UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2016

OR

For the transition period from              to             

Commission File Number: 001-34875

 

SCIQUEST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

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):

 

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 April 30, 2016, 27,808,603 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

 

 

 

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SCIQUEST, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

SciQuest, Inc.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

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

 

 

 

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SciQuest, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

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SciQuest, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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SciQuest, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

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

 

 

 

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1. Description of Business

 

SciQuest, Inc. (the Company) provides leading cloud-based business automation solutions for spend management. The Company’s solutions include: spend analytics solutions that cleanse and classify spend data from a wide variety of sources and formats putting data and analytics to work to drive and measure cost savings; sourcing solutions that create events, manage bids and award contracts automatically to simplify and optimize the bidding process; supplier management solutions that facilitate on-boarding, maintaining and managing supplier relationships and give visibility into which suppliers are best able to support goals; contract lifecycle management solutions that automate the complete contract lifecycle from contract authoring, automated workflow approvals to a fully searchable archive of executed contracts; procurement solutions that automate the purchasing process and drive contract compliance; inventory management solutions that facilitate finding, sourcing and tracking chemicals and research initiatives, enhance control over spending decisions and improve compliance and risk management. By simplifying and streamlining cumbersome, tedious, 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 three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year or any future period. The balance sheet at December 31, 2015 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, 2015, which was filed with the Securities and Exchange Commission on February 22, 2016.

 

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.

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

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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.

Sales taxes collected from customers and remitted to government authorities are excluded from revenue.

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.

 

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

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consolidated statements of operations and comprehensive income (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 March 31, 2016 and December 31, 2015. Realized gains and losses are included in other income (expense) based on the specific identification method. There were no realized gains or losses for the three months ended March 31, 2016 or 2015. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive loss, net of tax. As of March 31, 2016 and December 31, 2015, 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 March 31, 2016 or December 31, 2015.

 

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 $197 and $473 at March 31, 2016 and December 31, 2015, 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.

 

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 March 31, 2016.

 

Stock-Based Compensation

 

Stock-based payments to employees, including grants of employee stock options, are recognized in the consolidated statement of operations and comprehensive income (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.

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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 three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015, accumulated other comprehensive loss was ($5,010) and ($6,055), respectively, which is predominantly due to the intercompany balance with the Company’s Canadian subsidiary not expected to be settled in the foreseeable future and the goodwill balance on the Company’s Canadian subsidiary. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations and comprehensive income (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.

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

 

 

 

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

 

 

For the three months ended March 31, 2015, 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 months ended March 31, 2015, diluted net loss per share excluded the impact of 287 outstanding stock options, 21 nonvested shares of restricted stock, and 1 share of common stock issuable pursuant to the employee stock purchase plan.

 

Income Taxes

 

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

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

The Company accounts for uncertain tax positions by recognizing and measuring tax benefits taken or expected to be taken on a tax return. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If the recognition threshold is met, only the portion of the tax benefit that is more likely than not to be realized upon settlement with a taxing authority is recorded. The tax benefit that is not recorded is considered an unrecognized tax benefit. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.

Recent Accounting Pronouncements

 

In March 2016, the FASB issued new accounting guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

 

In February 2016, the FASB issued new accounting guidance on leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. The new guidance requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The new standard is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact this standard will have on its consolidated financial statements and the timing of adoption.

 

In November 2015, the FASB issued new accounting guidance related to balance sheet classification of deferred taxes. The new guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We early adopted this guidance during the year ended December 31, 2015.

 

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

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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. In March 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. 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 and has not yet selected a transition approach.

 

3. Cash Equivalents and Short-Term Investments

The components of cash equivalents and short-term investments at March 31, 2016 and December 31, 2015 are as follows:

 

 

There were no unrealized gains or losses as of March 31, 2016 or December 31, 2015.

 

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:

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

As of March 31, 2016 and December 31, 2015, the Company had cash equivalents of $45,954 and $60,714, respectively, which consist of money market accounts and commercial paper. As of March 31, 2016 and December 31, 2015, the Company had short-term investments of $81,553 and $74,612, 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

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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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 are as follows:

 

 

The fair value measurements of the Company’s financial assets at December 31, 2015 are as follows:

 

 

 

5. Property and Equipment

Property and equipment consist of the following as of March 31, 2016 and December 31, 2015:

 

 

Depreciation expense related to property and equipment (excluding capitalized internal-use software) was $739 and $740 for the three months ended March 31, 2016 and 2015, respectively.

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 $1,551 and $1,303, inclusive of foreign currency translation, during the three months ended March 31, 2016 and 2015, respectively. Net capitalized software development costs totaled $9,736 and $9,549 at March 31, 2016 and December 31, 2015, respectively. Amortization expense for the three months ended March 31, 2016 and 2015 related to capitalized software development costs was $1,293 and $917, respectively, which is classified within cost of revenues in the accompanying consolidated statements of operations and comprehensive income (loss).

 

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2016 were as follows:

 

 

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.

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A summary of intangible assets at March 31, 2016 and December 31, 2015 follows:

 

  

  

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 $1,112 and $1,232 for the three months ended March 31, 2016 and 2015, respectively, of which $497 and $497 is recorded in cost of revenues in the accompanying consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016 and 2015, respectively.

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

 

  

 

7. Debt

On November 2, 2012, the Company established a $30,000 revolving credit facility which expired on November 2, 2015. The revolving credit facility was for general corporate purposes. The facility consisted 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 beared 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 paid 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.

 

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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 March 31, 2016 and December 31, 2015, 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 March 31, 2016, 2,030 shares of common stock were available for issuance under the Plan.

The following table summarizes the number of shares outstanding and the number of shares available for future grant under the stock incentive plan at March 31, 2016:

 

 

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 Units and Performance-Based Restricted Stock Units

 

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 income (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 $551 and $254 was recorded during the three months ended March 31, 2016 and 2015, respectively, in connection with these awards. The total unrecognized compensation cost related to these awards is approximately $5,344 at March 31, 2016. This amount is expected to be recognized over a weighted-average period of 3.0 years.

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The following summarizes the activity of restricted stock awards for the three months ended March 31, 2016:

 

 

Stock Options

The Company also issues common stock options. The following summarizes stock option activity for the three months ended March 31, 2016:

 

 

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 March 31, 2016 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on March 31, 2016. The aggregate intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $18 and $82, respectively.  

The total unrecognized compensation cost related to outstanding stock options is $7,333 at March 31, 2016. 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 March 31, 2016:

 

 

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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:   

 

Stock-based compensation expense of $1,034 and $1,145 was recorded during the three months ended March 31, 2016 and 2015, respectively, related to the Company’s outstanding stock options. The weighted average grant date fair value per share for stock options granted in the three months ended March 31, 2016 and 2015 was $5.66 and $6.86, respectively. The aggregate fair value of stock options that vested during the three months ended March 31, 2016 and 2015 was $1,115 and $1,314, 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 March 31, 2016, 817 shares of common stock were available for issuance to participating employees under the Purchase Plan. During the three months ended March 31, 2016 and 2015, the Company recognized stock-based compensation expense of $58 and $70, 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:

 

Share Repurchase Program

 

On February 25, 2016, the Company announced that its Board of Directors has approved a share repurchase program that enables the Company to repurchase up to $30,000 of its outstanding common stock. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The share repurchase program is scheduled to expire on December 31, 2017, although purchases may be suspended or discontinued at any time prior to the expiration date. The Company purchased 45 shares of treasury stock for $587 in the three months ended March 31, 2016. As of March 31, 2016, $29,413 of shares may yet be repurchased under the share repurchase program.

 

 

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 (12.3)% for the three months ended March 31, 2016, was lower than the federal statutory rate of 35% primarily due to non-deductible expenses, the effect of federal R&D credits, a change in the federal tax rate from 34% to 35%, and an expected reduction in the state valuation allowance. The Company’s effective tax rate of (51.0)% for the three months ended March 31, 2015, was lower than the federal statutory rate of 34% primarily due to non-deductible expenses, including stock-based compensation and amortization of acquired intangibles.

 

 

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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 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 April 1, 2016 through May 6, 2016, the date the consolidated financial statements were issued. We concluded that no subsequent events occurred that would require recognition or disclosure in the consolidated financial statements.

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SCIQUEST, INC.

 

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:

Our solutions are designed 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, tedious, and often manual, processes and creating a comprehensive, intelligent view of spending and compliance, organizations can identify and capitalize on opportunities to reduce costs and optimize processes by gaining control over suppliers, contracts, purchases and payments.

Our spend management solutions provide a significant return on investment for our customers by facilitating the reduction of spending on goods and services, enhancing the visibility and control over spending decisions and practices as well as optimizing the efficiency of key business processes. As a result of these benefits, our customers have the tools to focus on strategic initiatives that result in even greater value to their organizations.

Our procurement, supplier management and accounts payable solutions leverage our managed SciQuest Supplier Network, which facilitates our customers doing business with many thousands of unique suppliers and spending billions of dollars annually. Unlike many other providers, we do not charge suppliers any fees for the use of our network in part because we believe many suppliers ultimately will pass on such costs to the customer. Our approach encourages suppliers to participate in the network and facilitates customers consolidating more of their spending through our solutions.

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

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multi-year contracts that are generally three to five years in length or one-year contracts with annual renewal provisions. Subscription payments are typically payable annually in advance. A portion of the implementation service fees are typically payable in advance with the remainder payable as the services are performed, usually within the first three to eight months of contract execution.

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.

Historically we have had a relatively high concentration of higher education, life sciences, healthcare and state and local government customers. Today, a majority of our customers span the general commercial market as a result of our acquisitions as well as our own marketing efforts. We currently market and sell our solutions across the entire addressable market for spend management solutions.

Key Financial Terms and Metrics

We have several key financial terms and metrics. During the three months ended March 31, 2016, 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, 2015, which was filed with the Securities and Exchange Commission on February 22, 2016.

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:

During the three months ended March 31, 2016, 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, 2015, which was filed with the Securities and Exchange Commission on February 22, 2016, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.

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Results of Operations

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

 

 

 

 

 

 

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

 

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Revenues. Revenues for the three months ended March 31, 2016 were $26.9 million, an increase of $1.0 million, or 4%, over revenues of $25.9 million for the three months ended March 31, 2015. 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 March 31, 2015.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2016 was $8.4 million, an increase of $0.1 million, or 1%, over cost of revenues of $8.3 million for the three months ended March 31, 2015. As a percentage of revenues, cost of revenues decreased to 31% for the three months ended March 31, 2016 from 32% for the three months ended March 31, 2015. The increase in dollar amount was primarily due to a $0.4 million increase in amortization of capitalized software development costs and a $0.2 million increase in other spend, which was partially offset by a $0.5 million decrease in employee-related costs attributable to our existing implementation services, supplier enablement services, customer support and client partner personnel. We had 176 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at March 31, 2016 compared to 207 full-time equivalents at March 31, 2015.

Research and Development Expenses. Research and development expenses were $7.1 million for both the three months ended March 31, 2016 and 2015. As a percentage of revenues, research and development expenses decreased to 26% for the three months ended March 31, 2016 from 27% for the three months ended March 31, 2015. Capitalized software development costs increased $0.1 million, which was offset by a $0.1 million decrease in other research and development spend. We had 198 full-time equivalents in our research and development organization at March 31, 2016 compared to 215 full-time equivalents at March 31, 2015.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2016 were $6.8 million, a decrease of $0.2 million, or 3%, over sales and marketing expenses of $7.0 million for the three months ended March 31, 2015. As a percentage of revenues, sales and marketing expenses decreased to 26% for the three months ended March 31, 2016 from 27% for the three months ended March 31, 2015. The decrease in dollar amount was due primarily to a $0.6 million decrease in trade show costs, which was partially offset by a $0.2 million increase in stock-based compensation and a $0.2 million increase in other sales and marketing spend. We had 113 full-time equivalents in our sales and marketing organization at March 31, 2016 compared to 107 full-time equivalents at March 31, 2015.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2016 were $3.0 million, a decrease of $0.3 million, or 9%, from general and administrative expenses of $3.3 million for the three months ended March 31, 2015. As a percentage of revenues, general and administrative expenses decreased to 11% for the three months ended March 31, 2016 from 13% for the three months ended March 31, 2015. The decrease in dollar amount was primarily due to a $0.3 million decrease in recruiting costs. We had 26 full-time equivalents in our general and administrative organization at March 31, 2016 compared to 27 full-time equivalents at March 31, 2015.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended March 31, 2016 were $0.6 million, a decrease of $0.1 million, or 14%, from amortization of intangible assets of $0.7 million for the three months ended March 31, 2015. As a percentage of revenues, amortization of intangible assets decreased to 2% for the three months ended March 31,

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2016 from 3% for the three months ended March 31, 2015. The decrease in dollar amount is due to a declining balance amortization basis.

Income Tax (Expense) Benefit. Income tax expense for the three months ended March 31, 2016 was $0.2 million, an increase in income tax expense of $0.5 million, or 166%, from an income tax benefit of $0.3 million for the three months ended March 31, 2015. The change in income tax (expense) benefit was primarily due to differences in our pre-tax net income and effective tax rates in each period.    

Liquidity

Net Cash Flows from Operating Activities

Net cash used in operating activities was $4.1 million during the three months ended March 31, 2016. 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 $21 million during the three months ended March 31, 2016. The cash expenditures for employee salaries, including incentive payments, were approximately $18 million during the three months ended March 31, 2016.

For the three months ended March 31, 2016, net cash used in operating activities of $4.1 million was primarily the result of $1.1 million of net income plus $1.6 million of stock-based compensation, $3.1 million of depreciation and amortization, a $2.5 million decrease in accounts receivable and a $0.3 million decrease in deferred commissions and other assets, less a $9.0 million decrease in deferred revenues and a $3.7 million decrease in accrued liabilities.

For the three months ended March 31, 2015, net cash used in operating activities of $1.7 million was primarily the result of $0.3 million of net loss plus $1.5 million of stock-based compensation, $2.9 million of depreciation and amortization, and a $3.3 million decrease in accounts receivable, less a $3.1 million decrease in accrued liabilities, a $5.6 million decrease in deferred revenues, and a $0.2 million increase in prepaid expenses and other current assets.

As of March 31, 2016, we had net operating loss carryforwards of approximately $204.6 million available to reduce future federal taxable income, which will begin to expire in 2018. Use of these carryforwards is subject to significant limitations. As of March 31, 2016, the Company believes that $6.0 million of the federal net operating loss carryforwards will be available for future utilization to the extent of future income. The Company has provided a valuation allowance for the remaining federal losses of $198.6 million due to uncertainty regarding the Company’s ability to fully realize these assets. In the future, we may fully utilize our available net operating loss carryforwards that are not subject to limitations and would begin making income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we generate taxable income and/or we are not allowed to use net operating loss carryforwards for federal/state income tax purposes, our cash generated from operations will be adequate to meet our income tax obligations.

 

Net Cash Flows from Investing Activities

 

For the three months ended March 31, 2016, net cash used in investing activities was $8.8 million, consisting of purchases of $74.0 million of short-term investments, various capital expenditures of $0.4 million and capitalization of $1.4 million of software development costs, less maturities of $67.0 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 employees.

 

For the three months ended March 31, 2015, net cash used in investing activities was $2.2 million, consisting of purchases of $32.5 million of short-term investments, various capital expenditures of $0.7 million and capitalization of $1.5 million of software development costs, less maturities of $32.5 million of short-term investments.

 

Net Cash Flows from Financing Activities

 

For the three months ended March 31, 2016, net cash used in financing activities was $0.3 million, consisting of $0.2 million in proceeds from the employee stock purchase plan less $0.5 million from the purchase of treasury stock.

 

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For the three months ended March 31, 2015, net cash provided by financing activities was $0.3 million, consisting primarily of proceeds from employee stock purchase plan activity.

 

Share Repurchase Program

 

On February 25, 2016, the Company announced that its Board of Directors has approved a share repurchase program that enables the Company to repurchase up to $30 million of its outstanding common stock. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The share repurchase program is scheduled to expire on December 31, 2017, although purchases may be suspended or discontinued at any time prior to the expiration date. The Company purchased 45,000 shares of treasury stock for approximately $0.6 million in the three months ended March 31, 2016. As of March 31, 2016, $29.4 million of shares may yet be repurchased under the share repurchase program.

Off-Balance Sheet Arrangements

As of March 31, 2016, 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, and sales and marketing expense to increase, general and administrative expenses to slightly decline and capital expenditures to remain relatively consistent 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.

Contractual and Commercial Commitment Summary

We have contractual obligations that require us to make future cash payments. During the three months ended March 31, 2016, 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, 2015, which was filed with the Securities and Exchange Commission on February 22, 2016.

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

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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.

 

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 March 31, 2016. 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.

 

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 March 31, 2016 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of March 31, 2016, 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

 

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.

 

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, 2015, which was filed with the Securities and Exchange Commission on February 22, 2016.

 

(c) Issuer Purchases of Equity Securities

Information related to the repurchases of the Company’s common stock by month in the first quarter of fiscal year 2016 is as follows:

 

 

On February 25, 2016, the Company announced that its Board of Directors has approved a share repurchase program that enables the Company to repurchase up to $30 million of its outstanding common stock. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The share repurchase program is scheduled to expire on December 31, 2017, although purchases may be suspended or discontinued at any time prior to the expiration date.

 

Not applicable.

 

Not applicable.

 

Not applicable.

 

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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.

 

 

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