XNAS:SQI SciQuest Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 001-34875

 

 

SCIQUEST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   56-2127592
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

6501 Weston Parkway, Suite 200

Cary, North Carolina 27513

(Address of Principal Executive Offices, Including Zip Code)

(919) 659-2100

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 31, 2012, 22,328,170 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

 


Table of Contents

SCIQUEST, INC.

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2012

TABLE OF CONTENTS

 

          Pages  
   PART I. FINANCIAL INFORMATION   

ITEM 1.

   CONSOLIDATED FINANCIAL STATEMENTS   
   Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011      3   
   Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011 (unaudited)      4   
   Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2012 (unaudited)      5   
   Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)      6   
   Notes to Consolidated Financial Statements (unaudited)      7   

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      19   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      25   

ITEM 4.

   CONTROLS AND PROCEDURES      25   
   PART II. OTHER INFORMATION   

ITEM 1.

   LEGAL PROCEEDINGS      26   

ITEM 1A.

   RISK FACTORS      26   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      26   

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      26   

ITEM 4.

   MINE SAFETY DISCLOSURES      26   

ITEM 5.

   OTHER INFORMATION      26   

ITEM 6.

   EXHIBITS      26   
   SIGNATURES      27   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

2


Table of Contents

SciQuest, Inc.

Consolidated Balance Sheets

(in thousands except share and per share amounts)

 

     As of
June 30,
2012
    As of
December 31,
2011
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 26,498      $ 14,958   

Short-term investments

     36,960        44,685   

Accounts receivable, net

     7,460        10,746   

Prepaid expenses and other current assets

     1,356        1,015   

Deferred tax asset

     59        70   
  

 

 

   

 

 

 

Total current assets

     72,333        71,474   

Property and equipment, net

     5,881        4,028   

Goodwill

     15,719        15,719   

Intangible assets, net

     4,931        5,433   

Deferred project costs

     6,973        7,025   

Deferred tax asset

     12,130        12,634   

Other

     134        55   
  

 

 

   

 

 

 

Total assets

   $ 118,101      $ 116,368   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ —        $ 102   

Accrued liabilities

     4,784        5,945   

Deferred revenues

     35,542        36,836   
  

 

 

   

 

 

 

Total current liabilities

     40,326        42,883   

Deferred revenues, less current portion

     13,949        12,778   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.001 par value; 50,000,000 shares authorized; 22,326,966 and 22,133,036 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     22        22   

Additional paid-in capital

     76,643        74,083   

Accumulated other comprehensive income

     6        —     

Accumulated deficit

     (12,845     (13,398
  

 

 

   

 

 

 

Total stockholders’ equity

     63,826        60,707   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 118,101      $ 116,368   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

SciQuest, Inc.

Consolidated Statements of Operations and Comprehensive Income

(in thousands except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  
     (unaudited)     (unaudited)  

Revenues

   $ 15,180      $ 12,910      $ 29,588      $ 25,434   

Cost of revenues

     4,409        3,134        8,586        5,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,771        9,776        21,002        19,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     3,134        2,916        6,171        5,669   

Sales and marketing

     4,009        3,635        8,115        7,419   

General and administrative

     2,599        1,997        5,171        4,113   

Amortization of intangible assets

     209        210        418        419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,951        8,758        19,875        17,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     820        1,018        1,127        1,853   

Other income:

        

Interest income

     32        21        56        44   

Other income (expense), net

     (18     —          (3     13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income, net

     14        21        53        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     834        1,039        1,180        1,910   

Income tax expense

     (434     (463     (627     (910
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 400      $ 576      $ 553      $ 1,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Foreign currency translation adjustments

     —          —          6        —     

Comprehensive income

   $ 400      $ 576      $ 559      $ 1,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.02      $ 0.03      $ 0.02      $ 0.05   

Diluted

   $ 0.02      $ 0.03      $ 0.02      $ 0.05   

Weighted average shares outstanding used in computing per share amounts:

        

Basic

     22,237        21,859        22,213        21,275   

Diluted

     22,676        22,463        22,653        21,906   

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

SciQuest, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(in thousands except share amounts)

 

     Common Stock      Additional Paid-In      Accumulated Other
Comprehensive
     Accumulated     Total
Stockholders’
 
   Shares      Amount      Capital      Income      Deficit     Equity  

Balance at December 31, 2011

     22,133,036       $ 22       $ 74,083       $ —         $ (13,398   $ 60,707   

Exercise of common stock options

     71,979         —           266         —           —          266   

Issuance of stock in connection with business acquisition

     121,951         —           —           —           —          —     

Stock-based compensation

     —           —           2,294         —           —          2,294   

Foreign currency translation adjustment

     —           —           —           6         —          6   

Net income

     —           —           —           —           553        553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

     22,326,966       $ 22       $ 76,643       $ 6       $ (12,845   $ 63,826   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

SciQuest, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

     Six Months Ended June 30,  
     2012     2011  
     (unaudited)  

Cash flows from operating activities

    

Net income

   $ 553      $ 1,000   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     1,501        1,007   

Stock-based compensation expense

     2,294        1,708   

Deferred taxes

     515        1,016   

Changes in operating assets and liabilities, net of effects of acquisition:

    

Accounts receivable

     3,286        (1,250

Prepaid expenses and other current assets

     (341     184   

Deferred project costs and other assets

     (27     (321

Accounts payable

     (102     (51

Accrued liabilities

     (1,161     (685

Deferred revenues

     (123     2,918   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,395        5,526   

Cash flows from investing activities

    

Business acquisition, net of cash acquired

     —          (7,346

Addition of capitalized software development costs

     (1,323     (405

Purchase of property and equipment

     (1,529     (447

Purchase of available-for-sale short-term investments

     (1,200     (12,395

Maturities of available-for-sale short-term investments

     8,925        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     4,873        (20,593

Cash flows from financing activities

    

Proceeds from public offering

     —          15,405   

Public offering costs

     —          (408

Collection of notes receivable from stockholders

     —          15   

Proceeds from exercise of common stock options

     266        113   
  

 

 

   

 

 

 

Net cash provided by financing activities

     266        15,125   

Effect of exchange rate changes on cash and cash equivalents

     6        —     

Net increase in cash and cash equivalents

     11,540        58   

Cash and cash equivalents at beginning of period

     14,958        17,494   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 26,498      $ 17,552   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

1. Description of Business

SciQuest, Inc. (the Company) provides on-demand strategic procurement and supplier management solutions that integrate customers with their suppliers to improve procurement of indirect goods and services, such as office supplies, laboratory supplies, furniture, MRO (maintenance, repair and operations) supplies and food and beverages. The Company’s on-demand software enables organizations to more efficiently source indirect goods and services, manage their spend and obtain the benefits of compliance with purchasing policies and negotiating power with suppliers. The Company’s on-demand strategic procurement software suite, coupled with its managed supplier network, forms the Company’s integrated solution, which is designed to achieve rapid and sustainable savings. The Company’s solution is designed to optimize tasks throughout the cycle of finding, procuring, receiving and paying for indirect goods and services, which can result in increased efficiency, reduced costs and increased insight into an organization’s buying patterns. The Company’s core target markets for strategic procurement products are higher education, life sciences, healthcare and state and local governments. In addition, the Company markets supplier management products in the general commercial market without regard to specific verticals. The Company is headquartered in Cary, North Carolina.

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Revenue Recognition

The Company primarily derives its revenues from subscription fees for its on-demand strategic procurement and supplier management software solutions and associated implementation services. Revenue is generated from subscription agreements and related services permitting customers to access and utilize the Company’s hosted software. Customers may, on occasion, also purchase a perpetual license for certain software modules. Revenue is recognized when there is persuasive evidence of an arrangement, the service has been provided or delivered to the customer, the collection of the fee is probable and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s arrangements do not contain general rights of return.

In October 2009, the FASB’s Emerging Issues Task Force amended the accounting standards for multiple-element revenue arrangements. The Company adopted this accounting guidance on January 1, 2011 for applicable arrangements entered into or materially modified after this date. The adoption of this guidance did not have a material impact on its financial position, results of operations, or cash flows.

The Company’s contractual agreements generally contain multiple service elements and deliverables. These elements include access to the hosted software, implementation services and, on a limited basis, perpetual licenses for certain software modules and related maintenance and support. The Company evaluates each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within the Company’s control.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

The Company allocates revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company allocates revenue among deliverables in an arrangement using the relative selling price method. Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on ESP.

The Company’s process for determining ESP for its deliverables considers multiple factors that may vary depending upon the facts and circumstances related to each deliverable. Key factors considered in developing ESP related to deliverables include established pricing and approval policies, type and size of customer, number of products purchased, and historical transactions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

As implementation services do not have stand-alone value to the customer, licenses and related implementation services are considered a single unit of accounting. The consideration allocated to licenses and services is recognized ratably over the term of the subscription agreement, beginning with the later of the start date specified in the subscription agreement, or the date access to the software is provided to the customer, provided all other revenue recognition criteria have been met. Fees for professional services that are contingent upon future performance are recognized ratably over the remaining subscription term once the performance milestones have been met. The Company recognizes revenue from any professional services that are sold separately as the services are performed.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s software and services described above. For multiple-year subscription agreements, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year subscription agreements. The Company’s services, such as implementation, are generally sold in conjunction with subscription agreements. These services are recognized ratably over the remaining term of the subscription agreement once any contingent performance milestones have been satisfied. The portion of deferred revenue that the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.

Cost of Revenues

Cost of revenues primarily consists of costs related to hosting the Company’s subscription software services, compensation and related expenses for implementation services, supplier enablement services, customer support staff and client partners, amortization of capitalized software development costs, allocated fixed asset depreciation and facilities costs. Cost of revenues is expensed as incurred.

Deferred Project Costs

The Company capitalizes sales commission costs that are directly related to the execution of its subscription agreements. The commissions are deferred and amortized over the contractual term of the related subscription agreement. The deferred commission amounts are recoverable from the future revenue streams under the subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenues from the subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenues are recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. The deferred commissions are reflected within deferred project costs in the accompanying consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all highly-liquid debt investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains cash balances at financial institutions that may at times exceed federally insured limits. The Company maintains this cash at reputable financial institutions and, as a result, believes credit risk related to its cash is minimal.

Short-Term Investments

Management determines the appropriate classification of investments at the time of purchase and evaluates such determination at each balance sheet date. The Company’s investments are classified as available-for-sale securities and are stated at fair value at June 30, 2012 and December 31, 2011. Realized gains and losses are included in other income (expense) based on the specific identification method. There were no realized gains or losses for the three or six months ended June 30, 2012 and 2011. Net unrealized gains and

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

losses on available-for-sale securities are reported as a component of other comprehensive income, net of tax. As of June 30, 2012 and December 31, 2011, there were no unrealized gains or losses on available-for-sale securities. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at June 30, 2012 or December 31, 2011.

Accounts Receivable

The Company assesses the need for an allowance for doubtful accounts based on estimates of probable credit losses. This assessment is based on several factors, including aging of customer accounts, known customer specific risks, historical experience and existing economic conditions. The Company generally does not require collateral for receivable balances. Accounts would be charged against the allowance after all means of collection were exhausted and recovery was considered remote. Any required provisions for doubtful accounts would be recorded in general and administrative expense. Based on management’s analysis of its outstanding accounts receivable, the Company has recorded an allowance of $43 and $217 at June 30, 2012 and December 31, 2011, respectively.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are usually seven years for furniture and three to five years for computer software and equipment. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the expected term of the leases. Costs for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Software Development Costs

The Company incurs certain costs associated with the development of its on-demand solution, which are accounted for as internal-use software. Certain qualifying costs incurred during the application development phase are capitalized and amortized to expense over the estimated useful life of the related applications, which is generally three years.

Although the Company’s development efforts are primarily focused on its hosted, on-demand solution, the Company also incurs costs in connection with the development of certain of its materials management software products, which are accounted for as costs of software to be sold, leased or otherwise marketed. Under this guidance, capitalization of software development costs begins upon the establishment of technological feasibility (based on a working model approach), subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has substantially coincided; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to its licensed software products and has charged all such costs to research and development expense.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. Additionally, the Company would also review the carrying value of goodwill whenever events or changes in circumstances indicated that its carrying amount may not be recoverable. The Company has concluded that it has one reporting unit for purposes of its annual goodwill impairment testing. To assess goodwill impairment, the first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. The results of our most recent annual assessment did not indicate any impairment of goodwill, and as such the second step of the impairment test was not required. Additionally, we do not believe there have been any triggering events that would result in potential impairment of goodwill as of June 30, 2012.

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their fair values. Stock-based compensation costs are measured at the grant date based on the fair value of the award and are recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model on the date of grant for stock options. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term for the six months ended June 30, 2012

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

and 2011, represents the average time that options that vest are expected to be outstanding based on the mid-point between the vesting date and the end of the contractual term of the award. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards.

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company has determined that it has a single reportable segment.

Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Outstanding unvested restricted stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding until vested. Diluted net income per share is computed giving effect to all potentially dilutive common stock, including options and restricted stock. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.

The following summarizes the calculation of basic and diluted net income per share:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Basic:

        

Net income

   $ 400       $ 576       $ 553       $ 1,000   

Weighted average common shares, basic

     22,236,925         21,858,603         22,213,356         21,275,378   

Basic net income per share

   $ 0.02       $ 0.03       $ 0.02       $ 0.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income

   $ 400       $ 576       $ 553       $ 1,000   

Weighted average common shares, basic

     22,236,925         21,858,603         22,213,356         21,275,378   

Dilutive effect of:

           

Options to purchase common stock

     394,505         474,748         390,412         491,585   

Nonvested shares of restricted stock

     44,828         130,026         48,840         138,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares, diluted

     22,676,258         22,463,377         22,652,608         21,905,599   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.02       $ 0.03       $ 0.02       $ 0.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following equity instruments have been excluded from diluted net income per common share as they would be anti-dilutive.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Common stock options

     323,469         252,439         327,140         222,609   

Income Taxes

Deferred income taxes are provided using tax rates enacted for periods of expected reversal on all temporary differences. Temporary differences relate to differences between the book and tax basis of assets and liabilities, principally intangible assets, property and equipment, deferred subscription revenues, pension assets, accruals and stock-based compensation. Valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized. To the extent that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.

Judgment is required in determining the provision for income taxes. Additionally, the income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities and to changes in tax law and rates in many jurisdictions. The Company would adjust its income tax provision in the period in which it becomes probable that actual results differ from management estimates.

The Company accounts for uncertain tax positions by recognizing and measuring tax benefits taken or expected to be taken on a tax return. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

precedents. If the recognition threshold is met, only the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with a taxing authority is recorded. The tax benefit that is not recorded is considered an unrecognized tax benefit. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.

Recent Accounting Pronouncements

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two step test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. The new guidance requires the presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance on January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

3. Business Combinations

On December 21, 2010, the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of capital stock of AECsoft USA, Inc., a Texas corporation, and AEC Global (Shanghai) Co., Ltd., a Chinese corporation (collectively, “AECsoft”), which together are a leading provider of supplier management and sourcing technology.

The Company completed the acquisition of AECsoft, USA, Inc. on January 1, 2011 and the acquisition of AEC Global (Shanghai) Co., Ltd. on March 31, 2011. The acquisition of AECsoft adds comprehensive supplier management, sourcing and compliance reporting to the Company’s existing strategic procurement and supplier enablement solutions.

The total purchase price of $13,795 consisted of $9,256 in cash and 350,568 shares of the Company’s common stock at a fair value of $4,539. The issuance of 25,365 of these shares, with an estimated fair value of $300, is subject to successful completion of certain performance targets under an earn-out arrangement with a former shareholder of AECsoft. Additionally, 299,838 shares of the Company’s common stock may be issued under an earn-out arrangement with the other former shareholders of AECsoft, upon the successful achievement of such performance targets over the next three fiscal years and continued employment with the Company. The performance conditions for 2011 were met in full, and the Company issued 121,951 shares of common stock on April 14, 2012. The fair value of these shares is being recognized as stock-based compensation expense in the consolidated statement of operations over the requisite service period of the award. During the three months ended June 30, 2012 and 2011, the Company recognized stock-based compensation expense of $367 and $366, respectively, and recognized $734 and $732 during the six months ended June 30, 2012 and 2011, respectively, related to this earn-out arrangement.

The Company incurred acquisition costs of approximately $0 and $134, respectively, during the three and six months ended June 30, 2011, which are included in general and administrative expense in the consolidated statements of operations. The acquisition was accounted for under the purchase method of accounting. The operating results of AECsoft are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase consideration consisted of the following:

 

Cash

   $ 9,256   

Fair value of common stock

     4,539   
  

 

 

 

Total purchase consideration

   $ 13,795   
  

 

 

 

Cash acquired

     1,910   
  

 

 

 

Net purchase consideration

   $ 11,885   
  

 

 

 

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquired technology and the covenant not to compete are amortized on a straight-line basis. Acquired customer relationships are amortized over a ten-year estimated life in a pattern consistent with which the economic benefit is expected to be realized. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is not deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific value resulting from synergies that are not included in the fair values of assets.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

The allocation of the purchase price as of the acquisition date was as follows:

 

     Estimated
Useful Life
     Estimated
Fair Value
 

Accounts receivable

      $ 831   

Prepaid expenses and other current assets

        174   

Property and equipment

        82   

Deferred tax asset

        1,414   

Covenant not to compete

     5 years         51   

Acquired technology

     7 years         1,176   

Customer relationships

     10 years         4,200   

Goodwill

        8,954   

Accrued expenses

        (524

Deferred tax liability

        (2,111

Deferred revenues

        (2,362
     

 

 

 

Total purchase consideration

      $ 11,885   
     

 

 

 

The measurement period for the acquisition purchase accounting was closed March 31, 2011.

On October 25, 2011, the Company made certain indemnification claims in the amount of $446 against the former shareholders of AECsoft pursuant to the Escrow Agreement with the former shareholders of AECsoft. The claims were agreed to by the former AECsoft shareholders and an escrow distribution to SciQuest consisting of $223 in cash and 18,115 shares of the Company’s common stock at a fair value of $223 was made. As of June 30, 2012, $1,052 in cash and 85,544 shares of common stock remain in escrow to satisfy potential indemnification claims.

4. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at June 30, 2012 and December 31, 2011 are as follows:

 

     June 30, 2012      December 31, 2011  
     Cost      Fair Market
Value
     Cost      Fair Market
Value
 

Cash Equivalents

   $ 14,594       $ 14,594       $ 9,623       $ 9,623   

Short-term investments

     36,960         36,960         44,685         44,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,554       $ 51,554       $ 54,308       $ 54,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no unrealized gains or losses as of June 30, 2012 or December 31, 2011.

5. Fair Value Measurements

Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

   

Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

   

Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant input and significant value drivers are observable in active markets.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

   

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments.

As of June 30, 2012 and December 31, 2011, the Company had cash equivalents of $14,594 and $9,623, respectively, which consist of money market accounts. As of June 30, 2012 and December 31, 2011, the Company had short-term investments of $36,960 and $44,685, respectively, which consist of variable rate demand notes that are invested in corporate and municipal bonds. These variable rate demand notes have final maturities between 2017 and 2042, but are puttable by the Company at any time with seven days notice. These cash equivalents and short-term investments are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices. As of June 30, 2012 and December 31, 2011, the Company did not have any financial assets or liabilities with observable inputs not quoted on active markets (Level 2), or without observable market values that would require a high level of judgment to determine fair value (Level 3).

The fair value measurements of the Company’s financial assets at June 30, 2012 are as follows:

 

     Total      Level 1      Level 2      Level 3  

Cash Equivalents

   $ 14,594       $ 14,594         —           —     

Short-term investments

     36,960         36,960         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,554       $ 51,554         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

6. Property and Equipment

Property and equipment consist of the following as of June 30, 2012 and December 31, 2011:

 

     June 30,     December 31,  
     2012     2011  

Furniture and equipment

   $ 1,202      $ 1,144   

Computer software and equipment

     9,553        6,824   

Leasehold improvements

     681        616   
  

 

 

   

 

 

 

Total costs

     11,436        8,584   

Less accumulated depreciation and amortization

     (5,555     (4,556
  

 

 

   

 

 

 

Property and equipment, net

   $ 5,881      $ 4,028   
  

 

 

   

 

 

 

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $357 and $170 for the three months ended June 30, 2012 and 2011, respectively, and was $657 and $338 for the six months ended June 30, 2012 and 2011, respectively.

Computer software and equipment includes capitalized software development costs incurred during development of the Company’s on-demand solution. The Company capitalized software development costs of $734 and $210 during the three months ended June 30, 2012 and 2011, respectively, and $1,323 and $405 during the six months ended June 30, 2012 and 2011, respectively. Net capitalized software development costs totaled $2,363 and $1,382 at June 30, 2012 and December 31, 2011, respectively. Amortization expense for the three months ended June 30, 2012 and 2011 related to capitalized software development costs was $194 and $94, respectively, and was $342 and $166 for the six months ended June 30, 2012 and 2011, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

7. Goodwill and Other Intangible Assets

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisition in January 2011 and the going private transaction in July 2004. A summary of intangible assets at June 30, 2012 and December 31, 2011 follows:

 

     June 30, 2012  
      Weighted Average
Amortization Period
     Gross
Carrying

Amount
     Accumulated
Amortization
    Net
Carrying

Amount
 

Goodwill

      $ 15,719       $ —        $ 15,719   

Acquired technology

     7 years         9,276         (8,352     924   

Customer relationships

     10 years         9,400         (5,859     3,541   

Covenant not to compete

     5 years         51         (15     36   

Trademarks

        430         —          430   
     

 

 

    

 

 

   

 

 

 

Total

      $ 34,876       $ (14,226   $ 20,650   
     

 

 

    

 

 

   

 

 

 

 

     December 31, 2011  
      Weighted Average
Amortization Period
     Gross
Carrying

Amount
     Accumulated
Amortization
    Net
Carrying

Amount
 

Goodwill

      $ 15,719       $ —        $ 15,719   

Acquired technology

     7 years         9,276         (8,268     1,008   

Customer relationships

     10 years         9,400         (5,446     3,954   

Covenant not to compete

     5 years         51         (10     41   

Trademarks

        430         —          430   
     

 

 

    

 

 

   

 

 

 

Total

      $ 34,876       $ (13,724   $ 21,152   
     

 

 

    

 

 

   

 

 

 

Amortization expense of intangible assets was $251 and $252 for the three months ended June 30, 2012 and 2011, respectively, of which $42 and $42 is recorded in cost of revenues in the accompanying consolidated statements of operations for the three months ended June 30, 2012 and 2011, respectively. Amortization expense of intangible assets was $502 and $503 for the six months ended June 30, 2012 and 2011, respectively, of which $84 and $84 is recorded in cost of revenues in the accompanying consolidated statements of operations for the six months ended June 30, 2012 and 2011, respectively.

The Company estimates the following amortization expense related to its intangible assets for the years ended December 31:

 

2012 (remaining six months)

   $ 503   

2013

     978   

2014

     825   

2015

     634   

2016

     535   

Thereafter

     1,026   
  

 

 

 
   $ 4,501   
  

 

 

 

8. Stockholders’ Equity

Stock Incentive Plan

The Company adopted a stock incentive plan (the Plan) August 27, 2004. The Plan, as amended, allows the Company to grant up to 5,307,736 common stock options, stock appreciation rights (SARs) and restricted stock awards to employees, board members and others who contribute materially to the success of the Company. The Company’s Board of Directors approves the terms of stock options granted. Individual option grants generally become exercisable ratably over a period of four years from the grant date. The contractual term of the options is approximately ten years from the date of grant.

The Company recognizes compensation expense associated with restricted stock and common stock options based on the grant-date fair value of the award on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period.

Restricted Stock

As part of the Plan, the Company has issued restricted shares of its common stock to certain employees. Upon employee termination, the Company has the option to repurchase the shares. The repurchase price is the original purchase price plus interest for unvested restricted shares and the current fair value (as determined by the Board of Directors prior to September 24, 2010, and subsequently as determined by the closing price of the Company’s shares of common stock on the NASDAQ Global Market on the date of termination) for vested restricted shares. The shares generally vest ratably over four years.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

The following summarizes the activity of nonvested shares of restricted stock for the six months ended June 30, 2012:

 

     Number of Shares     Weighted-
Average  Grant
Date Fair Value
 

Nonvested at December 31, 2011

     63,526      $ 1.66   

Issued

     —          —     

Vested

     (22,881     1.69   
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     40,645      $ 1.64   
  

 

 

   

 

 

 

In conjunction with the issuance of these restricted shares, subscription note agreements were executed for certain employees. The notes are payable in four annual payments due January 1 of each calendar year and bear interest at 6%. At June 30, 2012 and December 31, 2011, the balance outstanding for these subscription note agreements was $0.

Restricted stock awards are recognized in the consolidated statements of operations based on their fair values. As a result of the notes receivable being deemed nonrecourse for accounting purposes and other contractual provisions in the agreements, the related restricted stock grants are considered stock options for accounting purposes. Stock-based compensation expense of $20 and $38 was recorded during the three months ended June 30, 2012 and 2011, respectively, and $39 and $74 was recorded during the six months ended June 30, 2012 and 2011, respectively, in connection with these restricted stock awards. The total unrecognized compensation cost related to nonvested shares of restricted stock is approximately $66 at June 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.9 years.

On March 20, 2010, the Board of Directors authorized the forgiveness of the outstanding balance of the subscription note agreements issued by certain employees in connection with their previous purchases of the Company’s restricted stock. A total of $1,016 was forgiven, which included the outstanding principal note amount plus accrued but unpaid interest. The Company accounted for the forgiveness of the outstanding note balance as a modification of a stock option for accounting purposes. Accordingly, the Company measured incremental compensation expense of $746 in connection with this modification. Incremental compensation expense of $518 related to the vested shares of restricted stock was recognized immediately at the date of modification. Incremental compensation expense of $228 related to the unvested shares will be recognized as additional compensation expense over the remaining vesting period. During the three months ended June 30, 2012 and 2011, the Company recognized compensation expense of $8 and $22, respectively, and recognized $16 and $44 during the six months ended June 30, 2012 and 2011, respectively, related to this modification.

On April 25, 2012, the Company granted restricted stock units covering 18,640 shares of common stock to certain individuals. Restricted stock units differ from restricted stock awards in that restricted stock units represent the right to receive shares of common stock once such shares are vested and issuable in accordance with the terms of the restricted stock units. Once issued, such shares are not subject to further restrictions. The restricted stock units vest in their entirety on the first anniversary of the grant date, subject to continuous service during the vesting period. Once vested, 50% of the shares are issuable and 50% are deferred until service termination, though the individual may elect to defer all shares until service termination. Stock-based compensation expense related to these restricted stock units is recognized in the consolidated statements of operations based on the fair value of these awards, which is the grant date market value of the Company’s common stock. Stock-based compensation expense of $51 was recorded during the three and six months ended June 30, 2012 in connection with these restricted stock units. The total unrecognized compensation cost related to these awards is approximately $229 at June 30, 2012. This amount is expected to be recognized over a weighted-average period of 0.8 years.

Stock Options

The Company also issues common stock options under the terms of the Plan. The following summarizes stock option activity for the six months ended June 30, 2012:

 

     Number of  Options
Outstanding
    Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term (In Years)
     Aggregate
Intrinsic  Value
at
June 30,
2012  (Unaudited)
 

Balance at December 31, 2011

     1,323,231      $ 9.53         8.3       $ 6,864   
  

 

 

   

 

 

       

Options granted

     494,950      $ 14.69         

Options exercised

     (71,979   $ 3.67         

Options canceled

     (106,510   $ 15.29         
  

 

 

   

 

 

       

Balance at June 30, 2012

     1,639,692      $ 10.98         8.4       $ 11,452   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at June 30, 2012

     1,434,235      $ 10.69         8.4       $ 11,018   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2012

     612,407      $ 7.56         7.5       $ 6,367   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock at June 30, 2012 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on June 30, 2012. The aggregate intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was $340 and $1,110, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2012 and 2011 was $659 and $1,458, respectively.

The total unrecognized compensation cost related to outstanding stock options is $8,956 at June 30, 2012. This amount is expected to be recognized over a weighted-average period of 3.1 years.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2012:

 

     Options Outstanding at June 30, 2012      Options Exercisable at
June 30, 2012
 

Range of Exercise Price

   Number      Weighted-Average
Remaining
Contractual Life
(Yrs.)
     Weighted-
Average
Exercise Price
     Number      Weighted-
Average
Exercise Price
 

$0.08 — $ 0.14

     57,195         3.1       $ 0.10         57,195       $ 0.10   

$0.14 — $ 1.90

     9,782         6.8         1.71         7,341         1.65   

$2.04 — $ 8.18

     407,510         7.3         3.15         280,423         2.91   

$10.99 — $16.71

     1,138,205         9.1         14.26         264,293         14.17   

$16.81 — $17.73

     27,000         9.2         17.25         3,155         17.23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,639,692         8.4       $ 10.98         612,407       $ 7.56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of common stock options for employees and non-employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

 

     Six Months Ended June 30,  
     2012     2011  

Estimated dividend yield

     0     0

Expected stock price volatility

     60.0 – 70.0     90.0

Weighted-average risk-free interest rate

     1.0 – 1.5     1.8 – 2.6

Expected life of options (in years)

     6.25        6.25   

Stock-based compensation expense of $680 and $580 was recorded during the three months ended June 30, 2012 and 2011, respectively, and $1,439 and $858 was recorded during the six months ended June 30, 2012 and 2011, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the six months ended June 30, 2012 and 2011 was $9.20 and $10.64, respectively.

As discussed in Note 3, the Company recognized stock-based compensation expense of $367 and $366 in the accompanying consolidated statement of operations during the three months ended June 30, 2012 and 2011, respectively, and $734 and $732 during the six months ended June 30, 2012 and 2011, respectively, related to the earn-out arrangement with certain former shareholders of AECsoft.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) effective June 1, 2012. In order to qualify the Purchase Plan in accordance with the Internal Revenue Code of 1986, as amended, the Company’s stockholders must approve the Purchase Plan within 12 months following its commencement. The Company anticipates submitting the Purchase Plan to a vote of its stockholders at the 2013 annual meeting, which is expected to occur in April 2013. If the stockholders do not approve the Purchase Plan at the 2013 annual meeting, the Purchase Plan will be terminated and all contributions made by participants will be returned. Any person that is employed by the Company for the thirty day period immediately preceding the offering date in a given purchase period will be eligible to participate in the plan for that purchase period. Eligible employees can contribute up to 10% of their gross earnings for each pay period, up to a maximum of $25,000 for any calendar year. The initial offering period that commenced on June 1, 2012 is a period of 12 months, and thereafter six month offering periods begin on December 1 and June 1 of each year. During the offering period eligible employees may elect to purchase shares of the Company’s common stock according to the terms of the offering. The per share purchase price is equal to the lessor of 85% of the fair market value of the Company’s common stock on the offering date or 85% of the fair market value of the Company’s common stock on the purchase date. As of June 30, 2012, 1,000,000 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three and six months ended June 30, 2012, the Company recognized stock-based compensation expense of $15 related to the Purchase Plan.

 

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Table of Contents

SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

The fair value of stock purchase rights granted under the Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

 

     Six Months Ended
June 30, 2012
 

Estimated dividend yield

     0

Expected stock price volatility

     57.3

Weighted-average risk-free interest rate

     0.17

Expected life of options (in years)

     1   

9. Income Taxes

The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. The Company’s effective tax rate of 52.0% and 44.6% for the three months ended June 30, 2012 and 2011, respectively, and 53.1% and 47.6% for the six months ended June 30, 2012 and 2011, respectively, was higher than the federal statutory rate of 34% primarily due to state income taxes and non-deductible expenses. For the three and six months ended June 30, 2012, non-deductible expenses included stock-based compensation, stock-based compensation associated with the earn-out arrangement and amortization of acquired intangible assets.

10. Commitments and Contingencies

Legal Contingencies

From time to time, the Company is subject to legal proceedings and claims that arise in the ordinary course of business. The Company records an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

In 2001, the Company was named as a defendant in several securities class action complaints filed in the United States District Court for the Southern District of New York originating from its December 1999 initial public offering. On January 9, 2012, this litigation was dismissed.

On January 31, 2012, a lawsuit alleging patent infringement was filed against the Company and certain customers and suppliers that participate in the SciQuest Supplier Network. On March 31, 2012, SciQuest, Inc. entered into a settlement agreement with the plaintiff. The settlement amount, which did not have a material adverse effect on the Company’s financial position, results of operations, or cash flows, is recorded in operating expenses in the accompanying consolidated statement of operations for the six months ended June 30, 2012.

Warranties and Indemnification

The Company’s hosting service is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. Except as noted in the preceding paragraph, the Company to date has not incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations as contingencies and records a liability for these obligations when a loss is probable and reasonably estimable. To date, the Company has not incurred any material costs as a result of these indemnifications and has not accrued any liabilities related to the obligations in the accompanying consolidated financial statements.

The Company enters into service level agreements with its on-demand solution customers warranting certain levels of uptime reliability. To date, the Company has not incurred any material costs and has not accrued any liabilities related to such obligations.

 

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SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands except share and per share amounts)

 

11. Subsequent Event

Acquisition

On August 1, 2012, the Company completed the acquisition of substantially all of the assets of Upside Software, Inc. (“Upside”), a privately-owned Canadian corporation and a leader in contract lifecycle management solutions. The acquisition of Upside adds a contract lifecycle management solution, which includes collaborative contract creation and negotiation technology, to the Company’s existing strategic procurement and supplier management solutions.

The purchase price consisted of $22 million in cash, net of cash acquired. The acquisition of Upside occurred subsequent to June 30, 2012. Accordingly, the results of operations of the acquired entity are not included in the consolidated statements of operations of SciQuest, Inc. for the three and six months ended June 30, 2012. The Company is currently in the process of determining the initial accounting for this acquisition.

 

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SCIQUEST, INC.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under “Part II, Other Information—Item 1A, Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Except as otherwise indicated, all share and per share information referenced in this report has been adjusted to reflect the one-for-two reverse split of our common stock that occurred on September 20, 2010.

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or the “Company” refer to SciQuest, Inc.

Overview

We provide leading on-demand strategic procurement and supplier management solutions that integrate our customers with their suppliers to improve procurement of indirect goods and services. Our on-demand software enables organizations to realize the benefits of strategic procurement by identifying and establishing contracts with preferred suppliers, driving spend to those contracts and promoting process efficiencies through electronic transactions. Strategic procurement is the optimization of tasks throughout the cycle of finding, procuring, receiving and paying for indirect goods and services, which can result in increased efficiency, reduced costs and increased insight into an organization’s buying patterns. Using our managed SciQuest Supplier Network, our customers do business with many thousands of unique suppliers and spend billions of dollars annually.

In January 2011, we acquired all of the capital stock of AECsoft USA, Inc., or “AECsoft”, which was a leading provider of supplier management and sourcing technology. AECsoft’s technology has been incorporated into our product offering as our Total Supplier Manager, Sourcing Director and Supplier Diversity Manager modules. The purchase price consisted of approximately $9 million in cash and 350,568 shares of our common stock. The issuance of 25,365 of these shares is subject to successful completion of certain performance targets under an earn-out arrangement with a former shareholder of AECsoft. Additionally, 299,838 shares of our common stock may be issued under an earn-out arrangement with the other former shareholders of AECsoft, based on successful achievement of such performance targets over the next three fiscal years and continued employment with us. These shares are being recognized as compensation expense in the consolidated statement of operations over the requisite service period of the award. The performance conditions originally related primarily to the amount of revenue we recognize from AECsoft’s products and services during each of 2011, 2012 and 2013. In October 2011, we agreed with certain of the former AECsoft shareholders to remove their revenue-based conditions and add certain other conditions. The performance conditions for 2011 were met in full, and we issued 121,951 shares of common stock on April 14, 2012. If the performance conditions are met in full in 2012 and 2013, we will issue 121,951 shares of common stock on or about March 31, 2013 and 81,301 shares of common stock on or about March 31, 2014. The purchase price included $1.275 million in cash and 103,659 shares of common stock that have been deposited in escrow to satisfy potential indemnification claims, of which $1.052 million in cash and 85,544 shares of common stock remain as of June 30, 2012.

Key Financial Terms and Metrics

We have several key financial terms and metrics. During the six months ended June 30, 2012, there were no changes in the definitions of our key financial terms and metrics, which are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Terms and Metrics” included in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

 

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Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. 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 Note 2 to the financial statements, the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that is both material to the preparation 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:

 

   

revenue recognition;

 

   

stock-based compensation;

 

   

deferred project costs;

 

   

goodwill; and

 

   

income taxes.

During the six months ended June 30, 2012, there were no significant changes in our critical accounting policies or estimates. See Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and under the heading “Critical Accounting Policies” in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.

Results of Operations

The following table sets forth, for the periods indicated, our results of operations:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
            2012                   2011                   2012                  2011        

Revenues

   $ 15,180      $ 12,910      $ 29,588      $ 25,434   

Cost of revenues (1) (2)

     4,409        3,134        8,586        5,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,771        9,776        21,002        19,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses: (1)

        

Research and development

     3,134        2,916        6,171        5,669   

Sales and marketing

     4,009        3,635        8,115        7,419   

General and administrative

     2,599        1,997        5,171        4,113   

Amortization of intangible assets

     209        210        418        419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,951        8,758        19,875        17,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     820        1,018        1,127        1,853   

Interest and other income, net

     14        21        53        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     834        1,039        1,180        1,910   

Income tax expense

     (434     (463     (627     (910
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 400      $ 576      $ 553      $ 1,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts include stock-based compensation expense, as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2012             2011              2012               2011       

Cost of revenues

   $ (39   $ 61       $ 82       $ 108   

Research and development

     258        273         499         515   

Sales and marketing

     352        293         650         559   

General and administrative

     570        379         1,063         526   
  

 

 

   

 

 

    

 

 

    

 

 

 
   $ 1,141      $ 1,006       $ 2,294       $ 1,708   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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(2) Cost of revenues includes amortization of capitalized software development costs of:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
            2012                    2011                    2012                    2011         

Amortization of capitalized software development costs

   $ 194       $ 94       $ 342       $ 166   

Amortization of acquired software

     42         42         84         84   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 236       $ 136       $ 426       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenues:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Revenues

     100     100     100     100

Cost of revenues (1) (2)

     29        24        29        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     71        76        71        77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses: (1)

        

Research and development

     21        23        21        22   

Sales and marketing

     26        28        27        29   

General and administrative

     17        15        18        16   

Amortization of intangible assets

     1        2        1        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     65        68        67        69   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6        8        4        8   

Interest and other income, net

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6        8        4        8   

Income tax expense

     (3     (4     (2     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3     4     2     4
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Revenues. Revenues for the three months ended June 30, 2012 were $15.2 million, an increase of $2.3 million, or 18%, over revenues of $12.9 million for the three months ended June 30, 2011. The increase in revenues resulted primarily from the recognition of revenue for a full three-month period for the new customers added in, and subsequent to, the three months ended June 30, 2011. Our customer count increased from 322 as of June 30, 2011 to 325 as of June 30, 2012, consisting of 30 customer additions and 27 customer terminations. Revenues associated with the customer terminations were not significant as compared to revenues associated with the customer additions. We have increased our customer count through our continued efforts to enhance brand awareness and our sales and marketing efforts.

Cost of Revenues. Cost of revenues for the three months ended June 30, 2012 was $4.4 million, an increase of $1.3 million, or 42%, over cost of revenues of $3.1 million for the three months ended June 30, 2011. As a percentage of revenues, cost of revenues increased to 29% for the three months ended June 30, 2012 from 24% from the three months ended June 30, 2011. The increase in dollar amount primarily resulted from a $0.9 million increase in employee-related costs attributable to our existing personnel and additional implementation service personnel, a $0.1 million increase in amortization of capitalized software, a $0.1 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.2 million increase in other spend. We had 117 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at June 30, 2012, compared to 100 full-time equivalents at June 30, 2011.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2012 were $3.1 million, an increase of $0.2 million, or 7%, from research and development expenses of $2.9 million for the three months ended June 30, 2011. As a percentage of revenues, research and development expense decreased to 20% for the three months ended June 30, 2012 from 23% for the three months ended June 30, 2011. The increase in dollar amount was due primarily to a $0.1 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.1 million increase in other research and development spend. Increases in employee-related costs during the period were offset by increases in capitalized software development costs. We had 94 full-time equivalents in our research and development organization at June 30, 2012, compared to 67 full-time equivalents at June 30, 2011.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2012 were $4.0 million, an increase of $0.4 million, or 11%, over sales and marketing expenses of $3.6 million for the three months ended June 30, 2011. As a percentage of revenues, sales and marketing expenses decreased to 26% for the three months ended June 30, 2012 from 28% for the three months ended June 30, 2011. The increase in dollar amount was due primarily to a $0.1 million increase in employee-related costs attributable to our existing personnel and additional sales and marketing personnel, a $0.1 million increase in stock-based compensation expense, and a $0.1 million increase in amortized commission expense. We had 55 full-time equivalents in our sales and marketing organization at June 30, 2012, compared to 50 full-time equivalents at June 30, 2011.

 

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General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2012 were $2.6 million, an increase of $0.6 million, or 30%, over general and administrative expenses of $2.0 million for the three months ended June 30, 2011. As a percentage of revenues, general and administrative expenses increased to 17% for the three months ended June 30, 2012, from 15% for the three months ended June 30, 2011. The increase was primarily due to a $0.2 million increase in stock-based compensation expense, and a $0.4 million increase in other general and administrative spend. We had 21 full-time equivalents in our general and administrative organization at June 30, 2012, compared to 17 full-time equivalents at June 30, 2011.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended June 30, 2012 and 2011 was $0.2 million. As a percentage of revenues, amortization of intangible assets decreased to 1% for the three months ended June 30, 2012, from 2% for the three months ended June 30, 2011.

Income Tax Expense. Income tax expense for the three months ended June 30, 2012 was $0.4 million, a decrease of $0.1 million, or 20%, over income tax expense of $0.5 million for the three months ended June 30, 2011. The decrease was due to a decrease in our taxable income.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Revenues. Revenues for the six months ended June 30, 2012 were $29.6 million, an increase of $4.2 million, or 17%, over revenues of $25.4 million for the six months ended June 30, 2011. The increase in revenues resulted primarily from the recognition of revenue for a full six-month period for the new customers added in, and subsequent to, the six months ended June 30, 2011. Our customer count increased from 322 as of June 30, 2011 to 325 as of June 30, 2012, consisting of 30 customer additions and 27 customer terminations. Revenues associated with the customer terminations were not significant as compared to revenues associated with the customer additions. We have increased our customer count through our continued efforts to enhance brand awareness and our sales and marketing efforts.

Cost of Revenues. Cost of revenues for the six months ended June 30, 2012 was $8.6 million, an increase of $2.6 million, or 43%, over cost of revenues of $6.0 million for the six months ended June 30, 2011. As a percentage of revenues, cost of revenues increased to 29% for the six months ended June 30, 2012 from 23% from the six months ended June 30, 2011. The increase in dollar amount primarily resulted from a $1.7 million increase in employee-related costs attributable to our existing personnel and additional implementation service personnel, a $0.2 million increase in amortization of capitalized software, a $0.3 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.4 million increase in other spend. We had 117 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at June 30, 2012, compared to 100 full-time equivalents at June 30, 2011.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2012 were $6.2 million, an increase of $0.5 million, or 9%, from research and development expenses of $5.7 million for the six months ended June 30, 2011. As a percentage of revenues, research and development expense decreased to 21% for the six months ended June 30, 2012 from 22% for the six months ended June 30, 2011. The increase in dollar amount was due primarily to a $0.1 million increase in allocated overhead due to increases in leased square footage of office space, a $0.3 million increase in other research and development spend, and a $0.1 million net increase in employee-related costs attributable to our existing personnel and additional development personnel, which was offset by increases in capitalized software development costs. We had 94 full-time equivalents in our research and development organization at June 30, 2012, compared to 67 full-time equivalents at June 30, 2011.

Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2012 were $8.1 million, an increase of $0.7 million, or 9%, over sales and marketing expenses of $7.4 million for the six months ended June 30, 2011. As a percentage of revenues, sales and marketing expenses decreased to 27% for the six months ended June 30, 2012 from 29% for the six months ended June 30, 2011. The increase in dollar amount was due primarily to a $0.2 million increase in employee-related costs attributable to our existing personnel and additional sales and marketing personnel, a $0.1 million increase in stock-based compensation expense, a $0.1 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.2 million increase in amortized commission expense. We had 55 full-time equivalents in our sales and marketing organization at June 30, 2012, compared to 46 full-time equivalents at June 30, 2011.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2012 were $5.2 million, an increase of $1.1 million, or 27%, over general and administrative expenses of $4.1 million for the six months ended June 30, 2011. As a percentage of revenues, general and administrative expenses increased to 18% for the six months ended June 30, 2012, from 16% for the six months ended June 30, 2011. The increase was primarily due to a $0.1 million increase in employee-related costs attributable to our existing personnel and additional general and administrative personnel, a $0.5 million increase in stock-based compensation expense, and a $0.4 million increase in other general and administrative spend. We had 21 full-time equivalents in our general and administrative organization at June 30, 2012, compared to 17 full-time equivalents at June 30, 2011.

 

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Amortization of Intangible Assets. Amortization of intangible assets for the six months ended June 30, 2012 and 2011 was $0.4 million. As a percentage of revenues, amortization of intangible assets decreased to 1% for the three months ended June 30, 2012, from 2% for the three months ended June 30, 2011.

Income Tax Expense. Income tax expense for the six months ended June 30, 2012 was $0.6 million, a decrease of $0.3 million, or 33%, over income tax expense of $0.9 million for the six months ended June 30, 2011. The decrease was due to a decrease in our taxable income, partially offset by an increase in our effective tax rate.

Liquidity

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $6.4 million during the six months ended June 30, 2012. The amount of our net cash provided by operating activities is primarily a result of the timing of cash payments from our customers, offset by the timing of our primary cash expenditures, which are employee salaries. The cash payments from our customers will fluctuate quarterly as our new business sales normally fluctuate quarterly, primarily due to the timing of client budget cycles, with the second and fourth quarters of each year generally having the most sales and the first and third quarters generally having fewer sales. The cash payments from customers are typically due annually on the anniversary date of the initial contract. The cash payments from customers were approximately $33 million during the six months ended June 30, 2012. The cash payments to employees are typically ratable throughout the fiscal year, with the exception of annual incentive payments, which occur in the first quarter. The cash expenditures for employee salaries, including incentive payments, were approximately $17 million during the six months ended June 30, 2012.

For the six months ended June 30, 2012, net cash provided by operating activities of $6.4 million was primarily the result of $0.6 million of net income plus a $3.3 million decrease in accounts receivable, $2.3 million of stock-based compensation, and $1.5 million of depreciation and amortization, less a $1.2 million decrease in accrued liabilities.

For the six months ended June 30, 2011, net cash provided by operating activities of $5.5 million was primarily the result of the following, exclusive of acquired assets and liabilities, $1.0 million of net income plus a $2.9 million increase in deferred revenues, $1.7 million of stock-based compensation, $1.0 million of depreciation and amortization, and a $1.0 million decrease in deferred taxes, less a $1.3 million increase in accounts receivable, a $0.3 million increase in deferred project costs, and a $0.7 million decrease in accrued liabilities.

As of June 30, 2012, we had net operating loss carryforwards of approximately $183 million available to reduce future federal taxable income. In the future, we may fully utilize our available net operating loss carryforwards and would begin making income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we generate taxable income and/or we are not allowed to use net operating loss carryforwards for federal/state income tax purposes, our cash generated from operations will be adequate to meet our income tax obligations.

Net Cash Flows from Investing Activities

For the six months ended June 30, 2012, net cash provided by investing activities was $4.9 million, consisting of net maturities of $7.7 million of short-term investments, less various capital expenditures of $1.5 million and capitalization of $1.3 million of software development costs. In general, our capital expenditures are for our network infrastructure to support our increasing customer base and growth in new business and for internal use, such as equipment for our increasing employee headcount.

For the six months ended June 30, 2011, net cash used in investing activities was $20.6 million, consisting of the acquisition of AECsoft, net of cash acquired, of $7.3 million, the purchase of $12.4 million of short-term investments, various capital expenditures of $0.4 million and capitalization of $0.4 million of software development costs.

Net Cash Flows from Financing Activities

For the six months ended June 30, 2012, net cash provided by financing activities was $0.3 million, representing proceeds from the exercise of common stock options.

For the six months ended June 30, 2011, net cash provided by financing activities was $15.1 million, consisting primarily of $15.4 million in proceeds from our public offering net of underwriting costs, offset by $0.4 million expenditures for public offering costs.

 

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Off-Balance Sheet Arrangements

As of June 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

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 products and services, to acquire complementary businesses, products, or technologies, the sales and marketing resources needed to further penetrate our targeted vertical markets and gain acceptance of new modules we develop, the expansion of our operations in the United States and internationally and the response of competitors to our products and services. 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 expect our research and development, sales and marketing and capital expenditures to decline as a percentage of revenues but increase in absolute dollars in the future. In the future, we may also acquire complementary businesses, products or technologies. We have no formal agreements or commitments with respect to any acquisitions at this time.

We believe our cash and cash equivalents, and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 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.

Contractual and Commercial Commitment Summary

We have contractual obligations that require us to make future cash payments. During the six months ended June 30, 2012, there were no material changes in the contractual and commercial commitments that are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual and Commercial Commitment Summary” included in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

Seasonality

Our new business sales normally fluctuate as a result of seasonal variations in our business, principally due to the timing of client budget cycles. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of new business and the payment of annual bonuses. Historically, due to lower new sales in our first quarter, combined with the payment of annual bonuses from the prior year in our first quarter, our cash flow from operations is lowest in our first quarter, and due to the timing of client budget cycles, our cash flow from operations is lower in our second quarter as compared to our third and fourth quarters. In addition, deferred revenues can vary on a seasonal basis for the same reasons. This pattern may change, however, as a result of acquisitions, new market opportunities or new product introductions.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk.

We bill our customers predominately in U.S. dollars and receive payment predominately in U.S. dollars. Accordingly, our results of operations and cash flows are not materially subject to fluctuations due to changes in foreign currency exchange rates. If we grow sales of our solution outside of the United States, our contracts with foreign customers may be denominated in foreign currency and may become subject to changes in currency exchange rates.

Interest Rate Sensitivity.

Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our investments, which are primarily cash and cash equivalents and short-term investments, we believe there is no material risk of exposure.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation as of June 30, 2012 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of June 30, 2012, were effective for the purposes stated above.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

25


Table of Contents

SCIQUEST, INC.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are not party to any material legal proceedings at this time. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the Risk Factors we previously disclosed in our annual report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 24, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

Not applicable.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

Description

31.1*   Rule 13a-14(a)/15d-14(a) Certification, executed by Stephen J. Wiehe, President, Chief Executive Officer and Director of SciQuest.
31.2*   Rule 13a-14(a)/15d-14(a) Certification, executed by Rudy C. Howard, Chief Financial Officer of SciQuest.
32.1**   Section 1350 Certification, executed by Stephen J. Wiehe, President, Chief Executive Officer and Director of SciQuest.
32.2**   Section 1350 Certification, executed by Rudy C. Howard, Chief Financial Officer of SciQuest.
101***   Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

 

* Filed herewith.
** Furnished herewith.
*** Pursuant to Rule 406T of SEC Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

26


Table of Contents

SCIQUEST, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SCIQUEST, INC.
(Registrant)
By:   /s/    RUDY C. HOWARD        
  Rudy C. Howard
  Chief Financial Officer
  (Principal Financial and Accounting Officer)
  Date: August 9, 2012

 

27

XNAS:SQI SciQuest Inc Quarterly Report 10-Q Filling

SciQuest Inc XNAS:SQI Stock - Get Quarterly Report SEC Filing of SciQuest Inc XNAS:SQI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:SQI SciQuest Inc Quarterly Report 10-Q Filing - 6/30/2012
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