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EX-31.2 - EX-31.2 - SCIQUEST INCsqi-ex312_6.htm

 

 

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, 2015

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, 2015, 27,815,502 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, 2015

TABLE OF CONTENTS

 

 

 

 

Pages

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.

 

CONSOLIDATED FINANCIAL STATEMENTS

2

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

2

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014 (unaudited)

3

 

 

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2015 (unaudited)

4

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

5

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

ITEM 2.

 

 

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

19

 

ITEM 3.

 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

25

 

ITEM 4.

 

 

CONTROLS AND PROCEDURES

25

 

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1.

 

 

LEGAL PROCEEDINGS

27

 

ITEM 1A.

 

 

RISK FACTORS

27

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

27

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

27

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

27

 

ITEM 5.

 

OTHER INFORMATION

27

 

ITEM 6.

 

EXHIBITS

27

 

 

 

SIGNATURES

28

 

 

 

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,

 

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,137

 

 

$

59,419

 

Short-term investments

 

 

75,918

 

 

 

71,493

 

Accounts receivable, net

 

 

11,961

 

 

 

12,032

 

Prepaid expenses and other current assets

 

 

2,395

 

 

 

2,666

 

Deferred tax asset

 

 

378

 

 

 

400

 

Total current assets

 

 

150,789

 

 

 

146,010

 

Property and equipment, net

 

 

14,484

 

 

 

13,595

 

Goodwill

 

 

61,916

 

 

 

63,779

 

Intangible assets, net

 

 

19,733

 

 

 

23,846

 

Deferred commissions

 

 

6,199

 

 

 

6,094

 

Deferred tax asset, less current portion

 

 

11,015

 

 

 

11,657

 

Other

 

 

283

 

 

 

234

 

Total assets

 

$

264,419

 

 

$

265,215

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

508

 

 

$

375

 

Accrued liabilities

 

 

10,013

 

 

 

10,051

 

Deferred revenues

 

 

56,648

 

 

 

59,751

 

Total current liabilities

 

 

67,169

 

 

 

70,177

 

Deferred revenues, less current portion

 

 

9,337

 

 

 

11,350

 

Deferred rent, less current portion

 

 

1,969

 

 

 

2,027

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 50,000 shares authorized; 27,815 and 27,574

    shares issued and outstanding as of September 30, 2015 and

    December 31, 2014, respectively

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

210,334

 

 

 

204,065

 

Accumulated other comprehensive loss

 

 

(5,386

)

 

 

(3,055

)

Accumulated deficit

 

 

(19,032

)

 

 

(19,377

)

Total stockholders' equity

 

 

185,944

 

 

 

181,661

 

Total liabilities and stockholders' equity

 

$

264,419

 

 

$

265,215

 

 

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,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

26,256

 

 

$

25,670

 

 

$

78,698

 

 

$

76,364

 

Cost of revenues

 

8,409

 

 

 

7,854

 

 

 

25,439

 

 

 

23,400

 

Gross profit

 

17,847

 

 

 

17,816

 

 

 

53,259

 

 

 

52,964

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

6,811

 

 

 

7,146

 

 

 

20,613

 

 

 

21,261

 

Sales and marketing

 

6,308

 

 

 

6,208

 

 

 

20,041

 

 

 

19,409

 

General and administrative

 

2,805

 

 

 

4,348

 

 

 

9,324

 

 

 

10,791

 

Amortization of intangible assets

 

645

 

 

 

795

 

 

 

2,114

 

 

 

2,395

 

Total operating expenses

 

16,569

 

 

 

18,497

 

 

 

52,092

 

 

 

53,856

 

Income (loss) from operations

 

1,278

 

 

 

(681

)

 

 

1,167

 

 

 

(892

)

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

158

 

 

 

124

 

 

 

471

 

 

 

182

 

Other expense, net

 

(176

)

 

 

(37

)

 

 

(411

)

 

 

(48

)

Total other (expense) income, net

 

(18

)

 

 

87

 

 

 

60

 

 

 

134

 

Income (loss) before income taxes

 

1,260

 

 

 

(594

)

 

 

1,227

 

 

 

(758

)

Income tax (expense) benefit

 

(1,008

)

 

 

164

 

 

 

(882

)

 

 

321

 

Net income (loss)

$

252

 

 

$

(430

)

 

$

345

 

 

$

(437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(1,150

)

 

 

(898

)

 

 

(2,331

)

 

 

(973

)

Comprehensive loss

$

(898

)

 

$

(1,328

)

 

$

(1,986

)

 

$

(1,410

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.01

 

 

$

(0.02

)

 

$

0.01

 

 

$

(0.02

)

Diluted

$

0.01

 

 

$

(0.02

)

 

$

0.01

 

 

$

(0.02

)

Weighted average shares outstanding used in

   computing per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

27,818

 

 

 

27,514

 

 

 

27,684

 

 

 

26,295

 

Diluted

 

27,907

 

 

 

27,514

 

 

 

27,955

 

 

 

26,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

 

 

27,574

 

 

$

28

 

 

$

204,065

 

 

$

(3,055

)

 

$

(19,377

)

 

$

181,661

 

Issuance of stock in connection with stock

   option exercises

 

 

200

 

 

 

-

 

 

 

1,526

 

 

 

-

 

 

 

-

 

 

 

1,526

 

Issuance of stock in connection with employee

   stock purchase plan

 

 

32

 

 

 

-

 

 

 

398

 

 

 

-

 

 

 

-

 

 

 

398

 

Issuance of stock pursuant to vesting of

   restricted stock units

 

 

9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,345

 

 

 

-

 

 

 

-

 

 

 

4,345

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,331

)

 

 

-

 

 

 

(2,331

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

345

 

 

 

345

 

Balance at September 30, 2015

 

 

27,815

 

 

$

28

 

 

$

210,334

 

 

$

(5,386

)

 

$

(19,032

)

 

$

185,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2015

 

 

2014

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

$

345

 

 

$

(437

)

Adjustments to reconcile net income (loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

8,820

 

 

 

7,954

 

Loss on disposal of fixed assets

 

-

 

 

 

430

 

Stock-based compensation expense

 

4,345

 

 

 

4,672

 

Deferred taxes

 

664

 

 

 

(457

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

14

 

 

 

4,293

 

Prepaid expenses and other current assets

 

250

 

 

 

379

 

Deferred commissions and other assets

 

(173

)

 

 

753

 

Accounts payable

 

136

 

 

 

(582

)

Accrued liabilities

 

(235

)

 

 

(3,769

)

Deferred revenues

 

(4,942

)

 

 

(4,328

)

Deferred rent

 

(58

)

 

 

-

 

Net cash provided by operating activities

 

9,166

 

 

 

8,908

 

Cash flows from investing activities

 

 

 

 

 

 

 

Addition of capitalized software development costs

 

(4,744

)

 

 

(4,231

)

Purchase of property and equipment

 

(1,582

)

 

 

(3,304

)

Purchase of available-for-sale short-term investments

 

(113,975

)

 

 

(92,735

)

Maturities of available-for-sale short-term investments

 

109,550

 

 

 

30,480

 

Net cash used in investing activities

 

(10,751

)

 

 

(69,790

)

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

 

1,526

 

 

 

452

 

Proceeds from employee stock purchase plan activity

 

675

 

 

 

766

 

Net cash provided by financing activities

 

2,201

 

 

 

88,651

 

Effect of exchange rate changes on cash and cash equivalents

 

102

 

 

 

(36

)

Net increase in cash and cash equivalents

 

718

 

 

 

27,733

 

Cash and cash equivalents at beginning of period

 

59,419

 

 

 

19,117

 

Cash and cash equivalents at end of period

$

60,137

 

 

$

46,850

 

 

 

 

 

 

 

 

 

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, 2015 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2014 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, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015.

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 stand-alone 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 stand-alone value to its customers. For arrangements when implementation services do not have stand-alone 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 stand-alone 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, 2015 and December 31, 2014. Realized gains and losses are included in other (expense) income based on the specific identification method. There were no realized gains or losses for the three or nine months ended September 30, 2015 or 2014. 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, 2015 and December 31, 2014, 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, 2015 or December 31, 2014.

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 $463 and $1,100 at September 30, 2015 and December 31, 2014, 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, 2015.

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 and a lattice model on the date of grant for performance-based restricted stock units. 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. The expected term for the nine months ended September 30, 2015 and 2014, 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. At September 30, 2015 and December 31, 2014, accumulated other comprehensive loss was ($5,386) and ($3,055), respectively, which is predominantly due 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 (expense) income 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.

Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed giving effect to all potentially dilutive common stock, including options, restricted stock, and common stock issuable pursuant to the employee share purchase plan. 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 income (loss) per share:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

252

 

 

$

(430

)

 

$

345

 

 

$

(437

)

Weighted average common shares, basic

 

27,818

 

 

 

27,514

 

 

 

27,684

 

 

 

26,295

 

Basic net income (loss) per share

$

0.01

 

 

$

(0.02

)

 

$

0.01

 

 

$

(0.02

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

252

 

 

$

(430

)

 

$

345

 

 

$

(437

)

Weighted average common shares, basic

 

27,818

 

 

 

27,514

 

 

 

27,684

 

 

 

26,295

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

57

 

 

 

-

 

 

 

207

 

 

 

-

 

Nonvested shares of restricted stock

 

27

 

 

 

-

 

 

 

30

 

 

 

-

 

Shares of employee stock purchase plan

 

5

 

 

 

-

 

 

 

34

 

 

 

-

 

Weighted average common shares, diluted

 

27,907

 

 

 

27,514

 

 

 

27,955

 

 

 

26,295

 

Diluted net income (loss) per share

$

0.01

 

 

$

(0.02

)

 

$

0.01

 

 

$

(0.02

)

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Common stock options

 

812

 

 

 

654

 

 

 

617

 

 

 

308

 

 

For the three and nine months ended September 30, 2014, 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, respectively, 7 and 13 nonvested shares of restricted stock, respectively, and 1 and 23 shares of common stock issuable pursuant to the employee stock purchase plan, respectively.

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.

10


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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 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. The new standard was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016 and early adoption was not permitted. In August 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. The Company will adopt this standard in the first quarter of 2018. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements.

 

3. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at September 30, 2015 and December 31, 2014 are as follows:

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

 

 

 

Fair Market

 

 

 

 

 

 

Fair Market

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

$

1,839

 

 

$

1,839

 

 

$

2,130

 

 

$

2,130

 

Commercial paper

 

51,474

 

 

 

51,474

 

 

 

46,339

 

 

 

46,339

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

12,980

 

 

 

12,980

 

 

 

14,030

 

 

 

14,030

 

Commercial paper

 

62,938

 

 

 

62,938

 

 

 

57,463

 

 

 

57,463

 

Total

$

129,231

 

 

$

129,231

 

 

$

119,962

 

 

$

119,962

 

 

There were no unrealized gains or losses as of September 30, 2015 or December 31, 2014.

 

4. 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.

11


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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

As of September 30, 2015 and December 31, 2014, the Company had cash equivalents of $53,313 and $48,469, respectively, which consist of money market accounts and commercial paper. As of September 30, 2015 and December 31, 2014, the Company had short-term investments of $75,918 and $71,493, 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 2025 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, 2015 and December 31, 2014, 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, 2015 are as follows:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents

$

53,313

 

 

$

53,313

 

 

$

-

 

 

$

-

 

Short-term investments

 

75,918

 

 

 

75,918

 

 

 

-

 

 

 

-

 

Total

$

129,231

 

 

$

129,231

 

 

$

-

 

 

$

-

 

 

The fair value measurements of the Company’s financial assets at December 31, 2014 are as follows:

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents

$

48,469

 

 

$

48,469

 

 

$

-

 

 

$

-

 

Short-term investments

 

71,493

 

 

 

71,493

 

 

 

-

 

 

 

-

 

Total

$

119,962

 

 

$

119,962

 

 

$

-

 

 

$

-

 

 

 

5. Property and Equipment

Property and equipment consist of the following as of September 30, 2015 and December 31, 2014:

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Furniture and fixtures

$

1,550

 

 

$

1,560

 

Computer software and equipment

 

30,979

 

 

 

25,039

 

Leasehold improvements

 

632

 

 

 

624

 

Total costs

 

33,161

 

 

 

27,223

 

Less accumulated depreciation and amortization

 

(18,677

)

 

 

(13,628

)

Property and equipment, net

$

14,484

 

 

$

13,595

 

 

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $679 and $729 for the three months ended September 30, 2015 and 2014, respectively, and was $2,107 and $1,979 for the nine months ended September 30, 2015 and 2014, 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 $1,347 and $1,419 during the three months ended September 30, 2015 and 2014, respectively, and $4,475 and $4,166 during the nine months ended September 30, 2015 and 2014, respectively. Net capitalized software development costs totaled $9,314 and $7,867 at September 30, 2015 and December 31, 2014,

12


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

respectively. Amortization expense for the three months ended September 30, 2015 and 2014 related to capitalized software development costs was $1,120 and $791, respectively, and was $3,109 and $2,022 for the nine months ended September 30, 2015 and 2014, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations and comprehensive loss.

 

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 were as follows:

 

Balance at December 31, 2014

$

63,779

 

Foreign currency translation

 

(1,863

)

Balance at September 30, 2015

$

61,916

 

 

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, 2015 and December 31, 2014 follows:

 

 

September 30, 2015

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

Acquired technology

7.0 years

 

$

19,103

 

 

$

(12,793

)

 

$

6,310

 

Customer relationships

12.1 years

 

 

26,421

 

 

 

(13,895

)

 

 

12,526

 

Covenant not to compete

4.2 years

 

 

377

 

 

 

(286

)

 

 

91

 

Acquired trademarks

4.5 years

 

 

1,062

 

 

 

(686

)

 

 

376

 

Trademarks

indefinite

 

 

430

 

 

 

-

 

 

 

430

 

Total

 

 

$

47,393

 

 

$

(27,660

)

 

$

19,733

 

  

 

December 31, 2014

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

Acquired technology

7.0 years

 

$

19,578

 

 

$

(11,699

)

 

$

7,879

 

Customer relationships

12.1 years

 

 

26,842

 

 

 

(12,062

)

 

 

14,780

 

Covenant not to compete

4.2 years

 

 

380

 

 

 

(212

)

 

 

168

 

Acquired trademarks

4.5 years

 

 

1,093

 

 

 

(504

)

 

 

589

 

Trademarks

indefinite

 

 

430

 

 

 

-

 

 

 

430

 

Total

 

 

$

48,323

 

 

$

(24,477

)

 

$

23,846

 

  

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 $1,142 and $1,314 for the three months ended September 30, 2015 and 2014, respectively, of which $497 and $519 is recorded in cost of revenues in the accompanying consolidated statements of operations and comprehensive loss for the three months ended September 30, 2015 and 2014, respectively. Amortization expense of intangible assets was $3,604 and $3,953 for the nine months ended September 30, 2015 and 2014, respectively, of which $1,490 and $1,558 is recorded in cost of revenues in the accompanying consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2015 and 2014, respectively.

13


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:

 

2015 (remaining three months)

$

1,046

 

2016

 

3,975

 

2017

 

3,540

 

2018

 

2,953

 

2019

 

2,493

 

Thereafter

 

5,296

 

 

$

19,303

 

  

 

7. 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, 2015 and December 31, 2014, the Company had $0 outstanding under the revolving credit facility.

 

8. 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, 2015 and December 31, 2014, 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, including performance-based 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, including performance-based 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, 2015, 2,920 shares of common stock were available for issuance under the Plan.

14


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, 2015:

 

 

September 30, 2015

 

Number of shares reserved under the 2013 Plan

 

3,500

 

Number of shares remaining for future grants transferred from Prior Plan

 

1,060

 

Number of stock options outstanding under the 2013 Plan

 

(1,114

)

Weighted average exercise price under the 2013 Plan

$

20.18

 

Weighted average term (in years)

 

8.8

 

Number of restricted stock units issued under the 2013 Plan

 

(526

)

Number of shares remaining for future grants

 

 

 

SciQuest, Inc. 2013 Stock Incentive Plan

 

2,920

 

 

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 and performance-based restricted stock units to certain employees and non-employee directors. 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. Performance-based restricted stock units differ from restricted stock units in that the number of shares of common stock issuable under performance-based restricted stock units is variable based on over- or under- performance of the Company’s stock price over a specified period of time. Stock-based compensation expense related to these restricted stock units and performance-based restricted stock units is recognized in the consolidated statements of operations and comprehensive loss based on the fair value of these awards. For restricted stock units, the fair value of the awards is the grant date market value of the Company’s common stock. For performance-based restricted stock units, the fair value of the awards is estimated using a lattice model with a volatility assumption based on the vesting period of the awards. Stock-based compensation expense of $378 and $203 was recorded during the three months ended September 30, 2015 and 2014, respectively, and $963 and $534 was recorded during the nine months ended September 30, 2015 and 2014, respectively, in connection with these awards. The total unrecognized compensation cost related to these awards is approximately $3,514 at September 30, 2015. This amount is expected to be recognized over a weighted-average period of 2.8 years.

 

The following summarizes the activity of restricted stock awards for the nine months ended September 30, 2015:

 

 

 

 

 

 

Weighted-

 

 

Number of

 

 

Average Grant

 

 

Units

 

 

Date Fair Value

 

Nonvested as of December 31, 2014

 

83

 

 

$

22.20

 

Issued

 

305

 

 

 

13.88

 

Vested

 

(35

)

 

 

22.49

 

Forfeited

 

(49

)

 

 

16.04

 

Nonvested as of September 30, 2015

 

304

 

 

$

14.80

 

 

15


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, 2015:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

 

 

 

Average

 

 

Intrinsic Value

 

 

 

 

 

 

Weighted-

 

 

Remaining

 

 

as of

 

 

Number of

 

 

Average

 

 

Contractual

 

 

September 30,

 

 

Options

 

 

Exercise Price

 

 

Term (In Years)

 

 

2015

 

Balance outstanding as of December 31, 2014

 

2,220

 

 

$

17.56

 

 

 

7.5

 

 

$

2,389

 

Options granted

 

553

 

 

 

14.76

 

 

 

 

 

 

 

 

 

Options exercised

 

(200

)

 

 

7.65

 

 

 

 

 

 

 

 

 

Options cancelled

 

(389

)

 

 

19.63

 

 

 

 

 

 

 

 

 

Balance outstanding as of September 30, 2015

 

2,184

 

 

$

17.39

 

 

 

7.5

 

 

$

433

 

Vested and expected to vest at September 30, 2015

 

1,993

 

 

$

17.28

 

 

 

7.3

 

 

$

433

 

Exercisable as of September 30, 2015

 

1,229

 

 

$

16.52

 

 

 

6.4

 

 

$

432

 

 

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, 2015 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, 2015. The aggregate intrinsic value of options exercised during the three months ended September 30, 2015 and 2014 was $29 and $283, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2015 and 2014 was $1,574 and $1,414, respectively.  

The total unrecognized compensation cost related to outstanding stock options is $7,822 at September 30, 2015. This amount is expected to be recognized over a weighted-average period of 2.6 years.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2015:

 

 

 

Options Outstanding at September 30, 2015

 

 

Options Exercisable at September 30, 2015

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Term

 

 

Weighted-Average

 

 

 

 

 

 

Weighted-Average

 

Range of Exercise Price

 

Number

 

 

(In Years)

 

 

Exercise Price

 

 

Number

 

 

Exercise Price

 

$0.10 - $1.90

 

 

8

 

 

 

1.4

 

 

$

0.29

 

 

 

8

 

 

$

0.29

 

$2.04 - $8.18

 

 

85

 

 

 

4.2

 

 

 

5.79

 

 

 

85

 

 

 

5.79

 

$9.95 - $14.94

 

 

841

 

 

 

6.9

 

 

 

13.86

 

 

 

575

 

 

 

14.14

 

$15.02 - $23.25

 

 

682

 

 

 

8.1

 

 

 

16.63

 

 

 

297

 

 

 

16.83

 

$23.78 - $29.14

 

 

568

 

 

 

8.1

 

 

 

25.49

 

 

 

264

 

 

 

25.26

 

Total

 

 

2,184

 

 

 

7.5

 

 

$

17.39

 

 

 

1,229

 

 

$

16.52

 

 

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,

 

 

 

2015

 

 

 

2014

 

 

Estimated dividend yield

 

0

 

%

 

 

0

 

%

Expected stock price volatility

44.53 - 46.30

 

%

 

46.05 - 48.83

 

%

Weighted-average risk-free interest rate

1.36 - 1.89

 

%

 

1.75 - 2.01

 

%

Expected life of options (in years)

 

6.25

 

 

 

 

6.25

 

 

16


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

 

Stock-based compensation expense of $977 and $1,297 was recorded during the three months ended September 30, 2015 and 2014, respectively, and $3,160 and $3,898 was recorded during the nine months ended September 30, 2015 and 2014, 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, 2015 and 2014 was $6.77 and $11.96, respectively. The aggregate fair value of stock options that vested during the nine months ended September 30, 2015 and 2014 was $3,235 and $4,148, respectively.

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. 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, 2015, 848 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three months ended September 30, 2015 and 2014, the Company recognized stock-based compensation expense of $76 and $78, respectively, and recognized $222 and $240 during the nine months ended September 30, 2015 and 2014, 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,

 

 

 

2015

 

 

 

2014

 

 

Estimated dividend yield

 

0

 

%

 

 

0

 

%

Expected stock price volatility

 

47.20

 

%

 

 

47.20

 

%

Weighted-average risk-free interest rate

 

0.07

 

%

 

 

0.06

 

%

Expected life of options (in years)

 

0.5

 

 

 

 

0.5

 

 

 

 

 

9. Income Taxes

The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. The Company’s effective tax rate of (80.0)% and (71.9)% for the three and nine months ended September 30, 2015, respectively, was lower than the federal statutory rate of 34% primarily due to non-deductible expenses, including stock-based compensation and amortization of acquired intangibles, and a change in the North Carolina state tax rate, which was treated as a discrete item. The Company’s effective tax rate of (27.6)% and (42.3)% for the three and nine months ended September 30, 2014, respectively, was lower than the federal statutory rate of 34% primarily due to non-deductible expenses, including stock-based compensation and amortization of acquired intangibles.

 

10. Commitments and Contingencies

Legal Contingencies

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

17


SciQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share amounts)

 

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.

 

 

11. Subsequent Events

 

   The Company evaluated subsequent events from October 1, 2015 through November 6, 2015, the date the consolidated financial statements were issued. On November 2, 2015, the $30,000 revolving credit facility expired. The Company determined not to renew the revolving credit facility as we have no current plans to utilize it. For more details regarding the revolving credit facility please refer to Note 7. We concluded that no other subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

 

 

18


 

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.

19


 

Key Financial Terms and Metrics

We have several key financial terms and metrics. During the nine months ended September 30, 2015, 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, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015.

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, 2015, 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, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015, 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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Revenues

 

$

26,256

 

 

$

25,670

 

 

$

78,698

 

 

$

76,364

 

Costs of revenues (1) (2)

 

 

8,409

 

 

 

7,854

 

 

 

25,439

 

 

 

23,400

 

Gross profit

 

 

17,847

 

 

 

17,816

 

 

 

53,259

 

 

 

52,964

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

6,811

 

 

 

7,146

 

 

 

20,613

 

 

 

21,261

 

Sales and marketing

 

 

6,308

 

 

 

6,208

 

 

 

20,041

 

 

 

19,409

 

General and administrative

 

 

2,805

 

 

 

4,348

 

 

 

9,324

 

 

 

10,791

 

Amortization of intangible assets

 

 

645

 

 

 

795

 

 

 

2,114

 

 

 

2,395

 

Total operating expenses

 

 

16,569

 

 

 

18,497

 

 

 

52,092

 

 

 

53,856

 

Income (loss) from operations

 

 

1,278

 

 

 

(681

)

 

 

1,167

 

 

 

(892

)

Interest and other (expense) income, net

 

 

(18

)

 

 

87

 

 

 

60

 

 

 

134

 

Income (loss) before income taxes

 

 

1,260

 

 

 

(594

)

 

 

1,227

 

 

 

(758

)

Income tax (expense) benefit

 

 

(1,008

)

 

 

164

 

 

 

(882

)

 

 

321

 

Net income (loss)

 

$

252

 

 

$

(430

)

 

$

345

 

 

$

(437

)

 

20


 

(1)

Amounts include stock-based compensation expense, as follows:  

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Cost of revenues

 

$

210

 

 

$

187

 

 

$

612

 

 

$

533

 

Research and development

 

149

 

 

201

 

 

 

440

 

 

 

582

 

Sales and marketing

 

407

 

 

338

 

 

 

1,148

 

 

 

1,112

 

General and administrative

 

665

 

 

852

 

 

 

2,145

 

 

 

2,445

 

 

 

$

1,431

 

 

$

1,578

 

 

$

4,345

 

 

$

4,672

 

 

(2)

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

 

(In thousands)

 

Amortization of capitalized software development costs

 

$

1,120

 

 

$

791

 

 

$

3,109

 

 

$

2,022

 

Amortization of acquired software

 

 

497

 

 

 

519

 

 

 

1,490

 

 

 

1,558

 

 

 

$

1,617

 

 

$

1,310

 

 

$

4,599

 

 

$

3,580

 

 

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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

100

%

 

100

%

 

100

%

 

100

%

Cost of revenues

 

32

 

 

30

 

 

33

 

 

31

 

Gross profit

 

68

 

 

70

 

 

67

 

 

69

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

26

 

 

28

 

 

26

 

 

28

 

Sales and marketing

 

24

 

 

24

 

 

25

 

 

25

 

General and administrative

 

11

 

 

17

 

 

12

 

 

14

 

Amortization of intangible assets

 

2

 

 

3

 

 

3

 

 

3

 

Total operating expenses

 

63

 

 

72

 

 

66

 

 

70

 

Income (loss) from operations

 

5

 

 

(2)

 

 

1

 

 

(1)

 

Interest and other income, net

 

0

 

 

0

 

 

0

 

 

0

 

Income (loss) before income taxes

 

5

 

 

(2)

 

 

1

 

 

(1)

 

Income tax (expense) benefit

 

(4)

 

 

0

 

 

(1)

 

 

0

 

Net income (loss)

 

1

%

 

(2)

%

 

0

%

 

(1)

%

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Revenues. Revenues for the three months ended September 30, 2015 were $26.3 million, an increase of $0.6 million, or 2%, over revenues of $25.7 million for the three months ended September 30, 2014. 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, 2014.

Cost of Revenues. Cost of revenues for the three months ended September 30, 2015 was $8.4 million, an increase of $0.5 million, or 6%, over cost of revenues of $7.9 million for the three months ended September 30, 2014. As a percentage of revenues, cost of revenues increased to 32% for the three months ended September 30, 2015 from 30% for the three months ended September 30, 2014. The increase in dollar amount was primarily due to a $0.3 million increase in amortization of capitalized software development costs and a $0.2 million increase in other spend. We had 198 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at September 30, 2015 compared to 205 full-time equivalents at September 30, 2014.

21


 

Research and Development Expenses. Research and development expenses for the three months ended September 30, 2015 were $6.8 million, a decrease of $0.3 million, or 4%, from research and development expenses of $7.1 million for the three months ended September 30, 2014. As a percentage of revenues, research and development expense decreased to 26% for the three months ended September 30, 2015 from 28% for the three months ended September 30, 2014. The decrease in dollar amount was due primarily to a $0.2 million decrease in employee-related costs attributable to the existing research and development personnel and a $0.1 million decrease in other research and development spend. We had 206 full-time equivalents in our research and development organization at September 30, 2015 compared to 226 full-time equivalents at September 30, 2014.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended September 30, 2015 were $6.3 million, an increase of $0.1 million, or 2%, over sales and marketing expenses of $6.2 million for the three months ended September 30, 2014. As a percentage of revenues, sales and marketing expenses were 24% for both the three months ended September 30, 2015 and 2014. The increase in dollar amount was due primarily to a $0.1 million increase in employee-related costs attributable to our existing sales and marketing personnel. We had 105 full-time equivalents in our sales and marketing organization at September 30, 2015 compared to 103 full-time equivalents at September 30, 2014.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2015 were $2.8 million, a decrease of $1.5 million, or 35%, from general and administrative expenses of $4.3 million for the three months ended September 30, 2014. As a percentage of revenues, general and administrative expenses decreased to 11% for the three months ended September 30, 2015 from 17% for the three months ended September 30, 2014. The decrease in dollar amount was primarily due to a $0.2 million decrease in stock-based compensation expense, a $0.2 million decrease in rent expense, a $0.4 million decrease in the loss on fixed asset disposals related to the move from the Cary location to the Morrisville location, a $0.3 million decrease in sales taxes, and a $0.4 million decrease in other general and administrative spend. We had 28 full-time equivalents in our general and administrative organization at September 30, 2015 compared to 29 full-time equivalents at September 30, 2014.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended September 30, 2015 were $0.6 million, a decrease of $0.2 million, or 25%, from amortization of intangible assets of $0.8 million for the three months ended September 30, 2014. As a percentage of revenues, amortization of intangible assets decreased to 2% for the three months ended September 30, 2015 from 3% for the three months ended September 30, 2014. The decrease in dollar amount is due to fully amortizing a portion of the intangible assets balance prior to September 30, 2015.

Income Tax (Expense) Benefit. Income tax expense for the three months ended September 30, 2015 was $1.0 million compared to income tax benefit of $0.2 million for the three months ended September 30, 2014. The change in income tax (expense) benefit was primarily due to differences in our pre-tax net loss and effective tax rates in each period. A change in the NC state tax rate, which was treated as a discrete item, resulted in increased tax expense for the three months ended September 30, 2015.  

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Revenues. Revenues for the nine months ended September 30, 2015 were $78.7 million, an increase of $2.3 million, or 3%, over revenues of $76.4 million for the nine months ended September 30, 2014. 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, 2014.

Cost of Revenues. Cost of revenues for the nine months ended September 30, 2015 was $25.4 million, an increase of $2.0 million, or 9%, over cost of revenues of $23.4 million for the nine months ended September 30, 2014. As a percentage of revenues, cost of revenues increased to 33% for the nine months ended September 30, 2015 from 31% from the nine months ended September 30, 2014. The increase in dollar amount primarily resulted from a $0.5 million increase in employee-related costs attributable to our additional and existing implementation services, supplier enablement services, customer support and client partner personnel, a $1.1 million increase in amortization of capitalized software development costs, and a $0.4 million increase in other spend. We had 198 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at September 30, 2015 compared to 205 full-time equivalents at September 30, 2014.

Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2015 were $20.6 million, a decrease of $0.7 million, or 3%, from research and development expenses of $21.3 million for the nine months ended September 30, 2014. As a percentage of revenues, research and development expense decreased to 26% for the nine months ended September 30, 2015 from 28% for the nine months ended September 30, 2014. The decrease in dollar amount was primarily due to a $0.5 million increase in capitalized software development costs, a $0.1 million decrease in stock-based compensation expense, and a $0.1 million decrease in other research and development spend. We had 206 full-time equivalents in our research and development organization at September 30, 2015 compared to 226 full-time equivalents at September 30, 2014.

22


 

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended September 30, 2015 were $20.0 million, an increase of $0.6 million, or 3%, over sales and marketing expenses of $19.4 million for the nine months ended September 30, 2014. As a percentage of revenues, sales and marketing expenses were 25% for both the nine months ended September 30, 2015 and 2014. The increase in dollar amount was due primarily to a $0.8 million increase in employee-related costs attributable to our existing sales and marketing personnel, which was offset by a $0.2 million decrease in other sales and marketing spend. We had 105 full-time equivalents in our sales and marketing organization at September 30, 2015 compared to 103 full-time equivalents at September 30, 2014.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2015 were $9.3 million, a decrease of $1.5 million, or 14%, over general and administrative expenses of $10.8 million for the nine months ended September 30, 2014. As a percentage of revenues, general and administrative expenses decreased to 12% for the nine months ended September 30, 2015, from 14% for the nine months ended September 30, 2014. The increase in dollar amount was primarily due to a $0.3 million increase in employee-related costs attributable primarily to our existing general and administrative personnel, which was offset by a $1.1 million decrease in sales tax expense, a $0.3 million decrease in stock-based compensation expense, a $0.2 million decrease in rent expense, and a $0.2 million decrease in other general and administrative spend. We had 28 full-time equivalents in our general and administrative organization at September 30, 2015 compared to 29 full-time equivalents at September 30, 2014.

Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended September 30, 2015 were $2.1 million, a decrease of $0.3 million, or 12%, over amortization of intangible assets of $2.4 million for the nine months ended September 30, 2014. As a percentage of revenues, amortization of intangible assets was 3% for both the nine months ended September 30, 2015 and 2014. The decrease in dollar amount is due to fully amortizing a portion of the intangible assets balance prior to September 30, 2015.

Income Tax (Expense) Benefit. Income tax expense for the nine months ended September 30, 2015 was $0.9 million compared to income tax benefit of $0.3 million for the nine months ended September 30, 2014. The change in income tax benefit was due to a difference in our pre-tax net loss and effective tax rates in each period. A change in the NC state tax rate, which was treated as a discrete item, resulted in increased tax expense for the nine months ended September 30, 2015.  

Liquidity

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $9.2 million during the nine months ended September 30, 2015. 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 to the historical timing of client payments from second quarter sales, our cash flow from operations is lower in our second quarter as compared to our third and fourth quarters. The cash payments received from customers were approximately $75 million during the nine months ended September 30, 2015. The cash expenditures for employee salaries, including incentive payments, were approximately $46 million during the nine months ended September 30, 2015.

For the nine months ended September 30, 2015, net cash provided by operating activities of $9.2 million was primarily the result of $0.3 million of net income plus $4.3 million of stock-based compensation, $8.8 million of depreciation and amortization, and $0.7 million of deferred taxes, less a $4.9 million decrease in deferred revenues.

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.

As of September 30, 2015, we had net operating loss carryforwards of approximately $203.3 million available to reduce future federal taxable income. Use of these carryforwards is subject to significant limitations. In the future, perhaps as early as 2017, we may fully utilize our available net operating loss carryforwards and would begin making income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we generate taxable income and/or we are not allowed to use net operating loss carryforwards for federal/state income tax purposes, our cash generated from operations will be adequate to meet our income tax obligations.

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Net Cash Flows from Investing Activities

 

For the nine months ended September 30, 2015, net cash used in investing activities was $10.8 million, consisting of purchases of $114.0 million of short-term investments, various capital expenditures of $1.6 million and capitalization of $4.7 million of software development costs, plus maturities of $109.5 million of short-term investments. 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, 2014, net cash used in investing activities was $69.8 million, consisting of purchases of $92.7 million of short-term investments, various capital expenditures of $3.3 million and capitalization of $4.2 million of software development costs, plus maturities of $30.4 million of short-term investments.

 

Net Cash Flows from Financing Activities

 

For the nine months ended September 30, 2015, net cash provided by financing activities was $2.2 million, consisting of $1.5 million in proceeds from the exercise of common stock options and $0.7 million in proceeds from the employee stock purchase plan.

 

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 the employee stock purchase plan.

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, 2015 and December 31, 2014, we had $0 outstanding. As stated in the subsequent event footnote (Note 11), the revolving credit facility expired on November 2, 2015 and the Company has no plans to renew it in the future.

Off-Balance Sheet Arrangements

As of September 30, 2015, 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.

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.

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Contractual and Commercial Commitment Summary

We have contractual obligations that require us to make future cash payments. During the nine months ended September 30, 2015, 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 annual report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015.

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. Our primary exposure to foreign currencies results from payments made in Canadian dollars for payroll and other expenses relating to our office in Edmonton, Alberta, which represented approximately 10% of our total expenses in the quarter ended September 30, 2015. Although our results of operations could be adversely affected by a decline in the value of the U.S. dollar relative to the Canadian dollar, such a decline would have to be significant in order to have a material impact on our results of operations given our limited exposure to foreign currencies. The majority of our sales contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue. If we further grow our sales 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, 2015 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities

25


 

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, 2015, 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.

 

 

 

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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, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015.

 

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 Jennifer G. Kaelin, 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 Jennifer G. Kaelin, Chief Financial Officer of SciQuest.

 

101

 

 

Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

 

*

Filed herewith.

**

Furnished herewith.

 

 

 

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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/    Jennifer G. Kaelin

 

 

Jennifer G. Kaelin

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 

Date: November 6, 2015

 

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