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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 September 30, 2014

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

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3020 Carrington Mill Blvd., Suite 100

Morrisville, North Carolina 27560

(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 October 31, 2014, 27,522,264 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 September 30, 2014

TABLE OF CONTENTS

 

 

 

 

Pages

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.

 

CONSOLIDATED FINANCIAL STATEMENTS

2

 

 

 

Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

2

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013 (unaudited)

3

 

 

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2014 (unaudited)

4

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

5

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

ITEM 2.

 

 

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

23

 

ITEM 3.

 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

 

ITEM 4.

 

 

CONTROLS AND PROCEDURES

29

 

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1.

 

 

LEGAL PROCEEDINGS

31

 

ITEM 1A.

 

 

RISK FACTORS

31

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

31

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

31

 

ITEM 5.

 

OTHER INFORMATION

31

 

ITEM 6.

 

EXHIBITS

31

 

 

 

SIGNATURES

32

 

 

 

1


PART I. FINANCIAL INFORMATION

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

SciQuest, Inc.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

As of

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,850

 

 

$

19,117

 

Short-term investments

 

 

77,360

 

 

 

15,105

 

Accounts receivable, net

 

 

8,652

 

 

 

12,987

 

Prepaid expenses and other current assets

 

 

2,880

 

 

 

3,268

 

Deferred tax asset

 

 

324

 

 

 

290

 

Total current assets

 

 

136,066

 

 

 

50,767

 

Property and equipment, net

 

 

13,054

 

 

 

10,028

 

Goodwill

 

 

64,290

 

 

 

65,280

 

Intangible assets, net

 

 

25,283

 

 

 

29,490

 

Deferred commissions

 

 

5,980

 

 

 

6,701

 

Deferred tax asset, less current portion

 

 

11,592

 

 

 

10,885

 

Other

 

 

263

 

 

 

294

 

Total assets

 

$

256,528

 

 

$

173,445

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

158

 

 

$

741

 

Accrued liabilities

 

 

10,256

 

 

 

13,765

 

Deferred revenues

 

 

55,709

 

 

 

57,417

 

Total current liabilities

 

 

66,123

 

 

 

71,923

 

Deferred revenues, less current portion

 

 

10,610

 

 

 

13,343

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 50,000 shares authorized; 27,520 and 23,811 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

 

 

28

 

 

 

24

 

Additional paid-in capital

 

 

201,886

 

 

 

108,864

 

Accumulated other comprehensive loss

 

 

(2,374

)

 

 

(1,401

)

Accumulated deficit

 

 

(19,745

)

 

 

(19,308

)

Total stockholders' equity

 

 

179,795

 

 

 

88,179

 

Total liabilities and stockholders' equity

 

$

256,528

 

 

$

173,445

 

 

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

 

 

 

2


SciQuest, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

25,670

 

 

$

22,513

 

 

$

76,364

 

 

$

64,383

 

Cost of revenues

 

7,854

 

 

 

6,759

 

 

 

23,400

 

 

 

19,942

 

Gross profit

 

17,816

 

 

 

15,754

 

 

 

52,964

 

 

 

44,441

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

7,146

 

 

 

7,132

 

 

 

21,261

 

 

 

20,525

 

Sales and marketing

 

6,208

 

 

 

6,334

 

 

 

19,409

 

 

 

17,064

 

General and administrative

 

4,348

 

 

 

3,462

 

 

 

10,791

 

 

 

9,446

 

Amortization of intangible assets

 

795

 

 

 

602

 

 

 

2,395

 

 

 

1,545

 

Total operating expenses

 

18,497

 

 

 

17,530

 

 

 

53,856

 

 

 

48,580

 

Loss from operations

 

(681

)

 

 

(1,776

)

 

 

(892

)

 

 

(4,139

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

124

 

 

 

10

 

 

 

182

 

 

 

50

 

Other (expense) income, net

 

(37

)

 

 

(13

)

 

 

(48

)

 

 

(58

)

Total other income (expense), net

 

87

 

 

 

(3

)

 

 

134

 

 

 

(8

)

Loss before income taxes

 

(594

)

 

 

(1,779

)

 

 

(758

)

 

 

(4,147

)

Income tax benefit (expense)

 

164

 

 

 

(603

)

 

 

321

 

 

 

633

 

Net loss

$

(430

)

 

$

(2,382

)

 

$

(437

)

 

$

(3,514

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(898

)

 

 

426

 

 

 

(973

)

 

 

(606

)

Comprehensive loss

$

(1,328

)

 

$

(1,956

)

 

$

(1,410

)

 

$

(4,120

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.02

)

 

$

(0.10

)

 

$

(0.02

)

 

$

(0.15

)

Diluted

$

(0.02

)

 

$

(0.10

)

 

$

(0.02

)

 

$

(0.15

)

Weighted average shares outstanding used in

   computing per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

27,514

 

 

 

23,068

 

 

 

26,295

 

 

 

22,803

 

Diluted

 

27,514

 

 

 

23,068

 

 

 

26,295

 

 

 

22,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

3


SciQuest, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2013

 

 

23,811

 

 

$

24

 

 

$

108,864

 

 

$

(1,401

)

 

$

(19,308

)

 

$

88,179

 

Proceeds from public offering, net of underwriting discounts and offering costs

 

 

3,450

 

 

 

4

 

 

 

87,429

 

 

 

-

 

 

 

-

 

 

 

87,433

 

Issuance of stock in connection with stock option exercises

 

 

92

 

 

 

-

 

 

 

452

 

 

 

-

 

 

 

-

 

 

 

452

 

Issuance of stock in connection with employee stock purchase plan

 

 

33

 

 

 

-

 

 

 

469

 

 

 

-

 

 

 

-

 

 

 

469

 

Issuance of stock pursuant to vesting of restricted stock units

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of stock in connection with business acquisitions

 

 

132

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,672

 

 

 

-

 

 

 

-

 

 

 

4,672

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(973

)

 

 

-

 

 

 

(973

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(437

)

 

 

(437

)

Balance at September 30, 2014

 

 

27,520

 

 

$

28

 

 

$

201,886

 

 

$

(2,374

)

 

$

(19,745

)

 

$

179,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


SciQuest, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(437

)

 

$

(3,514

)

Adjustments to reconcile net loss to net cash provided by operating

   activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

7,954

 

 

 

5,460

 

Loss on disposal of fixed assets

 

430

 

 

 

-

 

Stock-based compensation expense

 

4,672

 

 

 

5,102

 

Deferred taxes

 

(457

)

 

 

(676

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

4,293

 

 

 

2,709

 

Prepaid expenses and other current assets

 

379

 

 

 

(469

)

Deferred commissions and other assets

 

753

 

 

 

785

 

Accounts payable

 

(582

)

 

 

(1,631

)

Accrued liabilities

 

(3,769

)

 

 

1,093

 

Deferred revenues

 

(4,328

)

 

 

470

 

Net cash provided by operating activities

 

8,908

 

 

 

9,329

 

Cash flows from investing activities

 

 

 

 

 

 

 

Business acquisitions, net of cash acquired

 

-

 

 

 

(25,533

)

Addition of capitalized software development costs

 

(4,231

)

 

 

(2,942

)

Purchase of property and equipment

 

(3,304

)

 

 

(1,841

)

Purchase of available-for-sale short-term investments

 

(92,735

)

 

 

(23,525

)

Maturities of available-for-sale short-term investments

 

30,480

 

 

 

38,035

 

Net cash used in investing activities

 

(69,790

)

 

 

(15,806

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from public offering, net of underwriting discount

 

87,673

 

 

 

-

 

Public offering costs

 

(240

)

 

 

-

 

Proceeds from exercise of common stock options

 

452

 

 

 

1,608

 

Proceeds from employee stock purchase plan activity

 

766

 

 

 

760

 

Net cash provided by financing activities

 

88,651

 

 

 

2,368

 

Effect of exchange rate changes on cash and cash equivalents

 

(36

)

 

 

(39

)

Net increase (decrease) in cash and cash equivalents

 

27,733

 

 

 

(4,148

)

Cash and cash equivalents at beginning of period

 

19,117

 

 

 

15,606

 

Cash and cash equivalents at end of period

$

46,850

 

 

$

11,458

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

Issuance of common stock in connection with acquisition

$

-

 

 

$

17,055

 

 

 

 

 

 

 

 

 

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

 

 

 

5


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

 

1. Description of Business

SciQuest, Inc. (the Company) provides leading cloud-based business automation solutions for spend management. The Company’s solutions include procurement solutions that automate the source-to-settle process, spend analysis solutions that cleanse and classify spend data to drive and measure cost savings, supplier management solutions that facilitate our customers’ interactions with their suppliers, contract lifecycle management solutions that automate the complete contract lifecycle from contract creation through maintenance and accounts payable solutions that automate the invoice processing and vendor payment processes. The Company’s solutions are designed to meet customer needs to reduce costs, simplify and improve visibility into key business processes, further strategic initiatives, enhance control over spending decisions and improve compliance and risk management. By simplifying and streamlining cumbersome, and often manual, processes and creating a comprehensive view of spending and compliance across the organization, organizations can identify and capitalize on opportunities to reduce costs by gaining control over suppliers, contracts, purchases and payments. The Company is headquartered in Morrisville, North Carolina.

 

Public Offering

On April 1, 2014, the Company completed a public offering of 3,000 shares of common stock at an offering price of $26.75 per share. An additional 450 shares of common stock were sold at an offering price of $26.75 per share pursuant to the underwriters’ over-allotment option. The Company received aggregate net proceeds of approximately $87,433, after payment of underwriting discounts and commissions and estimated 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 (“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 nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2013 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, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014.

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 and related services, permitting customers to access and utilize the Company’s cloud-based business automation solutions for spend management. Customers may also purchase a perpetual license for certain software products. 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.

6


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

Because customers do not have the right to take possession of the Software-as-a-Service (“SaaS”) based software, these arrangements are considered service contracts and are not within the scope of Industry Topic 985, Software. The Company’s contractual agreements generally contain multiple service elements and deliverables, for which we follow the guidance provided in Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition for Multiple-Element Arrangements. These elements include access to the hosted software, implementation or data classification services and, on a limited basis, perpetual licenses for certain software products 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.

For arrangements in which elements do have stand-alone value, the Company allocates revenue to each element in the 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. Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue is 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.

The Company evaluates its SaaS subscription agreements and considers whether the associated services have standalone value to its customers. For arrangements when implementation services do not have standalone value to the customer, licenses and related implementation services are considered a single unit of accounting. Accordingly, 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. Alternatively, when services have standalone value to the customer, licenses and related services are considered separate units of accounting. For separate units of accounting, services are recognized as the services are performed and delivered to the customer and licenses are recognized over the term of the subscription arrangement, 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.

Revenue from sales of certain of the Company’s perpetual software products and related implementation services and maintenance is recognized as a single unit of accounting since VSOE of fair value does not exist for the contractual elements. Accordingly, revenue for all elements in these arrangements is recognized over the contractual maintenance term, which is typically one year.

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 multi-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.

7


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

Deferred Commissions

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 non-cancelable subscription agreement. 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 and comprehensive loss. The deferred commissions are reflected 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 as of each balance sheet date. The Company’s investments were classified as available-for-sale securities and are stated at fair value at September 30, 2014 and December 31, 2013. 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 nine months ended September 30, 2014 or 2013. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive loss, net of tax. As of September 30, 2014 and December 31, 2013, 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 September 30, 2014 or December 31, 2013.

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. Based on management’s analysis of its outstanding accounts receivable, the Company recorded an allowance of $1,100 and $556 at September 30, 2014 and December 31, 2013, 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 remainder of the lease term. 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 cloud-based 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, cloud-based solution, the Company also incurs costs in connection with the development of certain of its software products licensed to customers on a perpetual basis, 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 dates between achieving technological feasibility and the general availability of such software have substantially coincided; therefore, software development costs for these products that would qualify for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs related to these software products and has charged all such costs to research and development expense.

8


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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 indicate 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 September 30, 2014.

Stock-Based Compensation

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statement of operations and comprehensive loss 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 Company uses the historical volatility of its stock price to calculate the expected volatility. Prior to the second half of 2013, the expected volatility rates were estimated based on the actual volatility of comparable public companies over the expected term, as the Company did not have enough trailing history in its own shares. The expected term for the nine months ended September 30, 2014 and 2013, 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.

Foreign Currency and Operations

The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is generally their local currency. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in accumulated other comprehensive loss, a separate component of stockholders’ equity. Also included in accumulated other comprehensive loss is the foreign translation loss adjustment of $3,137 and $1,729 at September 30, 2014 and December 31, 2013, respectively, related to the intercompany balance with the Company’s Canadian subsidiary not expected to be settled in the foreseeable future. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations and comprehensive loss.

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.

Loss Per Share

Basic net loss per share is computed by dividing net loss 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.

9


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(430

)

 

$

(2,382

)

 

$

(437

)

 

$

(3,514

)

Weighted average common shares, basic

 

27,514

 

 

 

23,068

 

 

 

26,295

 

 

 

22,803

 

Basic net loss per share

$

(0.02

)

 

$

(0.10

)

 

$

(0.02

)

 

$

(0.15

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(430

)

 

$

(2,382

)

 

$

(437

)

 

$

(3,514

)

Weighted average common shares, basic

 

27,514

 

 

 

23,068

 

 

 

26,295

 

 

 

22,803

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonvested shares of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average common shares, diluted

 

27,514

 

 

 

23,068

 

 

 

26,295

 

 

 

22,803

 

Diluted net loss per share

$

(0.02

)

 

$

(0.10

)

 

$

(0.02

)

 

$

(0.15

)

 

For the three and nine months ended September 30, 2014 and 2013, the Company incurred net losses and, therefore, the effect of the Company’s outstanding stock options, nonvested restricted stock and common stock issuable pursuant to the employee stock purchase plan was not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. For the three and nine months ended September 30, 2014, diluted net loss per share excluded the impact of 257 and 400 outstanding stock options, 7 and 13 nonvested shares of restricted stock, and approximately 1 and 23 shares of common stock issuable pursuant to the employee stock purchase plan. For the three and nine months ended September 30, 2013, diluted net loss per share excluded the impact of 425 and 400 outstanding stock options, 23 and 30 nonvested shares of restricted stock, and approximately 0 and 15 shares of common stock issuable pursuant to the employee stock purchase plan.

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.

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 precedents. If the recognition threshold is met, only the portion of the tax benefit that is more likely than not 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 August 2014, the FASB issued new accounting guidance which addresses management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. This guidance is effective for the fiscal year ending after December 15, 2016, and for fiscal years and interim

10


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

periods thereafter. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its financial statements.

In May 2014, the FASB issued new accounting guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt this standard in the first quarter of 2017. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements.

In July 2013, the FASB issued a revised accounting standard, which clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This standard is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company adopted this guidance on January 1, 2014. 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

CombineNet

On August 30, 2013, the Company acquired all of the outstanding capital stock of CombineNet, Inc. (“CombineNet”), a leading provider of advanced sourcing software. The acquisition of CombineNet expands the Company’s strategic sourcing footprint with an advanced, cloud-based tool that improves procurement decisions for spend categories that are typically beyond the capabilities of traditional eSourcing software.

The purchase price consisted of approximately $26,575 in cash and 820 shares of the Company’s common stock at a fair value of $17,055. The purchase price was subject to an adjustment based on the closing amount of working capital of CombineNet and accordingly as a result of this adjustment, the Company paid an additional $59 in cash and issued approximately 1 shares of common stock at a fair value of $38. The purchase price included $2,465 in cash and 76 shares of common stock that were deposited in escrow to satisfy potential indemnification claims. The Company incurred acquisition costs of approximately $431 during the three and nine months ended September 30, 2013, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. The acquisition was accounted for under the purchase method of accounting. The operating results of CombineNet are included in the accompanying consolidated financial statements from the date of acquisition.

 

The purchase consideration consisted of the following:

 

Cash

$

26,634

 

Fair value of common stock

 

17,093

 

Total purchase consideration

 

43,727

 

Cash acquired

 

1,042

 

Net purchase consideration

$

42,685

 

  

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, trademarks and the covenant not to compete are amortized on a straight-line basis over their respective estimated useful lives. Acquired customer relationships are amortized over a fifteen-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.

11


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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

 

 

Estimated

 

Estimated

 

 

Useful Life

 

Fair Value

 

Accounts receivable

 

 

$

2,679

 

Prepaid expenses and other current assets

 

 

 

334

 

Property and equipment

 

 

 

464

 

Deferred project costs

 

 

 

121

 

Deferred tax assets

 

 

 

4,606

 

Other assets

 

 

 

30

 

Covenant not to compete

2 years

 

 

100

 

Trademarks

3 years

 

 

300

 

Acquired technology

7 years

 

 

4,100

 

Customer relationships

15 years

 

 

13,000

 

Goodwill

 

 

 

28,624

 

Accounts payable

 

 

 

(98

)

Accrued expenses

 

 

 

(786

)

Deferred tax liability

 

 

 

(6,349

)

Deferred revenues

 

 

 

(4,440

)

Total purchase consideration

 

 

$

42,685

 

 

The measurement period for the acquisition purchase accounting was closed December 31, 2013.

The following unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2013 assume that the CombineNet acquisition occurred at the beginning of 2012. The unaudited pro forma information combines the historical results for the Company with the historical results for CombineNet for the same period. The unaudited pro forma financial information includes amortization of acquired intangible assets of $554 and $1,691 for the three and nine months ended September 30, 2013, respectively, and includes the fair value adjustment for deferred revenue of $3 and $2,364 for the three and nine months ended September 30, 2013, respectively.

The following unaudited pro forma information is not intended to be indicative of future operating results.

 

 

Three Months

 

 

Nine Months

 

 

Ended

 

 

Ended

 

 

September 30,

 

 

September 30,

 

 

2013

 

 

2013

 

Pro forma revenue

$

25,417

 

 

$

74,177

 

Pro forma net loss

$

(1,066

)

 

$

(2,798

)

Pro forma net loss per share, basic

$

(0.05

)

 

$

(0.12

)

Pro forma net loss per share, diluted

$

(0.05

)

 

$

(0.12

)

 

Spend Radar

On October 1, 2012, the Company completed the acquisition of substantially all of the assets of Spend Radar LLC (“Spend Radar”), a leading provider of spend analysis solutions. The acquisition of Spend Radar added cloud-based software for cleansing and classifying spend data to drive and measure cost savings to the Company’s existing business automation solutions for spend management.

The purchase price consisted of $8,000 in cash and 113 shares of the Company’s common stock at a fair value of $2,087. The purchase agreement also contained an earnout provision for up to $6,000 in cash and 85 shares of the Company’s common stock based on the successful achievement of certain performance targets and continued employment with the Company from the closing date to December 31, 2013. The performance conditions for Q4 2012 and Q1 2013 were met and the Company paid $2,400 and issued 34 shares of common stock on April 29, 2013. Additionally, the performance conditions for Q2, Q3 and Q4 2013 were met and the Company paid $3,600 on January 31, 2014 and issued 51 shares of common stock on February 3, 2014. The cash earn-out was recognized as compensation expense in the consolidated statement of operations and comprehensive loss in the period in which it was

12


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

earned. The fair value of the shares under the stock earn-out was recognized as stock-based compensation expense in the consolidated statement of operations and comprehensive loss over the requisite service period of the award. During the three and nine months ended September 30, 2013, the Company recognized compensation expense of $1,200 and $3,600, respectively, and recognized stock-based compensation expense of $313 and $939, respectively, related to this earn-out arrangement.

The acquisition was accounted for under the purchase method of accounting. The operating results of Spend Radar are included in the accompanying consolidated financial statements from the date of acquisition.

The purchase consideration consisted of the following:

 

Cash

$

8,000

 

Fair value of common stock

 

2,087

 

Total purchase consideration

 

10,087

 

Cash acquired

 

259

 

Net purchase consideration

$

9,828

 

  

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, trademarks and the covenant not to compete are amortized on a straight-line basis over their respective estimated useful lives. Acquired customer relationships are amortized over a five-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 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

 

 

$

634

 

Prepaid expenses and other current assets

 

 

 

100

 

Property and equipment

 

 

 

147

 

Covenant not to compete

5 years

 

 

203

 

Trademarks

5 years

 

 

566

 

Acquired technology

7 years

 

 

2,693

 

Customer relationships

5 years

 

 

1,338

 

Goodwill

 

 

 

5,682

 

Accrued expenses

 

 

 

(305

)

Deferred revenues

 

 

 

(1,230

)

Total purchase consideration

 

 

$

9,828

 

 

The measurement period for the acquisition purchase accounting was closed December 31, 2012.

Upside Software

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 that provides contract lifecycle management solutions. The acquisition of Upside added a contract lifecycle management solution, which includes collaborative contract creation and maintenance technology, to the Company’s existing business automation solutions for spend management.

The purchase price consisted of $22,447 in cash. The acquisition was accounted for under the purchase method of accounting. The operating results of Upside are included in the accompanying consolidated financial statements from the date of acquisition.

13


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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, trademarks and the covenant not to compete are amortized on a straight-line basis over their respective estimated useful lives. 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 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

 

 

$

2,096

 

Prepaid expenses and other current assets

 

 

 

230

 

Property and equipment

 

 

 

478

 

Covenant not to compete

5 years

 

 

30

 

Trademarks

5 years

 

 

263

 

Acquired technology

7 years

 

 

4,064

 

Customer relationships

10 years

 

 

3,594

 

Goodwill

 

 

 

15,927

 

Accrued expenses

 

 

 

(530

)

Deferred revenues

 

 

 

(3,705

)

Total purchase consideration

 

 

$

22,447

 

 

The measurement period for the acquisition purchase accounting was closed December 31, 2012.

AECsoft

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 added comprehensive supplier management, sourcing and compliance reporting to the Company’s existing business automation solutions for spend management.

The total purchase price of $13,795 consisted of $9,256 in cash and 351 shares of the Company’s common stock at a fair value of $4,539. The issuance of 25 of these shares, with an estimated fair value of $300, was subject to successful completion of certain performance targets under an earn-out arrangement with a former shareholder of AECsoft. Additionally, 300 shares of the Company’s common stock were issuable under an earn-out arrangement with the other former shareholders of AECsoft, upon the successful achievement of performance conditions over three fiscal years, including continued employment with the Company. The performance conditions for 2012 and 2011 were met in full, and the Company issued 122 shares of common stock on March 20, 2013 and April 14, 2012, respectively. The performance conditions for 2013 were met in full, and the Company issued 81 shares of common stock on February 5, 2014. The fair value of these shares was recognized as stock-based compensation expense in the consolidated statement of operations and comprehensive loss over the requisite service period of the award. During the three and nine months ended September 30, 2013, the Company recognized stock-based compensation expense of $244 and $732, respectively, related to this earn-out arrangement.

 

14


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

4. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at September 30, 2014 and December 31, 2013 are as follows:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

 

Fair Market

 

 

 

 

 

 

Fair Market

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

$

1,195

 

 

$

1,195

 

 

$

5,349

 

 

$

5,349

 

Commercial paper

 

41,342

 

 

 

41,342

 

 

 

-

 

 

 

-

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

14,725

 

 

 

14,725

 

 

 

15,105

 

 

 

15,105

 

Commercial paper

 

62,635

 

 

 

62,635

 

 

 

-

 

 

 

-

 

Total

$

119,897

 

 

$

119,897

 

 

$

20,454

 

 

$

20,454

 

 

There were no unrealized gains or losses as of September 30, 2014 or December 31, 2013.

 

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.

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 September 30, 2014 and December 31, 2013, the Company had cash equivalents of $42,537 and $5,349, respectively, which consist of money market accounts and commercial paper. As of September 30, 2014 and December 31, 2013, the Company had short-term investments of $77,360 and $15,105, respectively, which consist of commercial paper and variable rate demand notes that are invested in corporate and municipal bonds. The 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 September 30, 2014 and December 31, 2013, 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 September 30, 2014 are as follows:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents

$

42,537

 

 

$

42,537

 

 

$

-

 

 

$

-

 

Short-term investments

 

77,360

 

 

 

77,360

 

 

 

-

 

 

 

-

 

Total

$

119,897

 

 

$

119,897

 

 

$

-

 

 

$

-

 

 

15


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

The fair value measurements of the Company’s financial assets at December 31, 2013 are as follows:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents

$

5,349

 

 

$

5,349

 

 

$

-

 

 

$

-

 

Short-term investments

 

15,105

 

 

 

15,105

 

 

 

-

 

 

 

-

 

Total

$

20,454

 

 

$

20,454

 

 

$

-

 

 

$

-

 

 

 

6. Property and Equipment

Property and equipment consist of the following as of September 30, 2014 and December 31, 2013:

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Furniture and fixtures

$

1,576

 

 

$

1,284

 

Computer software and equipment

 

23,130

 

 

 

17,036

 

Leasehold improvements

 

391

 

 

 

715

 

Total costs

 

25,097

 

 

 

19,035

 

Less accumulated depreciation and amortization

 

(12,043

)

 

 

(9,007

)

Property and equipment, net

$

13,054

 

 

$

10,028

 

 

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $729 and $558 for the three months ended September 30, 2014 and 2013, respectively, and was $1,979 and $1,575 for the nine months ended September 30, 2014 and 2013, respectively.

During the three months ended September 30, 2014, the Company entered into a lease assignment, pursuant to which the Company assigned all of its right, title and interest in the Company’s office lease at its former headquarters.  In accordance with the assignment, certain fixed assets were transferred with the office space. Accordingly, the Company wrote off furniture and fixtures and leasehold improvements with an original cost of $1,366  and accumulated depreciation of $936. The Company recognized a loss of $430 in the accompanying consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 related to these disposals.

Computer software and equipment includes capitalized software development costs incurred during development of the Company’s cloud-based solution. The Company capitalized software development costs of $1,419 and $949 during the three months ended September 30, 2014 and 2013, respectively, and $4,166 and $2,932 during the nine months ended September 30, 2014 and 2013, respectively. Net capitalized software development costs totaled $7,501 and $5,349 at September 30, 2014 and December 31, 2013, respectively. Amortization expense for the three months ended September 30, 2014 and 2013 related to capitalized software development costs was $791 and $466, respectively, and was $2,022 and $1,287 for the nine months ended September 30, 2014 and 2013, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations and comprehensive loss.

 

7. Goodwill and Other Intangible Assets

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisitions in August 2013, October 2012, August 2012 and January 2011 and the going private transaction in July 2004.

 

 

 

16


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:

 

Balance at December 31, 2013

$

65,280

 

Business combination adjustment

 

(284

)

Foreign currency translation

 

(706

)

Balance at September 30, 2014

$

64,290

 

 

The Company recorded an adjustment to goodwill during the period based on a correction to the CombineNet deferred tax valuation, which resulted from a state tax apportionment change.

 

As the functional currency of the Company’s Canadian subsidiary, where certain of the Company’s goodwill is recorded, is its local currency, there are related foreign currency translation adjustments. The foreign currency is translated into U.S. dollars using the exchange rate in effect at period end, with any adjustment included in other comprehensive loss.

A summary of intangible assets at September 30, 2014 and December 31, 2013 follows:

 

 

September 30, 2014

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

Acquired technology

7.0 years

 

$

19,708

 

 

$

(11,313

)

 

$

8,395

 

Customer relationships

12.1 years

 

 

26,957

 

 

 

(11,354

)

 

 

15,603

 

Covenant not to compete

4.2 years

 

 

381

 

 

 

(186

)

 

 

195

 

Acquired trademarks

4.5 years

 

 

1,102

 

 

 

(442

)

 

 

660

 

Trademarks

indefinite

 

 

430

 

 

 

-

 

 

 

430

 

Total

 

 

$

48,578

 

 

$

(23,295

)

 

$

25,283

 

 

  

 

December 31, 2013

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

Acquired technology

7.0 years

 

$

19,889

 

 

$

(10,070

)

 

$

9,819

 

Customer relationships

12.1 years

 

 

27,117

 

 

 

(9,013

)

 

 

18,104

 

Covenant not to compete

4.2 years

 

 

382

 

 

 

(112

)

 

 

270

 

Acquired trademarks

4.5 years

 

 

1,113

 

 

 

(246

)

 

 

867

 

Trademarks

indefinite

 

 

430

 

 

 

-

 

 

 

430

 

Total

 

 

$

48,931

 

 

$

(19,441

)

 

$

29,490

 

  

As the functional currency of the Company’s Canadian subsidiary, where certain intangible assets are recorded, is its local currency, there are related foreign currency translation adjustments. The foreign currency is translated into U.S. dollars using the exchange rate in effect at period end, with any adjustment included in other comprehensive loss.

Amortization expense of intangible assets was $1,314 and $1,005 for the three months ended September 30, 2014 and 2013, respectively, of which $519 and $402 is recorded in cost of revenues in the accompanying consolidated statements of operations and comprehensive loss for the three months ended September 30, 2014 and 2013, respectively. Amortization expense of intangible assets was $3,953 and $2,598 for the nine months ended September 30, 2014 and 2013, respectively, of which $1,558 and $1,052 is recorded in cost of revenues in the accompanying consolidated statements of operations for the nine months ended September 30, 2014 and 2013, respectively.

17


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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

 

2014 (remaining three months)

$

1,225

 

2015

 

4,610

 

2016

 

4,189

 

2017

 

3,736

 

2018

 

3,128

 

Thereafter

 

7,965

 

 

$

24,853

 

  

 

8. Debt

On November 2, 2012, the Company established a $30,000 revolving credit facility which will be available for use until November 2, 2015. The revolving credit facility will be used for general corporate purposes. The facility consists of a $20,000 securities secured revolving credit facility and a $10,000 receivables secured revolving credit facility. The securities secured revolving credit facility and the receivables secured revolving credit facility bear interest equal to the BBA LIBOR Daily Floating Rate plus 0.75% and the BBA LIBOR Daily Floating Rate plus 1.50%, respectively. In addition, the Company pays a quarterly fee equal to 0.10% on any unused funds under the facility. As collateral for extension of credit under the facility, the Company and a domestic subsidiary granted security interests in substantially all of their assets, and the Company pledged the stock of a domestic subsidiary and 66% of the shares of one of its foreign subsidiaries. As of September 30, 2014 and December 31, 2013, the Company had $0 outstanding under the revolving credit facility.

 

9. Stockholders’ Equity

Preferred Stock

The Company is authorized to issue up to 5,000 shares of $0.001 par value preferred stock, of which 222 shares are designated as Series A redeemable preferred stock. The Company’s Board of Directors has the authority to issue up to 4,778 shares of preferred stock in one or more series and to fix the designations, rights, preferences and privileges and any qualifications, limitations or restrictions of the shares of each such series of preferred stock, including dividend rights and rates, conversion rights, voting rights, terms of redemption including price and sinking fund provisions, liquidation preferences and number of shares constituting any series or the designation of that series. As of September 30, 2014 and December 31, 2013, no shares of preferred stock were issued or outstanding.

Stock Incentive Plan

The Company’s 2013 Stock Incentive Plan (the “Plan”) allows the Company to grant common stock options, stock appreciation rights, restricted stock units and restricted stock awards to employees, board members and others who contribute materially to the success of the Company. The Company reserved 3,500 shares of its common stock for issuance under the Plan. Additionally, per the terms of the Plan, shares of common stock previously reserved for issuance under the 2004 Stock Incentive Plan (the “Prior Plan”) as well as shares reserved for outstanding awards under the Prior Plan for which the awards are canceled, forfeited, repurchased or otherwise result in common stock not being issued will be added to the number of shares available for issuance under the Plan. Restricted stock units and restricted stock awards that are granted shall count towards the total number of shares reserved for issuance under the Plan as 1.65 shares. As of September 30, 2014, 3,491 shares of common stock were available for issuance under the Plan.

18


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

The following table summarizes the number of shares outstanding and the number of shares available for future grant under the stock incentive plan at September 30, 2014:

 

 

September 30, 2014

 

Number of shares reserved under the 2013 Plan

 

3,500

 

Number of shares remaining for future grants transferred from Prior Plan

 

863

 

Number of stock options outstanding under the 2013 Plan

 

(777

)

Weighted average exercise price

$

24.83

 

Weighted average term (in years)

 

9.2

 

Number of restricted stock units issued under the 2013 Plan

 

(95

)

Number of shares remaining for future grants

 

 

 

SciQuest, Inc. 2013 Stock Incentive Plan

 

3,491

 

 

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

The Company issues restricted stock units to certain employees and non-employee directors. 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. Stock-based compensation expense related to these restricted stock units is recognized in the consolidated statements of operations and comprehensive loss 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 $203 and $123 was recorded during the three months ended September 30, 2014 and 2013, respectively, and $534 and $397 was recorded during the nine months ended September 30, 2014 and 2013, respectively, in connection with these restricted stock units. The total unrecognized compensation cost related to these awards is approximately $1,446 at September 30, 2014. This amount is expected to be recognized over a weighted-average period of 2.7 years.

The following summarizes the activity of restricted stock units for the nine months ended September 30, 2014:

 

 

 

 

 

 

Weighted-

 

 

Number of

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Nonvested as of December 31, 2013

 

49

 

 

$

18.02

 

Issued

 

58

 

 

 

24.71

 

Vested

 

(21

)

 

 

20.24

 

Nonvested as of September 30, 2014

 

86

 

 

$

22.00

 

 

Additionally, the Company previously issued restricted shares of its common stock to certain employees under the Prior Plan. These awards are recognized in the consolidated statements of operations and comprehensive loss based on their fair values. Stock-based compensation expense of $15 and $32 was recorded during the three and nine months ended September 30, 2013, respectively, in connection with these restricted stock awards.

19


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

Stock Options

The Company also issues common stock options. The following summarizes stock option activity for the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

 

 

 

Average

 

 

Intrinsic Value

 

 

 

 

 

 

Weighted-

 

 

Remaining

 

 

as of

 

 

Number of

 

 

Average

 

 

Contractual

 

 

September 30,

 

 

Options

 

 

Exercise Price

 

 

Term (In Years)

 

 

2014

 

Balance outstanding as of December 31, 2013

 

1,967

 

 

$

15.22

 

 

 

8.0

 

 

$

26,168

 

Options granted

 

471

 

 

 

25.51

 

 

 

 

 

 

 

 

 

Options exercised

 

(92

)

 

 

4.92

 

 

 

 

 

 

 

 

 

Options cancelled

 

(87

)

 

 

20.61

 

 

 

 

 

 

 

 

 

Balance outstanding as of September 30, 2014

 

2,259

 

 

$

17.57

 

 

 

7.8

 

 

$

3,054

 

Vested and expected to vest at September 30, 2014

 

2,041

 

 

$

17.17

 

 

 

7.7

 

 

$

3,040

 

Exercisable as of September 30, 2014

 

1,169

 

 

$

14.09

 

 

 

7.0

 

 

$

2,934

 

 

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 September 30, 2014 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on September 30, 2014. The aggregate intrinsic value of options exercised during the three months ended September 30, 2014 and 2013 was $283 and $278, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was $1,414 and $2,211, respectively.

The total unrecognized compensation cost related to outstanding stock options is $11,409 at September 30, 2014. This amount is expected to be recognized over a weighted-average period of 2.7 years.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2014:

 

 

 

Options Outstanding at September 30, 2014

 

 

Options Exercisable at September 30, 2014

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Contractual Term

 

 

Average

 

 

 

 

 

 

Average

 

Range of Exercise Price

 

Number

 

 

(In Years)

 

 

Exercise Price

 

 

Number

 

 

Exercise Price

 

$0.08 - $0.14

 

 

11

 

 

 

1.2

 

 

$

0.10

 

 

 

11

 

 

$

0.10

 

$0.14 - $1.90

 

 

3

 

 

 

4.0

 

 

 

1.34

 

 

 

3

 

 

 

1.34

 

$2.04 - $8.18

 

 

194

 

 

 

5.3

 

 

 

3.85

 

 

 

194

 

 

 

3.85

 

$11.45 - $17.20

 

 

1,200

 

 

 

7.3

 

 

 

14.89

 

 

 

779

 

 

 

14.59

 

$17.41 - $27.64

 

 

685

 

 

 

9.0

 

 

 

23.82

 

 

 

158

 

 

 

23.25

 

$27.91 - $29.14

 

 

166

 

 

 

9.3

 

 

 

28.71

 

 

 

24

 

 

 

28.73

 

Total

 

 

2,259

 

 

 

7.8

 

 

$

17.57

 

 

 

1,169

 

 

$

14.09

 

 

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:

  

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

 

2013

 

 

Estimated dividend yield

 

-

 

%

 

 

-

 

%

Expected stock price volatiliy

46.1 - 48.8

 

%

 

46.8 - 55.0

 

%

Weighted-average risk-free interest rate

1.8 - 2.0

 

%

 

0.9 - 2.0

 

%

Expected life of options (in years)

 

6.25

 

 

 

 

6.25

 

 

 

20


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

Stock-based compensation expense of $1,297 and $1,063 was recorded during the three months ended September 30, 2014 and 2013, respectively, and $3,898 and $2,798 was recorded during the nine months ended September 30, 2014 and 2013, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the nine months ended September 30, 2014 and 2013 was $11.96 and $10.06, respectively. The aggregate fair value of stock options that vested during the nine months ended September 30, 2014 and 2013 was $4,148 and $2,647, respectively.

As discussed in Note 3, the Company recognized stock-based compensation expense of $313 and $939 in the accompanying consolidated statement of operations and comprehensive loss during the three and nine months ended September 30, 2013 related to the earn-out arrangement associated with the Spend Radar acquisition. In addition, the Company recognized stock-based compensation of $244 and $732 in the accompanying consolidated statement of operations and comprehensive loss during the three and nine months ended September 30, 2013 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. Eligible employees can contribute up to 10% of their gross earnings for each pay period, up to a maximum of $25 for any calendar year. The initial offering period that commenced on June 1, 2012 was 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 lesser 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. 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. As of September 30, 2014, 910 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three months ended September 30, 2014 and 2013, the Company recognized stock-based compensation expense of $78 and $58, respectively, and recognized $240 and $204 during the nine months ended September 30, 2014 and 2013, respectively, related to the Purchase Plan.

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:

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

 

2013

 

 

Estimated dividend yield

 

-

 

%

 

 

-

 

%

Expected stock price volatiliy

 

47.2

 

%

 

 

52.2

 

%

Weighted-average risk-free interest rate

 

0.06

 

%

 

 

0.07

 

%

Expected life of options (in years)

 

0.5

 

 

 

 

0.5

 

 

 

 

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 rates of (28)% and (42)% for the three and nine months ended September 30, 2014, respectively, vary from the federal statutory rate of 34% primarily due to non-deductible expenses, including stock-based compensation. The Company’s effective tax rates of 34% and (15)% for the three and nine months ended September 30, 2013, respectively, vary from the federal statutory rate of 34% primarily due to research and development credits generated, and non-deductible expenses, including stock-based compensation and stock-based compensation associated with the earn-out arrangement. Additionally, North Carolina legislation centered around a change in the corporate income tax rate resulted in a change in the Company’s state deferred tax rate, which was treated as a discrete item, and resulted in income tax expense for the three months ended September 30, 2013.

 

11. Commitments and Contingencies

Lease Assignment

On July 29, 2014, the Company entered into a lease assignment, pursuant to which the Company assigned all of its right, title and interest in the Company’s office lease at its former headquarters. The assignment required the Company to pay an amount equal to $20 as an estimate of additional rental adjustments that are expected to be payable under the lease, and a lump sum payment to the landlord in the amount of $685 as a partial prepayment of rental payments owed under the lease for the remaining lease term. These costs,

21


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

adjusted for the existing deferred rent balance of $468, are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014. In addition, in connection with the negotiation of the lease assignment, the Company incurred broker’s fees of $141, which are included in general and administrative expense for the three and nine months ended September 30, 2014.  

As discussed in Note 6, certain fixed assets were transferred in accordance with the lease assignment. The Company recognized a loss of $430 in the accompanying consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 related to the disposal of these assets.

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. The Company is not currently subject to any material legal proceedings.

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.

 

 

 

 

22


 

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.

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 cloud-based business automation solutions for spend management that include:

procurement solutions that automate the source-to-settle process;

spend analysis solutions that cleanse and classify spend data to drive and measure cost savings;

supplier management solutions that facilitate our customers’ interactions with their suppliers;

contract lifecycle management solutions that automate the contract lifecycle from contract creation through maintenance; and

accounts payable solutions that automate the invoice processing and vendor payment processes.

Our solutions are designed to meet customer needs to reduce costs, simplify and improve visibility into key business processes, further strategic initiatives, enhance control over spending decisions and improve compliance and risk management. By simplifying and streamlining cumbersome, and often manual, processes and creating a comprehensive view of spending and compliance across the organization, organizations can identify and capitalize on opportunities to reduce costs by gaining control over suppliers, contracts, purchases and payments.

We deliver our cloud-based solutions using a Software-as-a-Service, or SaaS, model, which enables us to offer greater functionality, faster innovation, easier integration and improved reliability with less cost and risk to the organization than traditional on-premise solutions. Customers pay us subscription fees and implementation service fees for the use of our solutions under either multi-year contracts that are generally three to five years in length or one-year contracts with annual renewal provisions.

In 2001, we began developing and marketing our procurement solutions. We initially acquired a critical mass of customers in the higher education and life sciences vertical markets and selectively expanded to serve the healthcare and state and local government markets. In 2010, we completed an initial public offering of our common stock. In 2011, we acquired all of the capital stock of AECsoft USA, Inc., or “AECsoft”, a leading provider of supplier management and sourcing solutions. In 2012, we acquired substantially all of the assets of Upside Software, Inc., or “Upside”, a leading provider of contract lifecycle management solutions, and substantially all of the assets of Spend Radar LLC, or “Spend Radar”, a leading provider of spend analysis solutions. In 2013, we acquired all of the capital stock of CombineNet, Inc., or “CombineNet”, a leading provider of advanced sourcing software to organizations with large and potentially complex strategic sourcing needs.

Due to our historical focus on vertical markets, we have had a relatively high concentration of higher education, life sciences, healthcare and state and local government customers. But a majority of our customers now span the general commercial market as a result of our acquisitions as well as our own marketing efforts. We currently market our solutions across the entire addressable market for spend management solutions.

23


 

Key Financial Terms and Metrics

We have several key financial terms and metrics. During the nine months ended Septermber 30, 2014, there were no changes with respect to 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, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014.

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 commissions;

software development costs;

goodwill; and

income taxes.

During the nine months ended September 30, 2014, 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, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014, 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 

September 30,

 

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

2013

 

Revenues

$

25,670

 

 

$

22,513

 

 

$

76,364

 

 

$

64,383

 

Cost of revenues (1) (2)

 

7,854

 

 

 

6,759

 

 

 

23,400

 

 

 

19,942

 

Gross profit

 

17,816

 

 

 

15,574

 

 

 

52,964

 

 

 

44,441

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

7,146

 

 

 

7,132

 

 

 

21,261

 

 

 

20,525

 

Sales and marketing

 

6,208

 

 

 

6,334

 

 

 

19,409

 

 

 

17,064

 

General and administrative

 

4,348

 

 

 

3,462

 

 

 

10,791

 

 

 

9,446

 

Amortization of intangible assets

 

795

 

 

 

602

 

 

 

2,395

 

 

 

1,545

 

Total operating expenses

 

18,497

 

 

 

17,530

 

 

 

53,856

 

 

 

48,580

 

Loss from operations

 

(681

)

 

 

(1,776

)

 

 

(892

)

 

 

(4,139

)

Interest and other income (expense), net

 

87

 

 

 

(3

)

 

 

134

 

 

 

(8

)

Loss before income taxes

 

(594

)

 

 

(1,779

)

 

 

(758

)

 

 

(4,147

)

Income tax benefit (expense)

 

164

 

 

 

(603

)

 

 

321

 

 

 

633

 

Net loss

$

(430

)

 

$

(2,382

)

 

$

(437

)

 

$

(3,514

)

24


 

(1)

Amounts include stock-based compensation expense, as follows:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

2013

 

Cost of revenues

$

187

 

 

$

124

 

 

$

533

 

 

$

368

 

Research and development

 

201

 

 

 

442

 

 

 

582

 

 

 

1,288

 

Sales and marketing

 

338

 

 

 

533

 

 

 

1,112

 

 

 

1,415

 

General and administrative

 

852

 

 

 

717

 

 

 

2,445

 

 

 

2,031

 

 

$

1,578

 

 

$

1,816

 

 

$

4,672

 

 

$

5,102

 

(2)

Cost of revenues includes amortization of capitalized software development costs of:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

2013

 

Amortization of capitalized software development costs

$

791

 

 

$

466

 

 

$

2,022

 

 

$

1,287

 

Amortization of acquired software

 

519

 

 

 

402

 

 

 

1,558

 

 

 

1,052

 

 

$

1,310

 

 

$

868

 

 

$

3,580

 

 

$

2,339

 

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

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

2013

 

Revenues

 

100

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenues

 

30

 

 

 

30

 

 

 

31

 

 

 

31

 

Gross profit

 

70

 

 

 

70

 

 

 

69

 

 

 

69

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

28

 

 

 

32

 

 

 

28

 

 

 

32

 

Sales and marketing

 

24

 

 

 

28

 

 

 

25

 

 

 

26

 

General and administrative

 

17

 

 

 

15

 

 

 

14

 

 

 

15

 

Amortization of intangible assets

 

3

 

 

 

3

 

 

 

3

 

 

 

2

 

Total operating expenses

 

72

 

 

 

78

 

 

 

70

 

 

 

75

 

Loss from operations

 

(2

)

 

 

(8

)

 

 

(1

)

 

 

(6

)

Interest and other (expense) income, net

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(2

)

 

 

(8

)

 

 

(1

)

 

 

(6

)

Income tax benefit (expense)

 

 

 

 

(3

)

 

 

 

 

 

1

 

Net loss

 

(2)

 

 

(11

)%

 

 

(1)

%

 

 

(5

)% 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Revenues. Revenues for the three months ended September 30, 2014 were $25.7 million, an increase of $3.2 million, or 14%, over revenues of $22.5 million for the three months ended September 30, 2013. 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 September 30, 2013, as well as revenue relating to customers acquired as a result of our acquisition of CombineNet in August 2013.

Cost of Revenues. Cost of revenues for the three months ended September 30, 2014 was $7.9 million, an increase of $1.1 million, or 16%, over cost of revenues of $6.8 million for the three months ended September 30, 2013. As a percentage of revenues, cost of revenues was 30% for both the three months ended September 30, 2014 and 2013. The increase in dollar amount was primarily due to a $0.5 million increase in employee-related costs attributable to personnel gained through our CombineNet acquisition, as well as our additional and existing implementation services, supplier enablement services, customer support and client partner personnel, a $0.3 million increase in amortization of capitalized software development costs, a $0.1 million increase in amortization of acquired software due to our acquisition of CombineNet, and a $0.1 million increase in stock-based compensation expense. We had 205 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at September 30, 2014 compared to 206 full-time equivalents at September 30, 2013.

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Research and Development Expenses. Research and development expenses were $7.1 million for both the three months ended September 30, 2014 and 2013. As a percentage of revenues, research and development expense decreased to 28% for the three months ended September 30, 2014 from 32% for the three months ended September 30, 2013. Employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing research and development personnel, increased by $0.2 million and maintenance and hardware costs required to support our growing business increased by $0.3 million, which costs were offset by increases in capitalized software development costs of $0.6 million. We had 226 full-time equivalents in our research and development organization at September 30, 2014 compared to 219 full-time equivalents at September 30, 2013.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended September 30, 2014 were $6.2 million, a decrease of $0.1 million, or 2%, from sales and marketing expenses of $6.3 million for the three months ended September 30, 2013. As a percentage of revenues, sales and marketing expenses decreased to 24% for the three months ended September 30, 2014 from 28% for the three months ended September 30, 2013. The decrease in dollar amount was due primarily to a $0.2 million reduction in stock-based compensation expense. We had 103 full-time equivalents in our sales and marketing organization at September 30, 2014 compared to 101 full-time equivalents at September 30, 2013.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2014 were $4.3 million, an increase of $0.8 million, or 23%, over general and administrative expenses of $3.5 million for the three months ended September 30, 2013. As a percentage of revenues, general and administrative expenses increased to 17% for the three months ended September 30, 2014 from 15% for the three months ended September 30, 2013. The increase in dollar amount was due to $0.8 million of net headquarters relocation costs. We had 29 full-time equivalents in our general and administrative organization at September 30, 2014 compared to 31 full-time equivalents at September 30, 2013.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended September 30, 2014 were $0.8 million, an increase of $0.2 million, or 33%, over amortization of intangible assets of $0.6 million for the three months ended September 30, 2013. As a percentage of revenues, amortization of intangible assets was 3% for both the three months ended September 30, 2014 and 2013. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our CombineNet acquisition in August 2013.

Income Tax Benefit (Expense). Income tax benefit for the three months ended September 30, 2014 was $0.2 million compared to income tax expense of $(0.6) million for the three months ended September 30, 2013. The change in income tax benefit (expense) was primarily due to differences in our pre-tax net loss and effective tax rates in each period. A state deferred tax rate change in 2013, which was treated as a discrete item, resulted in tax expense for the three months ended September 30, 2013.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Revenues. Revenues for the nine months ended September 30, 2014 were $76.4 million, an increase of $12 million, or 19%, over revenues of $64.4 million for the nine months ended September 30, 2013. The increase in revenues resulted primarily from the recognition of revenue for a full nine-month period for the new customers added in, and subsequent to, the nine months ended September 30, 2013, as well as revenue relating to customers acquired as a result of our acquisition of CombineNet in August 2013.

Cost of Revenues. Cost of revenues for the nine months ended September 30, 2014 was $23.4 million, an increase of $3.5 million, or 18%, over cost of revenues of $19.9 million for the nine months ended September 30, 2013. As a percentage of revenues, cost of revenues was 31% for both the nine months ended September 30, 2014 and 2013. The increase in dollar amount was due to a $1.6 million increase in employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing implementation services, supplier enablement services, customer support and client partner personnel, a $0.7 million increase in amortization of capitalized software development costs, a $0.5 million increase in amortization of acquired software due to our acquisition of CombineNet, a $0.2 million increase in stock-based compensation, and a $0.2 million increase in other spend. We had 205 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at September 30, 2014 compared to 206 full-time equivalents at September 30, 2013.

Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2014 were $21.3 million, an increase of $0.8 million, or 4%, from research and development expenses of $20.5 million for the nine months ended September 30, 2013. As a percentage of revenues, research and development expense decreased to 28% for the nine months ended September 30, 2014 from 32% for the nine months ended September 30, 2013. The increase in dollar amount was primarily due to a $0.9 million increase in employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing research and development personnel, and a $1.2 million increase in maintenance and hardware costs required to support our growing business, which costs were offset by increases in capitalized software development costs of $1.3 million. We had 226 full-time equivalents in our research and development organization at September 30, 2014 compared to 219 full-time equivalents at September 30, 2013.

26


 

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended September 30, 2014 were $19.4 million, an increase of $2.3 million, or 13%, over sales and marketing expenses of $17.1 million for the nine months ended September 30, 2013. As a percentage of revenues, sales and marketing expenses decreased to 25% for the nine months ended September 30, 2014 from 26% for the nine months ended September 30, 2013. The increase in dollar amount was due primarily to a $0.8 million increase in employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing sales and marketing personnel, a $0.3 million increase in trade show related costs, a $0.5 million increase in travel costs, a $0.3 million increase in amortized commission expense, and a $0.4 million increase in other sales and marketing spend. We had 103 full-time equivalents in our sales and marketing organization at September 30, 2014 compared to 101 full-time equivalents at September 30, 2013.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2014 were $10.8 million, an increase of $1.4 million, or 15%, over general and administrative expenses of $9.4 million for the nine months ended September 30, 2013. As a percentage of revenues, general and administrative expenses decreased to 14% for the nine months ended September 30, 2014, from 15% for the nine months ended September 30, 2013. The increase in dollar amount was primarily due to a $0.2 million increase in employee-related costs attributable primarily to our additional and existing general and administrative personnel, as well as personnel gained through our CombineNet acquisition, $0.8 million of net headquarters relocation costs, and a $0.4 million increase in stock-based compensation expense. We had 29 full-time equivalents in our general and administrative organization at September 30, 2014 compared to 31 full-time equivalents at September 30, 2013.

Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended September 30, 2014 were $2.4 million, an increase of $0.9 million, or 60%, over amortization of intangible assets of $1.5 million for the nine months ended September 30, 2013. As a percentage of revenues, amortization of intangible assets increased to 3% for the nine months ended September 30, 2014, from 2% for the nine months ended September 30, 2013. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our CombineNet acquisition in August 2013.

Income Tax Benefit. Income tax benefit was $0.3 million for the nine months ended September 30, 2014 compared to income tax benefit of $0.6 million for the nine months ended September 30, 2013. The change in income tax benefit was primarily due to differences in our pre-tax net loss and effective tax rates in each period. A state deferred tax rate change in 2013, which was treated as a discrete item, resulted in a reduced tax benefit for the nine months ended September 30, 2013.

Liquidity

Net Cash Flows from Operating Activities

Net cash provided by in operating activities was $8.9 million during the nine months ended September 30, 2014. Our cash flow from operations is primarily a result of the timing of cash payments from our customers, offset by the timing of our cash expenditures, which are primarily employee salaries. Since annual subscription fees are typically due on each anniversary of contract signing, the amount of cash received for annual subscription fees typically fluctuates on a quarterly basis based on the historical levels of new business sales in that quarter. Due to lower historical sales levels 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 typically lowest in our first quarter. Due also to the historical timing of business sales, our cash flow from operations is lower in our second quarter as compared to our third and fourth quarters. The cash payments from customers were approximately $77 million during the nine months ended September 30, 2014. The cash expenditures for employee salaries, including incentive payments, were approximately $44 million during the nine months ended September 30, 2014.

For the nine months ended September 30, 2014, net cash provided by operating activities of $8.9 million was primarily the result of $0.4 million of net loss plus $4.7 million of stock-based compensation, $8.0 million of depreciation and amortization, a $4.3 million decrease in accounts receivable, and a $0.4 million decrease in prepaid expenses and other current assets, less a $3.8 million decrease in accrued liabilities, and a $4.3 million decrease in deferred revenues.

For the nine months ended September 30, 2013, net cash provided by operating activities of $9.3 million was primarily the result of $3.5 million of net loss plus a $2.7 million decrease in accounts receivable, $5.1 million of stock-based compensation, $5.5 million of depreciation and amortization, and a $1.1 million increase in accrued liabilities, less a $1.6 million decrease in accounts payable.

As of September 30, 2014, we had net operating loss carryforwards of approximately $208.5 million available to reduce future federal taxable income. Use of these carryforwards is subject to significant limitations. 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

27


 

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 nine months ended September 30, 2014, net cash used in investing activities was $69.8 million, consisting of net purchases of $62.3 million of short-term investments, various capital expenditures of $3.3 million and capitalization of $4.2 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 nine months ended September 30, 2013, net cash used in investing activities was $15.8 million, consisting of the acquisition of CombineNet, net of cash acquired, of $25.5 million, plus various capital expenditures of $1.8 million and capitalization of $2.9 million of software development costs, offset by net maturities of $14.5 million of short-term investments.

Net Cash Flows from Financing Activities

For the nine months ended September 30, 2014, net cash provided by financing activities was $88.7 million, consisting of $87.4 million in proceeds from our public offering, net of underwriting discounts and offering costs, $0.5 million in proceeds from the exercise of common stock options and $0.8 million in proceeds from employee stock purchase plan activity.

For the nine months ended September 30, 2013, net cash provided by financing activities was $2.4 million, consisting of $1.6 million in proceeds from the exercise of common stock options and $0.8 million in proceeds from employee stock purchase plan activity.

Line of Credit

On November 2, 2012, we established a $30 million revolving credit facility to cost effectively increase our liquidity, though we have no current plans to utilize it. The facility consists of a $20 million securities secured revolving credit facility and a $10 million receivables secured revolving credit facility and will be available for use until November 2, 2015. The securities secured facility and the receivables secured facility bear interest equal to the BBA LIBOR Daily Floating Rate plus 0.75% and the BBA LIBOR Daily Floating Rate plus 1.50%, respectively. We pay a quarterly fee equal to 0.10% on any unused funds under the facility. As of September 30, 2014 and December 31, 2013, we had $0 outstanding.

Off-Balance Sheet Arrangements

As of September 30, 2014, 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 as well as the broader commercial market and gain acceptance of new products we develop or acquire, 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 cost of revenues, research and development, sales and marketing, general and administrative and capital expenditures to increase in absolute dollars in the future. As a percentage of revenues, we expect cost of revenues and sales and marketing to remain relatively consistent and research and development, general and administrative and capital expenditures to decline 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 our cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

28


 

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 three months ended September 30, 2014, there were no material changes in 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 quarterly report on Form 10-Q for the six months ended June 30, 2014, which was filed with the Securities and Exchange Commission on August 8, 2014.

Seasonality

Historically, our new business sales have fluctuated as a result of seasonal variations in our business, principally due to the timing of client budget cycles, with lower new sales in our first and third quarters than in the remainder of our year. Due in large part to the expansion of our product portfolio and market focus, however, we do not believe that we currently experience material seasonality with respect to new business sales. Our expenses have not and do not vary significantly as a result of these historical factors, but they 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 historical timing of new business sales and the payment of annual bonuses. Since annual subscription fees are typically due on each anniversary of contract signing, the amount of cash payments for annual subscription fees typically fluctuates on a quarterly basis based on the historical levels of new business sales in that quarter. Due to lower historical sales levels 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. Due also to the historical timing of business sales, 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. These seasonal patterns for cash flow and deferred revenues may lessen or otherwise change in the future as the impact of our historical seasonality of new business sales lessens over time.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk.

We bill and receive payments from our customers predominately in U.S. dollars as well as make payments predominately in U.S. dollars. With the acquisition of Upside, the amount of payments received and made in Canadian dollars has increased slightly while remaining an immaterial portion of our business. Given our limited exposure to foreign currencies, the relative stability of currency exchange rates between the U.S. dollar and the Canadian dollar and our ability to monitor a single exchange rate, we believe that our results of operations and cash flows are not materially subject to fluctuations due to changes in foreign currency exchange rates. If we further grow sales of our solution outside the United States or establish other material operations outside the United States, we may become subject to greater risks with respect 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 September 30, 2014 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief

29


 

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 September 30, 2014, 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.

 

 

 

30


 

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, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014.

 

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.

 

 

 

31


 

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: November 7, 2014

 

32