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SQI > SEC Filings for SQI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SCIQUEST INC

Form 10-Q for SCIQUEST INC


9-Nov-2012

Quarterly Report


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 our Annual Report on Form 10-K 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 on-demand strategic procurement and supplier management solutions that integrate our customers with their suppliers to improve procurement of indirect goods and services. Our on-demand software enables organizations to realize the benefits of strategic procurement by identifying and establishing contracts with preferred suppliers, driving spend to those contracts and promoting process efficiencies through electronic transactions. Strategic procurement is the optimization of tasks throughout the cycle of finding, procuring, receiving and paying for indirect goods and services, which can result in increased efficiency, reduced costs and increased insight into an organization's buying patterns. Using our managed SciQuest Supplier Network, our customers do business with many thousands of unique suppliers and spend billions of dollars annually.

In August 2012, we acquired substantially all of the assets of Upside Software, Inc., or "Upside", a leader in contract lifecycle management solutions. Upside's technology has been incorporated into our product offering as our Contract Director product. The purchase price consisted of approximately $22.4 million in cash. The purchase price included $2.8 million in cash that was deposited in escrow to satisfy potential indemnification claims.

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

Subsequent to the period end, on October 1, 2012, we completed the acquisition of substantially all of the assets of Spend Radar LLC ("Spend Radar"), a leading provider of spend analysis solutions. Spend Radar's technology has been incorporated into our product


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offering as the Spend & Performance Analysis solution. The purchase price consisted of $8 million in cash and 113,250 shares of our common stock at a fair value of approximately $2 million. Additionally, up to $6 million in cash may be paid and 84,938 shares of the Company's common stock may be issued based on the successful achievement of certain performance targets and continued employment with the Company from the closing date to December 31, 2013.

Key Financial Terms and Metrics

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

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 2 to the financial statements, the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that is both material to the preparation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations:

revenue recognition;

stock-based compensation;

deferred project costs;

goodwill; and

income taxes.

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

Results of Operations

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



                                                    Three Months Ended             Nine Months Ended
                                                      September 30,                  September 30,
                                                   2012            2011           2012           2011

Revenues                                         $  17,173       $ 13,774       $  46,761      $ 39,208
Cost of revenues (1) (2)                             5,343          3,560          13,929         9,521

Gross profit                                        11,830         10,214          32,832        29,687

Operating expenses: (1)
Research and development                             4,734          3,001          10,905         8,670
Sales and marketing                                  4,073          3,396          12,188        10,815
General and administrative                           2,835          2,107           8,006         6,220
Amortization of intangible assets                      318            209             736           628

Total operating expenses                            11,960          8,713          31,835        26,333

(Loss) Income from operations                         (130 )        1,501             997         3,354
Interest and other (expense) income, net               (19 )           (1 )            34            56

(Loss) income before income taxes                     (149 )        1,500           1,031         3,410
Income tax benefit (expense)                           862           (741 )           235        (1,651 )

Net income                                       $     713       $    759       $   1,266      $  1,759


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

                                      Three Months Ended          Nine Months Ended
                                         September 30,              September 30,
                                       2012          2011          2012         2011

       Cost of revenues             $      109      $   105     $      191     $   213
       Research and development            274          279            773         794
       Sales and marketing                 359          295          1,009         854
       General and administrative          573          476          1,636       1,002

                                    $    1,315      $ 1,155     $    3,609     $ 2,863

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

                                                   Three Months Ended            Nine Months Ended
                                                      September 30,                September 30,
                                                  2012            2011           2012           2011

Amortization of capitalized software
development costs                               $     299       $     105      $     641       $  271
Amortization of acquired software                     145              42            229          126

                                                $     444       $     147      $     870       $  397

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

                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
                                         2012            2011         2012           2011

   Revenues                                 100 %          100 %         100 %         100 %
   Cost of revenues (1) (2)                  31             26            30            24

   Gross profit                              69             74            70            76

   Operating expenses: (1)
   Research and development                  28             22            23            22
   Sales and marketing                       24             25            26            27
   General and administrative                16             15            17            16
   Amortization of intangible assets          2              1             2             2

   Total operating expenses                  70             63            68            67

   Income from operations                    (1 )           11             2             9

   Interest and other income, net            -              -             -             -

   Income before income taxes                (1 )           11             2             9
   Income tax expense                         5             (5 )           1            (4 )

   Net income                                 4 %            6 %           3 %           5 %

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

Revenues. Revenues for the three months ended September 30, 2012 were $17.2 million, an increase of $3.4 million, or 25%, over revenues of $13.8 million for the three months ended September 30, 2011. The increase in revenues resulted primarily from the recognition of revenue for a full three-month period for the new customers added in, and subsequent to, the three months ended September 30, 2011, as well as the acquisition of Upside in August 2012.

Cost of Revenues. Cost of revenues for the three months ended September 30, 2012 was $5.3 million, an increase of $1.7 million, or 47%, over cost of revenues of $3.6 million for the three months ended September 30, 2011. As a percentage of revenues, cost of revenues increased to 31% for the three months ended September 30, 2012 from 26% from the three months ended September 30, 2011. The increase in dollar amount primarily resulted from a $1.3 million increase in employee-related costs attributable to our existing personnel and additional cost of revenue personnel, and a $0.2 million increase in amortization of capitalized software, and a $0.1 million increase in amortization of acquired software due to our acquisition of Upside. We had 184 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at September 30, 2012, of which 68 were added as part of our acquisition of Upside, compared to 110 full-time equivalents at September 30, 2011.


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Research and Development Expenses. Research and development expenses for the three months ended September 30, 2012 were $4.7 million, an increase of $1.7 million, or 57%, from research and development expenses of $3.0 million for the three months ended September 30, 2011. As a percentage of revenues, research and development expense increased to 27% for the three months ended September 30, 2012 from 22% for the three months ended September 30, 2011. The increase in dollar amount was due primarily to a $2.0 million increase in employee-related costs, and a $0.2 million increase in allocated overhead due to increases in leased square footage of office space, partially offset by a $0.6 million increase in capitalized software development costs. We had 167 full-time equivalents in our research and development organization at September 30, 2012, of which 63 were added as part of our acquisition of Upside, compared to 69 full-time equivalents at September 30, 2011.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended September 30, 2012 were $4.1 million, an increase of $0.7 million, or 21%, over sales and marketing expenses of $3.4 million for the three months ended September 30, 2011. As a percentage of revenues, sales and marketing expenses decreased to 24% for the three months ended September 30, 2012 from 25% for the three months ended September 30, 2011. The increase in dollar amount was due primarily to a $0.2 million increase in employee-related costs attributable to our existing personnel and additional sales and marketing personnel, a $0.1 million increase in stock-based compensation expense, a $0.1 million increase in amortized commission expense, and a $0.2 million increase in other sales and marketing spend. We had 70 full-time equivalents in our sales and marketing organization at September 30, 2012, of which 10 were added as part of our acquisition of Upside, compared to 51 full-time equivalents at September 30, 2011.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2012 were $2.8 million, an increase of $0.7 million, or 33%, over general and administrative expenses of $2.1 million for the three months ended September 30, 2011. As a percentage of revenues, general and administrative expenses increased to 16% for the three months ended September 30, 2012, from 15% for the three months ended September 30, 2011. The increase in dollar amount was primarily due to a $0.1 million increase in employee-related costs, attributable to our existing personnel and additional general and administrative personnel, $0.1 million increase in stock-based compensation expense, a $0.3 million increase in acquisition related costs attributable to our acquisition of Upside in August 2012, and a $0.2 million increase in other general and administrative spend. We had 24 full-time equivalents in our general and administrative organization at September 30, 2012, of which 2 were added as part of our acquisition of Upside, compared to 18 full-time equivalents at September 30, 2011.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended September 30, 2012 were $0.3 million, an increase of $0.1 million, or 50%, over amortization of intangible assets of $0.2 million for the three months ended September 30, 2011. As a percentage of revenues, amortization of intangible assets increased to 2% for the three months ended September 30, 2012, from 1% for the three months ended September 30, 2011. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our Upside acquisition in August 2012.

Income Tax Benefit (Expense). Income tax benefit for the three months ended September 30, 2012 was $0.9 million compared to income tax expense of ($0.7) million for the three months ended September 30, 2011. The change in income tax benefit (expense) was due to a difference in our pre-tax net (loss) income for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues. Revenues for the nine months ended September 30, 2012 were $46.8 million, an increase of $7.6 million, or 19%, over revenues of $39.2 million for the nine months ended September 30, 2011. 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, 2011, as well as the acquisition of Upside in August 2012.

Cost of Revenues. Cost of revenues for the nine months ended September 30, 2012 was $13.9 million, an increase of $4.4 million, or 46%, over cost of revenues of $9.5 million for the nine months ended September 30, 2011. As a percentage of revenues, cost of revenues increased to 30% for the nine months ended September 30, 2012 from 24% from the nine months ended September 30, 2011. The increase in dollar amount primarily resulted from a $3.0 million increase in employee-related costs attributable to our existing personnel and additional cost of revenue personnel, a $0.4 million increase in amortization of capitalized software, a $0.1 million increase in amortization of acquired software due to our acquisition of Upside, a $0.4 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.5 million increase in other spend. We had 184 full-time equivalents in our implementation services, supplier enablement services, customer support, and client partner organizations at September 30, 2012, of which 68 were added as part of our acquisition of Upside, compared to 110 full-time equivalents at September 30, 2011.

Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2012 were $10.9 million, an increase of $2.2 million, or 25%, from research and development expenses of $8.7 million for the nine months ended September 30, 2011. As a percentage of revenues, research and development expense increased to 23% for the nine months ended September 30, 2012 from 22% for the nine months ended September 30, 2011. The increase in dollar amount was due primarily to a


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$3.2 million increase in employee-related costs, a $0.3 million increase in allocated overhead due to increases in leased square footage of office space, and a $0.3 million increase in other research and development spend, partially offset by a $1.6 million increase in capitalized software development costs. We had 167 full-time equivalents in our research and development organization at September 30, 2012, of which 63 were added as part of our acquisition of Upside, compared to 69 full-time equivalents at September 30, 2011.

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended September 30, 2012 were $12.2 million, an increase of $1.4 million, or 13%, over sales and marketing expenses of $10.8 million for the nine months ended September 30, 2011. As a percentage of revenues, sales and marketing expenses decreased to 26% for the nine months ended September 30, 2012 from 28% for the nine months ended September 30, 2011. The increase in dollar amount was due primarily to a $0.5 million increase in employee-related costs attributable to our existing personnel and additional sales and marketing personnel, a $0.2 million increase in stock-based compensation expense, a $0.3 million increase in amortized commission expense, and a $0.3 million increase in other sales and marketing spend. We had 70 full-time equivalents in our sales and marketing organization at September 30, 2012, of which 10 were added as part of our acquisition of Upside, compared to 51 full-time equivalents at September 30, 2011.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2012 were $8.0 million, an increase of $1.8 million, or 29%, over general and administrative expenses of $6.2 million for the nine months ended September 30, 2011. As a percentage of revenues, general and administrative expenses increased to 17% for the nine months ended September 30, 2012, from 16% for the nine months ended September 30, 2011. The increase in dollar amount was primarily due to a $0.2 million increase in employee-related costs attributable to our existing personnel and additional general and administrative personnel, a $0.6 million increase in stock-based compensation expense, a $0.3 million increase in acquisition related costs attributable to our acquisition of Upside in August 2012, and a $0.6 million increase in other general and administrative spend. We had 24 full-time equivalents in our general and administrative organization at September 30, 2012, of which 2 were added as part of our acquisition of Upside, compared to 18 full-time equivalents at September 30, 2011.

Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended September 30, 2012 were $0.7 million, an increase of $0.1 million, or 17%, over amortization of intangible assets of $0.6 million for the nine months ended September 30, 2011. As a percentage of revenues, amortization of intangible assets was 2% for both the nine months ended September 30, 2012 and 2011. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our Upside acquisition in August 2012.

Income Tax Benefit (Expense). Income tax benefit for the nine months ended September 30, 2012 was $0.2 million compared to income tax expense of ($1.7) million for the nine months ended September 30, 2011. The change was due to a difference in our pre-tax net income for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.

Liquidity

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $13.8 million during the nine months ended September 30, 2012. The amount of our net cash provided by operating activities is primarily a result of the timing of cash payments from our customers, offset by the timing of our primary cash expenditures, which are employee salaries. The cash payments from our customers will fluctuate quarterly as our new business sales normally fluctuate quarterly, primarily due to the timing of client budget cycles, with the second and fourth quarters of each year generally having the most sales and the first and third quarters generally having fewer sales. The cash payments from customers are typically due annually on the anniversary date of the initial contract. The cash payments from customers were approximately $56 million during the nine months ended September 30, 2012. The cash payments to employees are typically ratable throughout the fiscal year, with the exception of annual incentive payments, which occur in the first quarter. The cash expenditures for employee salaries, including incentive payments, were approximately $27 million during the nine months ended September 30, 2012.

For the nine months ended September 30, 2012, net cash provided by operating activities of $13.8 million was primarily the result of $1.3 million of net income plus a $6.0 million decrease in accounts receivable, $3.6 million of stock-based compensation, and $2.7 million of depreciation and amortization, which does not include the impact of the upside acquisition.

For the nine months ended September 30, 2011, net cash provided by operating activities of $11.3 million was primarily the result of $1.8 million of net income plus a $3.7 million increase in deferred revenues, $2.9 million of stock-based compensation, $1.6 million of depreciation and amortization, and a $0.9 million decrease in deferred taxes, a $0.6 million decrease in accounts receivable, and a $0.4 million decrease in prepaid expenses, less a $0.6 million increase in deferred project costs, which does not include the impact of the AECsoft acquisition.

As of September 30, 2012, we had net operating loss carryforwards of approximately $182 million available to reduce future federal taxable income. In the future, we may fully utilize our available net operating loss carryforwards and would begin making


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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 . . .

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