UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-34875

SCIQUEST, INC.

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

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 þ No o

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

As of July 31, 2011, 22,144,219 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

SCIQUEST, INC.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2011
TABLE OF CONTENTS

		Pages
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)			4
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2011 (unaudited)			5
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)			6
Notes to Consolidated Financial Statements			7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18
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 5. OTHER INFORMATION			26
ITEM 6. EXHIBITS			26
SIGNATURES			27
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS

SciQuest, Inc.

		As of				As of
		June 30,				December 31,
		2011				2010
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	17,552			$	17,494
Short-term investments			32,395				20,000
Accounts receivable, net			8,481				6,400
Prepaid expenses and other current assets			1,287				1,297
Deferred tax asset			255				207
Total current assets			59,970				45,398
Property and equipment, net			2,423				1,993
Goodwill			15,719				6,765
Intangible assets, net			5,963				1,039
Deferred project costs			6,007				5,667
Deferred tax asset			13,914				15,675
Other			131				150
Total assets		$	104,127			$	76,687
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	—			$	51
Accrued liabilities			4,039				4,200
Deferred revenues			32,218				28,305
Total current liabilities			36,257				32,556
Deferred revenues, less current portion			11,263				9,896
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 22,144,212 and 20,532,443 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively			22				20
Additional paid-in capital			71,817				50,462
Notes receivable from stockholders			—				(15	)
Accumulated deficit			(15,232	)			(16,232	)
Total stockholders’ equity			56,607				34,235
Total liabilities and stockholders’ equity		$	104,127			$	76,687

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

SciQuest, Inc.

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(unaudited)								(unaudited)
Revenues		$	12,910			$	10,562			$	25,434			$	20,688
Cost of revenues			3,134				2,337				5,961				4,446
Gross profit			9,776				8,225				19,473				16,242
Operating expenses:
Research and development			2,916				1,882				5,669				3,919
Sales and marketing			3,635				2,831				7,419				5,969
General and administrative			1,997				1,255				4,113				2,635
Amortization of intangible assets			210				75				419				151
Total operating expenses			8,758				6,043				17,620				12,674
Income from operations			1,018				2,182				1,853				3,568
Other income (expense):
Interest income			21				5				44				12
Other income (expense), net			—				(4	)			13				1,676
Total other income, net			21				1				57				1,688
Income before income taxes			1,039				2,183				1,910				5,256
Income tax expense			(463	)			(909	)			(910	)			(2,052	)
Net income			576				1,274				1,000				3,204
Dividends on redeemable preferred stock			—				693				—				1,364
Net income attributable to common stockholders		$	576			$	581			$	1,000			$	1,840
Net income attributable to common stockholders per share:
Basic		$	0.03			$	0.04			$	0.05			$	0.13
Diluted		$	0.03			$	0.04			$	0.05			$	0.13
Weighted average shares outstanding used in computing per share amounts:
Basic			21,859				14,075				21,275				14,079
Diluted			22,463				14,703				21,906				14,680

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

SciQuest, Inc.

																						Total
		Common Stock								Additional Paid-In				Notes Receivable				Accumulated				Stockholders’
		Shares				Amount				Capital				from Stockholders				Deficit				Equity
Balance as of December 31, 2010			20,532,443			$	20			$	50,462			$	(15	)		$	(16,232	)		$	34,235
Exercise of common stock options			110,638				1				112				—				—				113
Proceeds from public offering, net of underwriting discounts and offering costs			1,150,000				1				14,996				—				—				14,997
Issuance of stock in connection with business acquisition			325,203				—				4,539				—				—				4,539
Exercise of warrants			25,928				—				—				—				—				—
Payments on notes receivable from stockholders			—				—				—				15				—				15
Stock-based compensation			—				—				1,708				—				—				1,708
Net income			—				—				—				—				1,000				1,000
Balance as of June 30, 2011			22,144,212			$	22			$	71,817			$	—			$	(15,232	)		$	56,607

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

SciQuest, Inc.

		Six Months Ended June 30,
		2011				2010
		(unaudited)
Cash flows from operating activities
Net income		$	1,000			$	3,204
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,007				518
Gain on sale of investment			—				(1,700	)
Stock-based compensation expense			1,708				756
Deferred taxes			1,016				1,764
Changes in operating assets and liabilities, net of the effects of the acquisition:
Accounts receivable			(1,250	)			(1,917	)
Prepaid expenses and other current assets			184				89
Deferred project costs and other assets			(321	)			(1,369	)
Accounts payable			(51	)			(43	)
Accrued liabilities and other			(685	)			(162	)
Deferred revenues			2,918				1,233
Net cash provided by operating activities			5,526				2,373
Cash flows from investing activities
Business acquisition, net of cash acquired			(7,346	)			—
Addition of capitalized software development costs			(405	)			(422	)
Purchase of property and equipment			(447	)			(379	)
Purchase of available-for-sale short-term investments			(12,395	)			—
Proceeds from sale of investment			—				1,700
Restricted cash			—				350
Net cash (used in) provided by investing activities			(20,593	)			1,249
Cash flows from financing activities
Proceeds from public offering			15,405				—
Public offering costs			(408	)			—
Issuance of common and restricted stock			—				39
Repurchases of restricted stock			—				(273	)
Repayment of notes payable			—				(350	)
Collection of notes receivable from stockholders			15				4
Proceeds from exercise of common stock options			113				21
Net cash provided by (used in) financing activities			15,125				(559	)
Net increase in cash and cash equivalents			58				3,063
Cash and cash equivalents at beginning of period			17,494				17,132
Cash and cash equivalents at end of period		$	17,552			$	20,195
Supplemental disclosure of cash flow information
Cash paid for interest		$	—			$	2
Supplemental disclosure of non-cash flow information
Dividends on redeemable preferred stock		$	—			$	1,364

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

SciQuest, Inc.

1. Description of Business

SciQuest, Inc. (the Company) provides an on-demand strategic procurement and supplier enablement solution that integrates 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 current primary target markets are higher education, life sciences, healthcare and state and local governments. The Company is headquartered in Cary, North Carolina.

Secondary Offering

On April 5, 2011, the Company completed a secondary public offering of 1,000,000 shares of common stock at an offering price of $14.25 per share. On April 13, 2011, the Company completed the additional sale of 150,000 shares of common stock at an offering price of $14.25 per share pursuant to the underwriters’ over-allotment option. The Company received aggregate net proceeds of $14,997, after payment of underwriting discounts and commissions and legal, accounting and other fees incurred in connection with the offering and the over-allotment option.

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 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 three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles 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, 2010, which was filed with the Securities and Exchange Commission on March 9, 2011.

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 accounting principles generally accepted in the United States (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 enablement software solution 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 standalone value and delivery of the undelivered element is probable and within the Company’s control.

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 ESPs.

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 ESPs 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 and 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 high credit quality 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 as of each balance sheet date. The Company’s investments were classified as available-for-sale securities and were stated at fair value at June 30, 2011 and December 31, 2010. 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, 2011 and 2010. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income (loss), net of tax. As of June 30, 2011 and December 31, 2010, 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, 2011 or December 31, 2010.

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 $17 and $0 as of June 30, 2011 and December 31, 2010, 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 generally 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.

Costs incurred in connection with the development of the Company’s licensed software products are accounted for as costs of software to be sold, leased or otherwise marketed. 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.

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statement 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, 2011 and 2010, 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 reporting segment.

Income Per Share

Basic net income per share is computed by dividing net income available to common stockholders 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 attributable to common stockholders per share:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Basic:
Net income		$	576			$	1,274			$	1,000			$	3,204
Less: Dividends on redeemable preferred stock			—				(693	)			—				(1,364	)
Net income attributable to common stockholders		$	576			$	581			$	1,000			$	1,840
Weighted average common shares, basic			21,858,603				14,075,073				21,275,378				14,078,738
Basic net income attributable to common stockholders per share		$	0.03			$	0.04			$	0.05			$	0.13
Diluted:
Net income attributable to common stockholders		$	576			$	581			$	1,000			$	1,840
Weighted average common shares, basic			21,858,603				14,075,073				21,275,378				14,078,738
Dilutive effect of:
Options to purchase common stock			474,748				318,674				491,585				312,940
Warrants to purchase common stock			—				219,512				—				218,283
Nonvested shares of restricted stock			130,026				90,063				138,636				69,607
Weighted average common shares, diluted			22,463,377				14,703,322				21,905,599				14,679,568
Diluted net income attributable to common stockholders per share		$	0.03			$	0.04			$	0.05			$	0.13

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,
		2011				2010				2011				2010
Common stock options			252,439				39,147				222,609				44,565

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, 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.

On January 1, 2007, the Company adopted new guidance which prescribed a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. The Company’s adoption of this new guidance did not have a material effect on its financial position or results of operations.

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 fair value of these shares will be recognized as stock-based compensation expense in the consolidated statement of operations over the requisite service period of the award. During the three and six months ended June 30, 2011, the Company recognized stock-based compensation expense of $366 and $732, respectively, related to this earn-out arrangement.

The Company incurred acquisition costs of approximately $134 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.

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

		Estimated				Estimated
		Useful Life				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 following unaudited proforma consolidated results of operations for the three and six months ended June 30, 2010 assumes that the AECsoft acquisition occurred at the beginning of the year. The unaudited pro forma information combines the historical results for the Company with the historical results for AECsoft for the same period. The following unaudited pro forma information is not intended to be indicative of future operating results.

		Three Months				Six Months
		Ended				Ended
		June 30, 2010				June 30, 2010
Pro forma revenue		$	11,845			$	23,050
Pro forma net income		$	1,178			$	2,804
Pro forma net income per share, basic		$	0.08			$	0.19
Pro forma net income per share, diluted		$	0.08			$	0.19

4. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at June 30, 2011 and December 31, 2010 are as follows:

		June 30, 2011								December 31, 2010
						Fair Market								Fair Market
		Cost				Value				Cost				Value
Cash Equivalents:
Money market accounts		$	13,214			$	13,214			$	8,755			$	8,755
Short-term investments:
Variable rate demand notes			32,395				32,395				20,000				20,000
Total		$	45,609			$	45,609			$	28,755			$	28,755

There were no unrealized gains or losses as of June 30, 2011 or December 31, 2010.

5. Fair Value Measurements

Under U.S. 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. U.S. 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.

•

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, 2011 and December 31, 2010, the Company had cash equivalents of $13,214 and $8,755, respectively, which consist of money market accounts. As of June 30, 2011 and December 31, 2010, the Company had short-term investments of $32,395 and $20,000, 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 2020 and 2034, 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, 2011 and December 31, 2010, 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, 2011 are as follows:

		Total				Level 1				Level 2				Level 3
Cash Equivalents		$	13,214			$	13,214				—				—
Short-term investments			32,395				32,395				—				—
Total		$	45,609			$	45,609				—				—

6. Property and Equipment

Property and equipment consist of the following as of June 30, 2011 and December 31, 2010:

		As of				As of
		June 30,				December 31,
		2011				2010
Furniture and equipment		$	842			$	605
Computer software and equipment			5,476				4,821
Leasehold improvements			293				251
Total costs			6,611				5,677
Less accumulated depreciation and amortization			(4,188	)			(3,684	)
Property and equipment, net		$	2,423			$	1,993

Depreciation expense related to property and equipment (excluding capitalized internal-use software) for the three months ended June 30, 2011 and 2010 was $170 and $132, respectively, and was $338 and $270 for the six months ended June 30, 2011 and 2010, 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 $210 and $220 during the three months ended June 30, 2011 and 2010, respectively, and $405 and $422 during the six months ended June 30, 2011 and 2010, respectively. Net capitalized software development costs totaled $1,007 and $740 as of June 30, 2011 and December 31, 2010, respectively. Amortization expense for the three months ended June 30, 2011 and 2010 related to capitalized software development costs was $94 and $49, respectively, and was $166 and $97 for the six months ended June 30, 2011 and 2010, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations.

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.

The changes in the carrying amount of goodwill for the six months ended June 30, 2011 were as follows:

Balance as of December 31, 2010		$	6,765
Goodwill acquired			8,954
Balance as of June 30, 2011		$	15,719

A summary of intangible assets as of June 30, 2011 and December 31, 2010 follows:

		June 30, 2011
		Weighted Average				Gross Carrying				Accumulated				Net Carrying
		AmortizationPeriod				Amount				Amortization				Amount
Acquired technology		7 years				$	9,276			$	(8,184	)		$	1,092
Customer relationships		10 years					9,400				(5,005	)			4,395
Covenant not to compete		5 years					51				(5	)			46
Trademarks							430				—				430
Total						$	19,157			$	(13,194	)		$	5,963

		December 31, 2010
		Weighted Average				Gross Carrying				Accumulated				Net Carrying
		AmortizationPeriod				Amount				Amortization				Amount
Acquired technology						$	8,100			$	(8,100	)		$	—
Customer relationships		10 years					5,200				(4,591	)			609
Covenant not to compete							—				—				—
Trademarks							430				—				430
Total						$	13,730			$	(12,691	)		$	1,039

Amortization expense of intangible assets was $252 and $75 for the three months ended June 30, 2011 and 2010, respectively, of which $42 and $0 is recorded in cost of revenues in the accompanying consolidated statements of operations for the three months ended June 30, 2011 and 2010, respectively. Amortization expense of intangible assets was $503 and $151 for the six months ended June 30, 2011 and 2010, respectively, of which $84 and $0 is recorded in cost of revenues in the accompanying consolidated statements of operations for the six months ended June 30, 2011 and 2010, respectively.

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

2011 (remaining six months)		$	502
2012			978
2013			951
2014			798
2015			607
Thereafter			1,697
		$	5,533

8. Debt

On October 30, 2008, the Company entered into a credit agreement with a bank which provides for borrowings of up to $2,500. Interest accrued on the unpaid principal balance at the LIBOR Market Index Rate plus 1.5%. In accordance with the terms of the agreement, the Company maintained a restricted cash balance in the amount equal to the outstanding credit balance. In March 2010, the Company fully repaid the outstanding balance under its line of credit of $350, plus accrued interest, and closed the credit agreement. In accordance with the terms of the credit agreement, the restricted cash balance became unrestricted upon the repayment and closing of the credit agreement.

9. 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 4,307,736 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.

The following summarizes the activity of nonvested shares of restricted stock for the six months ended June 30, 2011:

						Weighted-
						Average Grant
		Number of Shares				Date Fair Value
Nonvested as of December 31, 2010			174,288			$	1.67
Issued			—				—
Vested			(43,369	)			1.69
Nonvested as of June 30, 2011			130,919			$	1.66

The total unrecognized compensation cost related to nonvested shares of restricted stock is approximately $217 at June 30, 2011. This amount is expected to be recognized over a weighted-average period of 1.9 years.

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%. As of June 30, 2011, there was no outstanding balance for these subscription note agreements.

Restricted stock awards are recognized in the consolidated statement 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 $38 and $37 was recorded during the three months ended June 30, 2011 and 2010, respectively, and $74 and $75 was recorded during the six months ended June 30, 2011 and 2010, respectively, in connection with these restricted stock awards.

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. The Company recognized compensation expense of $22 and $22 during the three months ended June 30, 2011 and 2010, respectively, and recognized $44 and $540 during the six months ended June 30, 2011 and 2010, respectively, related to this modification.

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, 2011:

										Weighted-				Aggregate
										Average				Intrinsic Value
						Weighted-				Remaining				as of
		Number of Options				Average				Contractual				June 30,
		Outstanding				Exercise Price				Term (In Years)				2011 (Unaudited)
Balance as of December 31, 2010			733,651			$	2.76				7.7			$	7,515
Options granted			703,524			$	14.04
Options exercised			(110,638	)		$	0.98
Options canceled			(22,685	)		$	8.59
Balance as of June 30, 2011			1,303,852			$	8.90				8.7			$	10,683
Vested and expected to vest at June 30, 2011			1,116,208			$	8.53				8.6			$	10,314
Exercisable as of June 30, 2011			365,631			$	3.30				7.1			$	5,041

The aggregate intrinsic value in the table above represents the difference between the current market value of the Company’s common stock at June 30, 2011 and the exercise price of the underlying awards 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, 2011. The aggregate intrinsic value of options exercised during the three months ended June 30, 2011 and 2010 was $1,110 and $66, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2011 and 2010 was $1,458 and $66, respectively.

The total unrecognized compensation cost related to outstanding stock options is $7,706 at June 30, 2011. This amount is expected to be recognized over a weighted-average period of 3.4 years.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2011:

														Options Exercisable at
		Options Outstanding at June 30, 2011												June 30, 2011
						Weighted-Average
						Remaining				Weighted-								Weighted-
Range of						Contractual Life				Average								Average
Exercise Price		Number				(Yrs.)				Exercise Price				Number				Exercise Price
$0.08 — $0.14			100,432				4.1			$	0.10				100,272			$	0.10
$0.14 — $1.90			14,434				7.7				1.60				8,993				1.42
$2.04 — $8.18			459,847				8.2				3.06				211,067				2.71
$10.99 — $16.71			712,639				9.7				13.86				45,299				13.54
$16.85 — $17.50			16,500				9.9				17.20				0				0
Total			1,303,852				8.7			$	8.90				365,631			$	3.30

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,
		2011				2010
Estimated dividend yield			0	%			0	%
Expected stock price volatility			90.00	%			100.00	%
Weighted-average risk-free interest rate			1.8 – 2.6	%			2.6 – 3.0	%
Expected life of options (in years)			6.25				6.25

Stock-based compensation expense of $580 and $89 was recorded during the three months ended June 30, 2011 and 2010, respectively, and $858 and $141 was recorded during the six months ended June 30, 2011 and 2010, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the three months ended June 30, 2011 and 2010 was $11.23 and $6.61, respectively. The weighted average grant date fair value per share for stock options granted in the six months ended June 30, 2011 and 2010 was $10.64 and $3.08, respectively.

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

Warrants

As of June 30, 2011, there were no outstanding warrants. As of December 31, 2010, the Company had warrants outstanding representing 26,080 shares of common stock, with all of the warrants being exercisable as of December 31, 2010 to purchase the Company’s common stock at $0.08 per share. The fair value of each warrant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 3.47%; expected lives of five years; dividend yield of 0%; and volatility factor of 80%. All warrants were issued in conjunction with prior credit agreements that have since terminated and the fair value of the warrants was recorded as a financing cost and amortized to interest expense over the term of the related debt. In February 2011, the outstanding warrants were exercised at purchase price of $0.08 per share. The warrant holders utilized a cashless exercise option, resulting in 25,928 shares of common stock issued.

10. 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 47.6% and 39.0% for the six months ended June 30, 2011 and 2010, respectively, was higher than the federal statutory rate of 34 percent primarily due to state income taxes and non-deductible expenses. For the six months ended June 30, 2011, non-deductible expenses included stock-based compensation, stock-based compensation associated with the earn-out arrangement and amortization of acquired intangible assets.

11. Commitments and Contingencies

Legal Contingencies

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. The complaints alleged, among other things, that the prospectus used in the Company’s initial public offering contained material misstatements or omissions regarding the underwriters’ allocation practices and compensation and that the underwriters manipulated the aftermarket for the Company’s stock. These complaints were consolidated along with similar complaints filed against over 300 other issuers in connection with their initial public offerings. After several years of litigation and appeals related to the sufficiency of the pleadings and class certification, the parties agreed to a settlement of the entire litigation, which was approved by the Court on October 5, 2009. Notices of appeal to the Court’s order have been filed by various appellants. The Company has not incurred significant costs to date in connection with its defense of these claims since this litigation is covered by its insurance policy. The Company believes it has sufficient coverage under its insurance policy to cover its obligations under the settlement agreement. Accordingly, the Company believes the ultimate resolution of these matters will not have an impact on its financial position and, therefore, it has not accrued a contingent liability as of June 30, 2011 or December 31, 2010 related to this litigation.

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. The Company does not currently believe the resolution of these actions will have a material adverse effect upon the Company’s financial position, results of operations or cash flows.

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. 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.

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 a leading on-demand strategic procurement and supplier enablement solution that integrates 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 more than 30,000 unique suppliers and spend billions of dollars annually.

In the six months ended June 30, 2011, we acquired all of the capital stock of AECsoft USA, Inc. and AEC Global (Shanghai) Co., Ltd. (collectively, “AECsoft”), which is a leading provider of supplier management and sourcing technology. AECsoft’s technology has been incorporated into our product offering as new Total Supplier Manager, Sourcing Director and Supplier Diversity Manager modules as well as providing increased functionality for some of our preexisting modules. The purchase price consisted of approximately $9.3 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 will be recognized as stock-based compensation expense in the consolidated statement of operations over the requisite service period of the award. The performance targets relate to the amount of revenue we recognize from AECsoft’s products and services during each of 2011, 2012 and 2013. If the performance conditions are met in full, we will issue 121,951 shares of common stock on or about March 31, 2012, 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.

Key Financial Terms and Metrics

We have several key financial terms and metrics. During the six months ended June 30, 2011, 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, 2010, which was filed with the Securities and Exchange Commission on March 9, 2011.

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, 2011, 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 as filed with the Securities and Exchange Commission 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,
		2011				2010				2011				2010
Revenues		$	12,910			$	10,562			$	25,434			$	20,688
Cost of revenues (1) (2)			3,134				2,337				5,961				4,446
Gross profit			9,776				8,225				19,473				16,242
Operating expenses: (1)
Research and development			2,916				1,882				5,669				3,919
Sales and marketing			3,635				2,831				7,419				5,969
General and administrative			1,997				1,255				4,113				2,635
Amortization of intangible assets			210				75				419				151
Total operating expenses			8,758				6,043				17,620				12,674
Income from operations			1,018				2,182				1,853				3,568
Interest and other income, net			21				1				57				1,688
Income before income taxes			1,039				2,183				1,910				5,256
Income tax expense			(463	)			(909	)			(910	)			(2,052	)
Net income		$	576			$	1,274			$	1,000			$	3,204

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Cost of revenues		$	61			$	20			$	108			$	31
Research and development			273				22				515				175
Sales and marketing			293				21				559				118
General and administrative			379				85				526				432
		$	1,006			$	148			$	1,708			$	756

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Amortization of capitalized software development costs		$	94			$	49			$	166			$	97
Amortization of acquired software			42				—				84				—
		$	136			$	49			$	250			$	97

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,
		2011				2010				2011				2010
Revenues			100	%			100	%			100	%			100	%
Cost of revenues (1) (2)			24				22				23				21
Gross profit			76				78				77				79
Operating expenses: (1)
Research and development			23				18				22				19
Sales and marketing			28				27				29				29
General and administrative			15				12				16				13
Amortization of intangible assets			2				—				2				1
Total operating expenses			68				57				69				62
Income from operations			8				21				8				17
Interest and other income, net			—				—				—				8
Income before income taxes			8				21				8				25
Income tax expense			(4	)			(9	)			(4	)			(10	)
Net income			4	%			12	%			4	%			15	%

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues. Revenues for the three months ended June 30, 2011 were $12.9 million, an increase of $2.3 million, or 22%, over revenues of $10.6 million for the three months ended June 30, 2010. The increase in revenues resulted primarily from an increase in the number of customers from 168 as of June 30, 2010 to 322 as of June 30, 2011, recognition of revenue for a full three-month period for the new customers added in, and subsequent to, the three months ended June 30, 2010, as well as the acquisition of AECsoft in January 2011. We have increased our customer count through our continued efforts to enhance brand awareness, our sales and marketing efforts, and our AECsoft acquisition in January 2011.

Cost of Revenues. Cost of revenues for the three months ended June 30, 2011 was $3.1 million, an increase of $0.8 million, or 35%, over cost of revenues of $2.3 million for the three months ended June 30, 2010. As a percentage of revenues, cost of revenues increased to 24% for the three months ended June 30, 2011 from 22% from the three months ended June 30, 2010. The increase in dollar amount primarily resulted from a $0.7 million increase in employee-related costs attributable to our existing personnel and additional implementation service personnel. We had 100 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at June 30, 2011, compared to 70 full-time equivalents at June 30, 2010.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2011 were $2.9 million, an increase of $1.0 million, or 53%, from research and development expenses of $1.9 million for the three months ended June 30, 2010. As a percentage of revenues, research and development expense increased to 23% for the three months ended June 30, 2011 from 18% for the three months ended June 30, 2010. The increase in dollar amount was due primarily to a $0.6 million increase in employee-related costs attributable to our existing personnel and additional research and development personnel, and a $0.3 million increase in stock-based compensation expense. We had 67 full-time equivalents in our research and development organization at June 30, 2011, compared to 54 full-time equivalents at June 30, 2010.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2011 were $3.6 million, an increase of $0.8 million, or 29%, over sales and marketing expenses of $2.8 million for the three months ended June 30, 2010. As a percentage of revenues, sales and marketing expenses increased to 28% for the three months ended June 30, 2011 from 27% for the three months ended June 30, 2010. 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 $0.3 million increase in stock-based compensation expense, and a $0.3 million increase in other sales and marketing spend. We had 50 full-time equivalents in our sales and marketing organization at June 30, 2011, compared to 46 full-time equivalents at June 30, 2010.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2011 were $2.0 million, an increase of $0.7 million, or 54%, over general and administrative expenses of $1.3 million for the three months ended June 30, 2010. As a percentage of revenues, general and administrative expenses increased to 15% for the three months ended June 30, 2011, from 12% for the three months ended June 30, 2010. The increase was primarily due to a $0.3 million increase in employee-related costs attributable to our existing personnel and additional general and administrative personnel, and a $0.3 million increase in stock-based compensation expense. We had 17 full-time equivalents in our general and administrative organization at June 30, 2011, compared to 13 full-time equivalents at June 30, 2010.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended June 30, 2011 were $0.2 million, an increase of $0.1 million or 100%, over amortization of intangible assets of $0.1 million for the three months ended June 30, 2010. As a percentage of revenues, amortization of intangible assets increased to 2% for the three months ended June 30, 2011 from 0% for the three months ended June 30, 2010. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our acquisition of AECsoft in January 2011.

Income Tax Expense. Income tax expense for the three months ended June 30, 2011 was $0.5 million, a decrease of $0.4 million, or 44%, over income tax expense of $0.9 million for the three months ended June 30, 2010. The decrease was due to a decrease in our taxable income, partially offset by an increase in our effective tax rate.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues. Revenues for the six months ended June 30, 2011 were $25.4 million, an increase of $4.7 million, or 23%, over revenues of $20.7 million for the six months ended June 30, 2010. The increase in revenues resulted primarily from an increase in the number of customers from 168 as of June 30, 2010 to 322 as of June 30, 2011, recognition of revenue for a full six-month period for the new customers added in, and subsequent to, the six months ended June 30, 2010, as well as the acquisition of AECsoft in January 2011. We have increased our customer count through our continued efforts to enhance brand awareness, our sales and marketing efforts, and our AECsoft acquisition in January 2011.

Cost of Revenues. Cost of revenues for the six months ended June 30, 2011 was $6.0 million, an increase of $1.6 million, or 36%, over cost of revenues of $4.4 million for the six months ended June 30, 2010. As a percentage of revenues, cost of revenues increased to 23% for the six months ended June 30, 2011 from 21% from the six months ended June 30, 2010. The increase in dollar amount primarily resulted from a $1.3 million increase in employee-related costs attributable to our existing personnel and additional implementation service personnel, a $0.1 million increase in stock-based compensation expense, and a $0.2 million increase in other spend. We had 100 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at June 30, 2011, compared to 70 full-time equivalents at June 30, 2010.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2011 were $5.7 million, an increase of $1.8 million, or 46%, from research and development expenses of $3.9 million for the six months ended June 30, 2010. As a percentage of revenues, research and development expense increased to 22% for the six months ended June 30, 2011 from 19% for the six months ended June 30, 2010. The increase in dollar amount was due primarily to a $1.0 million increase in employee-related costs attributable to our existing personnel and additional research and development personnel, a $0.3 million increase in stock-based compensation expense, and a $0.3 million increase in other research and development spend. We had 67 full-time equivalents in our research and development organization at June 30, 2011, compared to 54 full-time equivalents at June 30, 2010.

Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2011 were $7.4 million, an increase of $1.4 million, or 23%, over sales and marketing expenses of $6.0 million for the six months ended June 30, 2010. As a percentage of revenues, sales and marketing expenses were 29% for both the six months ended June 30, 2011 and 2010. The increase in dollar amount was due primarily to a $0.3 million increase in employee-related costs attributable to our existing personnel and additional sales and marketing personnel, a $0.4 million increase in stock-based compensation expense, and a $0.5 million increase in other sales and marketing spend. We had 50 full-time equivalents in our sales and marketing organization at June 30, 2011, compared to 46 full-time equivalents at June 30, 2010.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2011 were $4.1 million, an increase of $1.5 million, or 58%, over general and administrative expenses of $2.6 million for the six months ended June 30, 2010. As a percentage of revenues, general and administrative expenses increased to 16% for the six months ended June 30, 2011, from 13% for the six months ended June 30, 2010. The increase was primarily due to a $0.4 million increase in employee-related costs attributable to our existing personnel and additional general and administrative personnel, a $0.5 million increase in public company costs, a $0.1 million increase in stock-based compensation expense, a $0.1 million increase in acquisition related costs attributed to our acquisition of AECsoft in January 2011, and a $0.3 million increase in other general and administrative spend. We had 17 full-time equivalents in our general and administrative organization at June 30, 2011, compared to 13 full-time equivalents at June 30, 2010.

Amortization of Intangible Assets. Amortization of intangible assets for the six months ended June 30, 2011 were $0.4 million, an increase of $0.2 million or 100%, over amortization of intangible assets of $0.2 million for the six months ended June 30, 2010. As a percentage of revenues, amortization of intangible assets increased to 2% for the six months ended June 30, 2011 from 1% for the six months ended June 30, 2010. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our acquisition of AECsoft in January 2011.

Interest and Other Income. Interest and other income for the six months ended June 30, 2011 was none compared to $1.7 million for the six months ended June 30, 2010. As a percentage of revenues, interest and other income was 8% for the six months ended June 30, 2010. This decrease was due to a gain on the sale of warrants we had in an unaffiliated private company during the six months ended June 30, 2010.

Income Tax Expense. Income tax expense for the six months ended June 30, 2011 was $0.9 million, a decrease of $1.2 million, or 57%, over income tax expense of $2.1 million for the six months ended June 30, 2010. 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 $5.5 million during the six months ended June 30, 2011. 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 $27 million during the six months ended June 30, 2011. 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 $14 million during the six months ended June 30, 2011.

For the six months ended June 30, 2011, net cash provided by operating activities of $5.5 million was primarily the result of $1.0 million of net income plus a $2.9 million increase in deferred revenues, non-cash stock-based compensation of $1.7 million, non-cash depreciation and amortization of $1.0 million, 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 other assets, and a $0.7 million decrease in accrued liabilities.

For the six months ended June 30, 2010, net cash provided by operating activities of $2.4 million was primarily the result of $3.2 million of net income plus a $1.8 million decrease in deferred taxes and a $1.2 million decrease in deferred revenues, less a $1.7 million gain on the sale of warrants and a $1.9 million increase in accounts receivable. Our accounts receivable and deferred revenues typically decrease in our first quarter and then increase in our second quarter due to our historical occurrence of high new sales in our second quarter.

As of June 30, 2011, we had net operating loss carryforwards of approximately $194 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, 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. 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, 2010, net cash provided by investing activities was $1.2 million, consisting of a gain on the sale of warrants of $1.7 million and a decrease in restricted cash of $0.4 million, partially offset by various capital expenditures of $0.4 million and capitalization of $0.4 million of software development costs. The restricted cash collateralized our line of credit, which was obtained in 2008 and repaid and extinguished in 2010.

Net Cash Flows from Financing Activities

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 discounts, offset by $0.4 million expenditures for public offering costs.

For the six months ended June 30, 2010, net cash used in financing activities was $0.6 million, consisting primarily of a $0.4 million repayment of our line of credit and a $0.3 million payment for the repurchase of restricted stock.

Off-Balance Sheet Arrangements

As of June 30, 2011, 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, 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.

On April 5, 2011, the Company completed a secondary public offering of 1,000,000 shares of common stock at an offering price of $14.25 per share. On April 13, 2011, the Company completed the additional sale of 150,000 shares of common stock at an offering price of $14.25 per share pursuant to the underwriters’ over-allotment option. The Company received aggregate net proceeds of approximately $15 million, after payment of underwriting discounts and commissions and legal, accounting and other fees incurred in connection with the offering and the over-allotment option.

We believe our cash and cash equivalents, the proceeds from the public offering that closed in April, 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. On June 6, 2011, the Company entered into a lease agreement that increased the amount of leased space for the Company’s headquarters to 49,000 square feet from approximately 45,000 through January 31, 2017. As a result, the contractual and commercial commitments that are discussed 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, 2010, which was filed with the Securities and Exchange Commission on March 9, 2011 have been updated as follows:

						Payments Due by Period
						Less Than												More Than
Contractual Obligations		Total				1 Year				1 - 3 Years				3 - 5 Years				5 Years
		(In thousands)
Operating lease commitments		$	6,011			$	668			$	2,190			$	1,993			$	1,160

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. Historically, we have had lower new sales in our first and third quarters than in the remainder of our year. 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.

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, 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, 2011 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, 2011, 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.

SCIQUEST, INC.

PART II. OTHER INFORMATION

ITEM 1.		LEGAL PROCEEDINGS

In 2001, we were 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 our December 1999 initial public offering. The complaints alleged, among other things, that the prospectus used in our December 1999 initial public offering contained material misstatements or omissions regarding the underwriters’ allocation practices and compensation and that the underwriters manipulated the aftermarket for our stock. These complaints were consolidated along with similar complaints filed against over 300 other issuers in connection with their initial public offerings. After several years of litigation and appeals related to the sufficiency of the pleadings and class certification, the parties agreed to a settlement of the entire litigation, which was approved by the Court on October 5, 2009. Notices of appeal to the Court’s order have been filed by various appellants. We have not incurred significant costs to date in connection with our defense of these claims since this litigation is covered by our insurance policy. We believe we have sufficient coverage under our insurance policy to cover our obligations under the settlement agreement. Accordingly, we believe the ultimate resolution of these matters will not have an impact on our financial position and, therefore, we have not accrued a contingent liability as of June 30, 2011.

We are not party to any other 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 from the Risk Factors we previously disclosed in our annual report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 9, 2011.

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

None.

ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.		(REMOVED AND RESERVED)

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.

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.