Companys property under these leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Computer equipment and purchased software
|
|
$
|
1,664
|
|
|
$
|
1,664
|
|
Less: accumulated amortization
|
|
|
(795
|
)
|
|
|
(892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
869
|
|
|
$
|
772
|
|
|
|
|
|
|
|
|
|
|
Future minimum payments under capital leases are as follows for
2009:
|
|
|
|
|
2010
|
|
|
366
|
|
2011
|
|
|
125
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
491
|
|
Less: amount representing interest
|
|
|
(31
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
460
|
|
Less: current portion
|
|
|
338
|
|
|
|
|
|
|
|
|
$
|
122
|
|
|
|
|
|
|
Operating
Leases
The Company is obligated under non-cancellable operating leases
primarily for office space. In addition to base rent under the
leases, the Company pays utilities and its pro rata share of
real estate taxes. Rent expense charged to operations was $580,
$663 and $682 for the years ended December 31, 2007, 2008
and 2009.
Future minimum lease payments are as follows:
|
|
|
|
|
2010
|
|
|
776
|
|
2011
|
|
|
787
|
|
2012
|
|
|
666
|
|
|
|
|
|
|
|
|
$
|
2,229
|
|
|
|
|
|
|
Management
Incentive Agreements
During 2002, the board of directors of the Company approved
management incentive agreements that provide for a bonus to be
paid to certain executive officers upon the sale of the Company.
The aggregate bonus is equal to 0.322% of the amount of the
purchase price, as defined, exceeding $25,000 and less than
$65,000. The aggregate bonus under these agreements is limited
to $150. The management incentive agreements terminate on
June 30, 2012, regardless of employment status. At
December 31, 2008 and 2009, no expense or liability had
been recorded relating to these agreements.
F-18
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
Other
Contingencies
The Company is involved in various claims and legal actions in
the normal course of business. Management believes that the
outcome of such legal actions will not have a significant
adverse effect on the Companys financial position, results
of operations or cash flows.
NOTE F
STOCKHOLDERS DEFICIT
Redeemable
Convertible Preferred Stock
The Company has issued various classes of redeemable convertible
preferred stock. The holders of Series A, B, and C
redeemable convertible preferred stock have the option to put
their shares back to the Company at the liquidation preference
value, as defined in the Certificate of Incorporation, in the
event of any liquidation, dissolution or winding up of the
Company. Certain events defined in the Certificate of
Incorporation are deemed to be a liquidation.
None of the Series A, B and C redeemable convertible
preferred stock have a mandatory redemption feature. In the
event of liquidation, as defined, the holders of Series C
redeemable convertible preferred stock shall be entitled to
receive, prior to and in preference to any distribution of any
assets or surplus funds of the Company to the holders of
Series B and A redeemable convertible preferred stock or
common stock, an amount in cash equal to $5.99 per share plus
accrued unpaid dividends. After the liquidation payment to
Series C redeemable convertible preferred stockholders, the
holders of Series B redeemable convertible preferred stock
shall be entitled to receive, prior to and in preference to any
distribution of any assets or surplus funds of the Company to
the holders of Series A redeemable convertible preferred
stock or common stock, an amount in cash equal to $3.67 per
share plus accrued unpaid dividends. After the liquidation
payment of Series B redeemable convertible preferred
stockholders, the holders of Series A redeemable
convertible preferred stock shall be entitled to receive, prior
to and in preference to any distribution of any assets or
surplus funds of the Company to the holders of common stock, an
amount in cash equal to $8.65 per share plus accrued unpaid
dividends. After the liquidation payment to Series C, B and
A redeemable convertible preferred stockholders, holders of
common stock and Series A, B and C redeemable convertible
preferred stock shall share pro rata in the remaining assets of
the Company.
Each share of Series A, B, and C redeemable convertible
preferred stock, at the option of the holder, is convertible
into common shares at a conversion ratio which was 1 to 1 at
December 31, 2009. The conversion ratio is equal to the
conversion value divided by the conversion price. The conversion
value and conversion price were initially set in the
Companys Fifth Amended and Restated Certificate of
Incorporation at $8.65, $3.67 and $5.99 for the Series A, B
and C redeemable convertible preferred stock, respectively. The
conversion price is subject to adjustment for certain dilutive
issuances. The Company has not issued any dilutive instruments
which would adjust the conversion price. Therefore, at
December 31, 2009, the conversion value and the conversion
price have not changed since they were initially set.
Each share of Series A, B and C redeemable convertible
preferred stock shall automatically and immediately be converted
into shares of common stock upon the closing of a public
offering pursuant to an effective registration statement at the
then effective conversion ratio, if the offering price per share
is not less than $13.45 and the gross proceeds to the Company
are at least $20,000. Each share of redeemable convertible
preferred stock is subject to weighted-average anti-dilution
price protection. The holders of the redeemable convertible
preferred stock are entitled to dividends only when declared. No
dividends have been declared since the issuance of the
redeemable convertible preferred stock. Generally, holders of
Series A, B and C redeemable convertible preferred stock
shall vote on all matters submitted to a vote of stockholders,
except those required by law to be submitted to a class vote.
F-19
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
NOTE G
SHARE-BASED COMPENSATION
At December 31, 2009, there were 122,706 options available
for grant under approved stock option plans. At
December 31, 2007, 2008 and 2009 there were 155 stock
options outstanding issued outside the stock option plans. The
stock options generally vest over three to four years and
generally have a contractual term of ten years from the date of
grant. The 2001 Stock Option Plan provides for the grant of
incentive and nonqualified stock options to employees,
non-employee directors, and other consultants who provide
services to the Company. The 2001 Stock Option Plan provides
that grants of incentive stock options cannot be less than 110%
of the fair market value of the Companys common stock on
the date of grant and the exercise price of incentive stock
options granted to any other employees may not be less than 100%
of the fair market value of the Companys common stock on
the date of grant.
Stock
Options
A summary of the Companys stock option activity is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price($/Sh)
|
|
|
Outstanding at January 1, 2007
|
|
|
1,092,989
|
|
|
$
|
1.94
|
|
Granted
|
|
|
311,085
|
|
|
|
3.27
|
|
Exercised
|
|
|
(124,593
|
)
|
|
|
0.37
|
|
Forfeited
|
|
|
(39,016
|
)
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
1,240,465
|
|
|
|
2.48
|
|
Granted
|
|
|
46,191
|
|
|
|
4.62
|
|
Exercised
|
|
|
(82,151
|
)
|
|
|
0.37
|
|
Forfeited
|
|
|
(16,922
|
)
|
|
|
3.67
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,187,583
|
|
|
|
2.69
|
|
Granted
|
|
|
339,187
|
|
|
|
2.86
|
|
Exercised
|
|
|
(15,640
|
)
|
|
|
0.37
|
|
Forfeited
|
|
|
(262,925
|
)
|
|
|
7.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,248,205
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
F-20
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
The following table summarizes our stock option grants from
January 1, 2009 through December 31, 2009 and our
contemporaneous valuations for those grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Fair
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
Per Share
|
|
Value(s)
|
|
Value of
|
|
|
|
|
Options
|
|
Exercise
|
|
Estimate
|
|
Options
|
|
Valuation
|
Period of Grant
|
|
Granted
|
|
Price(s)
|
|
Per Share
|
|
Granted
|
|
Date(s)
|
|
First Quarter 2009
|
|
|
82,503
|
|
|
$
|
3.45
|
|
|
$
|
3.45
|
|
|
$
|
664
|
|
|
February 10, 2009
|
Second Quarter 2009
|
|
|
99,858
|
|
|
$
|
2.43-$2.55
|
|
|
$
|
2.43-$2.55
|
|
|
$
|
903
|
|
|
April 1, 2009 and
April 22, 2009
|
Third Quarter 2009(1)
|
|
|
238,527
|
|
|
$
|
3.03
|
|
|
$
|
3.03
|
|
|
$
|
2,019
|
|
|
July 23, 2009
|
Fourth Quarter 2009
|
|
|
801
|
|
|
$
|
3.71
|
|
|
$
|
3.71
|
|
|
$
|
6
|
|
|
October 22, 2009
|
|
|
|
(1) |
|
On July 23, 2009, 237,726 options were modified to lower
the per share exercise price to $3.03. |
The following table summarizes information about stock options
outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Exercise Price Per Share
|
|
Outstanding
|
|
|
Life
|
|
|
Price($/Sh)
|
|
|
Exercisable
|
|
|
Price($/Sh)
|
|
|
$0.375
|
|
|
752,755
|
|
|
|
4.0
|
|
|
$
|
0.37
|
|
|
|
746,756
|
|
|
$
|
0.37
|
|
$0.41 $7.45
|
|
|
476,453
|
|
|
|
7.4
|
|
|
|
2.85
|
|
|
|
220,512
|
|
|
|
2.94
|
|
$7.49 $11.24
|
|
|
17,802
|
|
|
|
1.5
|
|
|
|
7.49
|
|
|
|
17,802
|
|
|
|
7.49
|
|
$149.81 $247.19
|
|
|
1,040
|
|
|
|
0.2
|
|
|
|
224.79
|
|
|
|
1,040
|
|
|
|
224.72
|
|
$383.52 $432.96
|
|
|
155
|
|
|
|
0.0
|
|
|
|
383.52
|
|
|
|
155
|
|
|
|
383.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,248,205
|
|
|
|
5.3
|
|
|
$
|
1.65
|
|
|
|
986,265
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the year ended
December 31, 2007, 2008, and 2009 was $280, $346, and $101.
The weighted-average fair value of the options granted during
2007, 2008 and 2009 were $1.76, $2.40, and $1.54 respectively.
The fair value of each option granted was estimated on the date
of grant using the Black-Scholes method with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Weighted-average volatility
|
|
|
52.0
|
%
|
|
|
53.0
|
%
|
|
49% - 53%
|
Expected dividends
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
0.0%
|
Expected life (in years)
|
|
|
8.0
|
|
|
|
7.0
|
|
|
4.0 - 7.0
|
Weighted-average risk-free interest rate
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
|
2.71% - 4.01%
|
The expected term of the options is based on evaluations of
historical and expected future employee exercise behavior. The
risk-free interest rate is based on the U.S. Treasury rates
at the date of grant with maturity dates approximately equal to
the expected life at the grant date. Volatility is based on
historic volatilities from traded shares of a selected publicly
traded peer group. It is not routine for the Company to issue
dividends and it does not expect to do so in the future.
On July 23, 2009, the Company unilaterally amended the
terms of 237,726 stock options granted to 17 employees and
one director to reduce the exercise price for all the shares
subject to each option to $3.03
F-21
SPS
Commerce, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
per share, which was the fair market value of the common stock
on the date of the amendments. The amendments did not change the
vesting provisions or the number of shares subject to any of the
option awards. This was accounted for as a stock option
modification and required the remeasurement of these stock
options. This remeasurement resulted in total additional
incremental stock-based compensation cost of $60, which will be
recognized ratably over the remaining vesting period of the
original awards. Of the $228 of stock based compensation
recognized in the period ended December 31, 2009,
approximately $32 related to the stock-based compensation costs
associated with the modified options.
Common
Stock Warrants
The Company had 200 and 0 warrants outstanding to purchase
common stock, with exercise prices ranging from $0.75 to $393.26
per share, at December 31, 2008 and 2009.
Preferred
Stock Warrants
At December 31, 2008 and 2009, the Company had warrants
outstanding to purchase 68,201 shares of Series B
redeemable convertible preferred stock, with exercise prices of
$3.67 per share. These warrants expire on dates ranging from May
2011 to February 2016.
The Company is required to classify the outstanding warrants to
purchase redeemable convertible preferred stock as a liability
on its balance sheet and record adjustments to their fair value
in the statements of operations. The Company recorded income
(expense) of $(69), $(45) and $(381) for the years ended
December 31, 2007, 2008 and 2009. This expense was recorded
in other income (expense). The warrants are subject to
revaluation at each balance sheet date and any change in fair
value is recognized as a component of other income (expense),
net, until conversion of the preferred stock warrants to common
stock upon completion of the Companys initial public
offering.
NOTE H
EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) retirement savings plan whereby
employees are allowed to contribute up to 50% of their salaries
and the Company will match 25% up to the first 6%. The
Companys contributions vest immediately. Company
contributions to the plan were $124, $172 and $219, respectively
for the years ended December 31, 2007, 2008 and 2009.
NOTE I
GUARANTEES
The Company provides limited guarantees to certain customers
through service level agreements. These agreements are defined
in the master agreements with the customer and performance is
measured on a monthly basis for the life of the contracts.
Service level agreements require the Company to perform at
specified levels, which would include, but are not limited to,
document processing times, data center availability, customer
support and issue resolution.
NOTE J
SUBSEQUENT EVENT
On April 13, 2010, the Company effected a 0.267 for 1
reverse stock split in the form of a combination of the
Companys outstanding stock. All shares and per share
amounts in the accompanying consolidated financial statements
and notes to the financial statements have been retroactively
adjusted for all periods presented to give effect to the reverse
stock split.
F-22
SCHEDULE II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
Balance at
|
|
Revenue,
|
|
|
|
|
|
|
Beginning of
|
|
Cost or
|
|
|
|
Balance at
|
Description
|
|
Period
|
|
Expenses
|
|
Deductions
|
|
End of Period
|
|
|
(In thousands)
|
|
Reserves deducted from assets to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 Accounts Receivable Allowance
|
|
$
|
241
|
|
|
$
|
150
|
|
|
$
|
(193
|
)
|
|
$
|
198
|
|
Year ended December 31, 2008 Accounts Receivable Allowance
|
|
$
|
198
|
|
|
$
|
396
|
|
|
$
|
(286
|
)
|
|
$
|
308
|
|
Year ended December 31, 2009 Accounts Receivable Allowance
|
|
$
|
308
|
|
|
$
|
439
|
|
|
$
|
(521
|
)
|
|
$
|
226
|
|
F-23
3,333,334 Shares
Common
Stock
PROSPECTUS
,
2010
Thomas
Weisel Partners LLC
|
|
William
Blair & Company |
Needham & Company, LLC |
JMP
Securities
Neither we nor any
of the selling stockholders or underwriters have authorized
anyone to provide information different from that contained in
this prospectus. When you make a decision about whether to
invest in our common stock, you should not rely upon any
information other than the information in this prospectus. This
prospectus is not an offer to sell or solicitation of an offer
to buy these shares of common stock in any circumstances under
which the offer or solicitation is unlawful.
Until ,
2010, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotment or
subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other
than the underwriting discounts and commissions, payable by us
in connection with the sale of common stock being registered.
All amounts shown are estimates, except the SEC registration
fee, the Financial Industry Regulatory Authority, Inc. filing
fee and the Nasdaq Global Market listing fee.
|
|
|
|
|
|
|
Amount
|
|
|
SEC registration fee
|
|
$
|
2,840
|
|
FINRA fee
|
|
|
5,483
|
|
Nasdaq Global Market listing fee
|
|
|
100,000
|
|
Legal fees and expenses
|
|
|
800,000
|
|
Accounting fees and expenses
|
|
|
700,000
|
|
Printing expenses
|
|
|
150,000
|
|
Transfer agent and registrar fees and expenses
|
|
|
15,000
|
|
Miscellaneous
|
|
|
26,677
|
|
|
|
|
|
|
Total
|
|
$
|
1,800,000
|
|
Item 14.
Indemnification of Directors and Officers.
We are a corporation organized under the laws of the State of
Delaware. Section 145 of the Delaware General Corporation
Law provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to an action
by reason of the fact that he or she was a director, officer,
employee or agent of the corporation or is or was serving at the
request of the corporation against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful, except that,
in the case of an action by or in right of the corporation, no
indemnification may generally be made in respect of any claim as
to which such person is adjudged to be liable to the
corporation. Our amended and restated bylaws, in the form that
will become effective upon the closing of this offering, provide
that we will indemnify and advance expenses to our directors and
officers (and may choose to indemnify and advance expenses to
other employees and other agents) to the fullest extent
permitted by law; provided, however, that if we enter into an
indemnification agreement with such directors or officers, such
agreement controls.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duties as a director,
except for liability for any:
|
|
|
|
|
breach of a directors duty of loyalty to the corporation
or its stockholders;
|
|
|
|
act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payment of dividends or redemption of shares; or
|
|
|
|
transaction from which the director derives an improper personal
benefit.
|
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, provides that our directors are not personally liable
for breaches of fiduciary duties to the fullest extent permitted
by the Delaware General Corporation Law.
II-1
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Section 145(g) of the Delaware General Corporation Law
permits a corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee
or agent of the corporation. Our amended and restated bylaws, in
the form that will become effective upon the closing of this
offering, permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us, regardless of whether our bylaws permit
indemnification. We intend to obtain a directors and
officers liability insurance policy prior to the closing
of this offering.
As permitted by the Delaware General Corporation Law, we entered
into indemnity agreements with each of our directors that
require us to indemnify such persons against various actions
including, but not limited to, third-party actions where such
director, by reason of his or her corporate status, is a party
or is threatened to be made a party to an action, or by reason
of anything done or not done by such director in any such
capacity. We indemnify directors against all costs, judgments,
penalties, fines, liabilities, amounts paid in settlement by or
on behalf such directors, and for any expenses actually and
reasonably incurred by such directors in connection with such
action, if such directors acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal
proceeding, had no reasonable cause to believe their conduct was
unlawful. We also advance to our directors expenses (including
attorneys fees) incurred by such directors in advance of
the final disposition of any action after the receipt by the
corporation of a statement or statements from directors
requesting such payment or payments from time to time, provided
that such statement or statements are accompanied by an
undertaking, by or on behalf of such directors, to repay such
amount if it shall ultimately be determined that they are not
entitled to be indemnified against such expenses by the
corporation.
The indemnification agreements set forth certain procedures that
will apply in the event of a claim for indemnification or
advancement of expenses, including, among others, provisions
about providing notice to the corporation of any action in
connection with which a director seeks indemnification or
advancement of expenses from the corporation, and provisions
concerning the determination of entitlement to indemnification
or advancement of expenses.
Prior to the closing of this offering we plan to enter into an
underwriting agreement, which will provide that the underwriters
are obligated, under some circumstances, to indemnify our
directors, officers and controlling persons against specified
liabilities.
II-2
Item 15.
Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration
statement, we issued the securities indicated below that were
not registered under the Securities Act. All share and price
information in the table below does not reflect the impact of
the conversion of all of our preferred stock into common stock
immediately prior to consummation of this offering and the 0.267
for 1 reverse stock split of our common stock that occurred on
April 13, 2010.
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|
|
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|
|
|
|
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|
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|
|
Total
|
Individual or Group Name
|
|
Type of Securities
|
|
Date of Sale
|
|
Preferred
|
|
Common
|
|
Consideration
|
|
Pacific Capital Ventures LLC
|
|
Series C convertible preferred stock
|
|
April 10, 2007
|
|
|
124,536
|
|
|
|
|
|
|
$
|
199,257.60
|
|
River Cities Capital Fund II L.P.
|
|
Series C convertible preferred stock
|
|
April 10, 2007
|
|
|
250,000
|
|
|
|
|
|
|
$
|
400,000.00
|
|
River Cities SBIC III L.P.
|
|
Series C convertible preferred stock
|
|
April 10, 2007
|
|
|
625,000
|
|
|
|
|
|
|
$
|
1,000,000.00
|
|
SPVC VI, LLC
|
|
Series C convertible preferred stock
|
|
April 10, 2007
|
|
|
468,750
|
|
|
|
|
|
|
$
|
750,000.00
|
|
CID Mezzanine Capital, L.P.
|
|
Series C convertible preferred stock
|
|
April 10, 2007
|
|
|
901,742
|
|
|
|
|
|
|
$
|
1,442,787.20
|
|
River Cities SBIC III L.P.
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
1,473,438
|
|
|
|
|
|
|
$
|
2,357,500.80
|
|
Axiom Venture Partners II, L.P.
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
312,500
|
|
|
|
|
|
|
$
|
500,000.00
|
|
BlueCrest Strategic Limited
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
263,127
|
|
|
|
|
|
|
$
|
421,003.20
|
|
BVCF IV, L.P.
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
250,000
|
|
|
|
|
|
|
$
|
400,000.00
|
|
Ronald P. Karlsberg, TTEE FBO R.P. Karlsberg Cardiovascular
Medical Group of Southern California 401K, profit sharing plan,
DTD 1/1/1989
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
15,000
|
|
|
|
|
|
|
$
|
24,000.00
|
|
Casimir Skrzypczak
|
|
Series C convertible preferred stock
|
|
April 18, 2007
|
|
|
3,407
|
|
|
|
|
|
|
$
|
5,451.20
|
|
Robert J. Guerriere
|
|
common stock
|
|
April 20, 2007
|
|
|
|
|
|
|
27,092
|
|
|
$
|
2,709.20
|
|
Thomas C. Velin
|
|
common stock
|
|
June 29, 2007
|
|
|
|
|
|
|
232,848
|
|
|
$
|
23,284.80
|
|
Archie C. Black
|
|
common stock
|
|
July 11, 2007
|
|
|
|
|
|
|
200,000
|
|
|
$
|
20,000.00
|
|
Thomas C. Velin
|
|
common stock
|
|
August 9, 2007
|
|
|
|
|
|
|
6,322
|
|
|
$
|
632.20
|
|
Gregory R. Storlie
|
|
common stock
|
|
August 18, 2007
|
|
|
|
|
|
|
380
|
|
|
$
|
38.00
|
|
John P. Sekeres
|
|
common stock
|
|
January 16, 2008
|
|
|
|
|
|
|
3,038
|
|
|
$
|
778.80
|
|
PNC Investment Corp.
|
|
common stock
|
|
May 21, 2008
|
|
|
|
|
|
|
8,360
|
|
|
|
*
|
|
Patrick J. Maurer
|
|
common stock
|
|
May 30, 2008
|
|
|
|
|
|
|
263,260
|
|
|
|
*
|
|
Chad Johnson
|
|
common stock
|
|
August 8, 2008
|
|
|
|
|
|
|
1,386
|
|
|
$
|
138.60
|
|
Archie C. Black
|
|
common stock
|
|
September 4, 2008
|
|
|
|
|
|
|
40,000
|
|
|
$
|
4,000.00
|
|
Sandra L. Evanson
|
|
common stock
|
|
September 11, 2009
|
|
|
|
|
|
|
30,188
|
|
|
|
|
*
|
Archie C. Black
|
|
common stock
|
|
December 22, 2009
|
|
|
|
|
|
|
25,000
|
|
|
$
|
2,500.00
|
|
|
|
|
*
|
|
Indicates shares acquired upon
cashless exercise of an option or warrant. In the case of PNC
Investment Corp., the exercise price of $2,000 was paid by
cancellation of 1,640 shares subject to the applicable
warrant. In the case of Patrick J. Maurer, the exercise price of
$28,676 was paid by cancellation of 25,506 shares subject
to the applicable option. In the case of Sandra L. Evanson, the
exercise price of $3,358 was paid by cancellation of
3,392 shares subject to the applicable option.
|
The above-described sales of Series C convertible preferred
stock were made in reliance upon the exemption from registration
requirements of the Securities Act available under
Section 4(2) of the Securities Act and Rule 506 of
Regulation D. These sales did not involve any underwriters,
underwriting discounts or commissions or any public offering.
The recipients of the securities in these transactions
represented that they were sophisticated persons and that they
intended to acquire the securities for investment only and not
with a view to, or for sale in connection with, any distribution
thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such sales. We believe
that the purchasers either received adequate information about
us or had adequate access, through their relationships with us,
to such information.
The sale of common stock to PNC Investment Corp. was made in
reliance upon the exemption from registration requirements of
the Securities Act available under Section 4(2) of the
Securities Act. This sale did not involve any underwriters,
underwriting discounts or commissions or any public offering.
All other sales of common stock described above were made
pursuant to the exercise of stock options granted under our 2001
Stock Option Plan to our officers, directors, employees and
consultants in reliance upon an available exemption from the
registration requirements of the Securities Act, including those
II-3
contained in Rule 701 promulgated under Section 3(b)
of the Securities Act. Among other things, we relied on the fact
that, under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d)
of the Exchange Act are exempt from registration under the
Securities Act with respect to certain offers and sales of
securities pursuant to compensatory benefit plans as
defined under that rule. We believe that our 2001 Stock Option
Plan qualifies as a compensatory benefit plan.
The following table sets forth information on the stock options
issued by us in the three years preceding the filing of this
registration statement. Though not reflected in the table below,
we intend to grant stock options to purchase up to 1,610,250
shares of our common stock (not reflecting the 0.267 for 1
reverse stock split of our common stock that occurred on
April 13, 2010) effective upon completion of this offering
with an exercise price equal to the offering price. All
information in the table below relating to the number of options
or exercise price does not reflect the 0.267 for 1 reverse stock
split of our common stock that occurred on April 13, 2010.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
Grant Date
|
|
|
|
Exercise
|
|
|
Number of
|
|
Exercise Price
|
|
Grant Date
|
|
Price
|
Date of Issuance
|
|
Options Granted
|
|
($/Sh)
|
|
Fair Value
|
|
($/Sh)
|
|
January 24, 2007
|
|
|
53,475
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
April 26, 2007
|
|
|
3,000
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
July 26, 2007
|
|
|
522,640
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
October 24, 2007
|
|
|
15,000
|
|
|
$
|
0.96
|
|
|
$
|
0.96
|
|
|
$
|
0.81
|
|
October 24, 2007
|
|
|
6,000
|
|
|
$
|
0.96
|
|
|
$
|
0.96
|
|
|
$
|
0.96
|
|
November 27, 2007
|
|
|
500,000
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
$
|
0.81
|
|
November 28, 2007
|
|
|
65,000
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
$
|
0.81
|
|
January 21, 2008
|
|
|
35,000
|
|
|
$
|
1.14
|
|
|
$
|
1.14
|
|
|
$
|
0.81
|
|
January 21, 2008
|
|
|
3,000
|
|
|
$
|
1.14
|
|
|
$
|
1.14
|
|
|
$
|
1.14
|
|
April 23, 2008
|
|
|
3,000
|
|
|
$
|
1.22
|
|
|
$
|
1.22
|
|
|
$
|
0.81
|
|
July 24, 2008
|
|
|
123,500
|
|
|
$
|
1.26
|
|
|
$
|
1.26
|
|
|
$
|
0.81
|
|
October 31, 2008
|
|
|
8,500
|
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
|
$
|
0.81
|
|
February 10, 2009
|
|
|
309,000
|
|
|
$
|
0.92
|
|
|
$
|
0.92
|
|
|
$
|
0.65
|
|
April 1, 2009
|
|
|
309,000
|
(1)
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
April 22, 2009
|
|
|
65,000
|
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
July 23, 2009
|
|
|
893,364
|
(2)
|
|
$
|
0.81
|
|
|
$
|
0.81
|
|
|
$
|
0.81
|
|
October 22, 2009
|
|
|
3,000
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
|
|
(1) |
|
Represents stock options granted to three employees that result
from our unilateral amendment to reduce the exercise price for
all of the shares subject to options granted to the employees on
February 10, 2009. The amendments reduce the exercise price
of the previously granted options to $0.65 per share, which was
the fair market value of our common stock on the date of the
amendments. The amendments did not affect the vesting provisions
or the number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as being forfeited and the amendments as new option
grants; however, none of the holders of the previously granted
options made any investment decisions in connection with the
amendments. |
|
(2) |
|
Includes a total of 890,364 stock options granted to
17 employees and one director that result from our
unilateral amendment to reduce the exercise price for all of the
shares subject to options previously granted to the employees
and director. The amendments reduce the exercise price of the
previously granted options to $0.81 per share, which was the
fair market value of our common stock on the date of the
amendments. The amendments did not affect the vesting provisions
or the number of shares subject to any of the option awards. For
financial statement reporting, we treat the previously granted
options as |
II-4
|
|
|
|
|
being forfeited and the amendments as new option grants;
however, none of the holders of the previously granted options
made any investment decisions in connection with the amendments. |
No consideration was paid to us by any recipient of any of the
foregoing options for the grant of such options. All of the
stock options described above were granted under our 2001 Stock
Option Plan to our officers, directors, employees and
consultants in reliance upon an available exemption from the
registration requirements of the Securities Act, including those
contained in Rule 701 promulgated under Section 3(b)
of the Securities Act. Among other things, we relied on the fact
that, under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d)
of the Exchange Act are exempt from registration under the
Securities Act with respect to certain offers and sales of
securities pursuant to compensatory benefit plans as
defined under that rule. We believe that our 2001 Stock Option
Plan qualifies as a compensatory benefit plan.
Item 16.
Exhibits and Financial Statement Schedules.
See the Exhibit Index following the signature page.
Item 17.
Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this amendment
no. 6 to registration statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota on
this 13th day of April, 2010.
SPS COMMERCE, INC.
|
|
|
|
By:
|
/s/ Kimberly
K. Nelson
|
Kimberly K. Nelson
Executive Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 6 to registration statement has been signed
by the following persons in the capacities and on the dates
indicated.
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|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Archie
C. Black
|
|
President and Chief Executive Officer (principal executive
officer)
|
|
April 13, 2010
|
|
|
|
|
|
/s/ Kimberly
K. Nelson
Kimberly
K. Nelson
|
|
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
|
|
April 13, 2010
|
|
|
|
|
|
*
Steve
A. Cobb
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
*
Michael
B. Gorman
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
*
Martin
J. Leestma
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
*
George
H. Spencer, III
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
*
Murray
R. Wilson
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
*
Sven
A. Wehrwein
|
|
Director
|
|
April 13, 2010
|
|
|
|
|
|
* /s/ Kimberly
K. Nelson
|
|
|
|
|
By: Kimberly K. Nelson
Agent and attorney-in-fact
|
|
|
|
|
II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
registrant to be effective immediately following the closing of
the offering
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the registrant to be effective
immediately prior to the closing of the offering
|
|
4
|
.1
|
|
Specimen Certificate representing shares of common stock of SPS
Commerce, Inc.
|
|
4
|
.2
|
|
Registration rights agreement dated April 10, 2007
|
|
5
|
.1
|
|
Opinion of Faegre & Benson LLP
|
|
10
|
.1
|
|
1999 Equity Incentive Plan**
|
|
10
|
.2
|
|
Form of Option Agreement under 1999 Equity Incentive Plan**
|
|
10
|
.3
|
|
2001 Stock Option Plan**
|
|
10
|
.4
|
|
Form of Incentive Stock Option Agreement under 2001 Stock Option
Plan**
|
|
10
|
.5
|
|
Form of Non-Statutory Stock Option Agreement (Director) under
2001 Stock Option Plan**
|
|
10
|
.6
|
|
2010 Equity Incentive Plan**
|
|
10
|
.7
|
|
Form of Incentive Stock Option Agreement under 2010 Equity
Incentive Plan**
|
|
10
|
.8
|
|
Form of Non-Statutory Stock Option Agreement (Director) under
2010 Equity Incentive Plan**
|
|
10
|
.9
|
|
Loan and Security Agreement dated February 3, 2006 by and
between Ritchie Capital Finance, L.L.C. and the Company
|
|
10
|
.10
|
|
Amendment to Loan and Security Agreement dated March 20,
2007 by and between BlueCrest Venture Finance Master
Fund Limited, as assignee of Ritchie Capital Finance, LLC
and Ritchie Debt Acquisition Fund, Ltd., and the Company
|
|
10
|
.11
|
|
Second Amendment to Loan and Security Agreement dated
March 24, 2008 by and between BlueCrest Venture Finance
Master Fund Limited, as assignee of Ritchie Capital
Finance, LLC and Ritchie Debt Acquisition Fund, Ltd., and the
Company
|
|
10
|
.12
|
|
Third Amendment to Loan and Security Agreement dated
March 30, 2009 by and between BlueCrest Venture Finance
Master Fund Limited, as assignee of Ritchie Capital
Finance, LLC and Ritchie Debt Acquisition Fund, Ltd., and the
Company
|
|
10
|
.13
|
|
Fourth Amendment to Loan and Security Agreement dated
April 8, 2009 by and between BlueCrest Venture Finance
Master Fund Limited, as assignee of Ritchie Capital
Finance, LLC and Ritchie Debt Acquisition Fund, Ltd., and the
Company
|
|
10
|
.14
|
|
2002 Management Incentive Agreement between the Company and
Archie C. Black**
|
|
10
|
.15
|
|
2002 Management Incentive Agreement between the Company and
James J. Frome**
|
|
10
|
.16
|
|
Non-Employee Director Compensation Policy**
|
|
10
|
.17
|
|
Form of Indemnification Agreement for Steve A. Cobb, Michael B.
Gorman, George H. Spencer, III and Murry R. Wilson
|
|
10
|
.18
|
|
Form of Indemnification Agreement for Martin J. Leestma and Sven
A. Wehrwein
|
|
10
|
.19
|
|
Form of Indemnification Agreement for Archie C. Black**
|
|
10
|
.20
|
|
Employment Agreement between the Company and Archie C. Black**
|
|
10
|
.21
|
|
Form of At-will Confidentiality Agreement Regarding Certain
Terms and Conditions of Employment for Kimberly K. Nelson, James
J. Frome, Michael J. Gray and David J. Novak, Jr.**
|
II-7
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.22
|
|
Warrant to Purchase Stock issued by the Company to Silicon
Valley Bank as of May 20, 2004
|
|
10
|
.23
|
|
Warrant issued by the Company to Ritchie Capital Finance, L.L.C.
as of February 3, 2006
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
23
|
.2
|
|
Consent of Faegre & Benson LLP (included in
Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney
|
|
|
|
** |
|
Indicates management contract or compensatory plan or
arrangement. |
II-8