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SQI > SEC Filings for SQI > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for SCIQUEST INC

Form 10-Q for SCIQUEST INC


9-May-2014

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 this report under "Part II, Other Information--Item 1A, Risk Factors." Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

As used herein, except as otherwise indicated by context, references to "we," "us," "our," or the "Company" refer to SciQuest, Inc.

Overview

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

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

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

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

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

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

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

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

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

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


Key Financial Terms and Metrics

We have several key financial terms and metrics. During the three months ended March 31, 2014, there were no changes with respect to our key financial terms and metrics, which are discussed in more detail under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Terms and Metrics" included in our annual report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014.

Critical Accounting Policies

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

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

- revenue recognition;

- stock-based compensation;

- deferred commissions;

- software development costs;

- goodwill; and

- income taxes.

During the three months ended March 31, 2014, there were no significant changes in our critical accounting policies or estimates. See Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and under the heading "Critical Accounting Policies" in our annual report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.

Results of Operations

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



                                                Three Months Ended March 31,
                                                  2014                 2013
    Revenues                                 $       25,407       $       20,665
    Cost of revenues (1) (2)                          7,670                6,614
    Gross profit                                     17,737               14,051
    Operating expenses: (1)
    Research and development                          6,927                6,542
    Sales and marketing                               6,960                5,471
    General and administrative                        3,110                2,895
    Amortization of intangible assets                   797                  454
    Total operating expenses                         17,794               15,362
    Loss from operations                               (57)               (1,311 )
    Interest and other (expense) income, net            (3)                   (6 )
    Loss before income taxes                           (60)               (1,317 )
    Income tax benefit                                  126                  705
    Net income (loss)                        $           66       $         (612 )


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

                                         Three Months Ended March 31,
                                           2014                2013
            Cost of revenues           $         163       $         120
            Research and development             180                 412
            Sales and marketing                  362                 433
            General and administrative           758                 597
                                       $       1,463       $       1,562

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

                                                Three Months Ended March 31,
                                                  2014                   2013
   Amortization of capitalized software
   development costs                        $            558         $        367
   Amortization of acquired software                     520                  325
                                            $          1,078         $        692

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

                                                Three Months Ended March 31,
                                                2014                    2013
   Revenues                                          100 %                   100 %
   Cost of revenues                                   30                      32
   Gross profit                                       70                      68
   Operating expenses:
   Research and development                           27                      32
   Sales and marketing                                28                      26
   General and administrative                         12                      14
   Amortization of intangible assets                   3                       2
   Total operating expenses                           70                      74
   Loss from operations                                -                      (6 )
   Interest and other (expense) income, net            -                       -
   Loss before income taxes                            -                      (6 )
   Income tax benefit                                  -                       3
   Net income (loss)                                   - %                    (3 )%

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenues. Revenues for the three months ended March 31, 2014 were $25.4 million, an increase of $4.7 million, or 23%, over revenues of $20.7 million for the three months ended March 31, 2013. The increase in revenues resulted primarily from the recognition of revenue for a full three-month period for the new customers added in, and subsequent to, the three months ended March 31, 2013, as well as revenue relating to customers acquired as a result of our acquisition of CombineNet in August 2013.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2014 was $7.7 million, an increase of $1.1 million, or 17%, over cost of revenues of $6.6 million for the three months ended March 31, 2013. As a percentage of revenues, cost of revenues decreased to 30% for the three months ended March 31, 2014 from 32% from the three months ended March 31, 2013. The increase in dollar amount primarily resulted from a $0.4 million increase in employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing implementation services, supplier enablement services, customer support and client partner personnel, a $0.2 million increase in amortization of capitalized software development costs, a $0.2 million increase in amortization of acquired software due to our acquisition of CombineNet, and a $0.1 million increase in other spend. We had 200 full-time equivalents in our implementation services, supplier enablement services, customer support and client partner organizations at March 31, 2014 compared to 188 full-time equivalents at March 31, 2013.

Research and Development Expenses. Research and development expenses for the three months ended March 31, 2014 were $6.9 million, an increase of $0.4 million, or 6%, from research and development expenses of $6.5 million for the three months ended March 31, 2013. As a percentage of revenues, research and development expense decreased to 27% for the three months ended March 31, 2014 from 32% for the three months ended March 31, 2013. The increase in dollar amount was primarily due to a $0.4


million increase in maintenance and hardware costs required to support our growing business. We had 219 full-time equivalents in our research and development organization at March 31, 2014 compared to 184 full-time equivalents at March 31, 2013.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2014 were $7.0 million, an increase of $1.5 million, or 27%, over sales and marketing expenses of $5.5 million for the three months ended March 31, 2013. As a percentage of revenues, sales and marketing expenses increased to 28% for the three months ended March 31, 2014 from 26% for the three months ended March 31, 2013. The increase in dollar amount was due primarily to a $0.5 million increase in employee-related costs attributable primarily to personnel gained through our CombineNet acquisition, as well as our additional and existing sales and marketing personnel, a $0.5 million increase in trade show related costs, a $0.1 million increase in amortized commission expense, and a $0.3 million increase in other sales and marketing spend. We had 104 full-time equivalents in our sales and marketing organization at March 31, 2014 compared to 68 full-time equivalents at March 31, 2013.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2014 were $3.1 million, an increase of $0.2 million, or 7%, over general and administrative expenses of $2.9 million for the three months ended March 31, 2013. As a percentage of revenues, general and administrative expenses decreased to 12% for the three months ended March 31, 2014, from 14% for the three months ended March 31, 2013. The increase in dollar amount was primarily due to a $0.2 million increase in stock-based compensation expense. We had 28 full-time equivalents in our general and administrative organization at March 31, 2014 compared to 24 full-time equivalents at March 31, 2013.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended March 31, 2014 were $0.8 million, an increase of $0.3 million, or 60%, over amortization of intangible assets of $0.5 million for the three months ended March 31, 2013. As a percentage of revenues, amortization of intangible assets increased to 3% for the three months ended March 31, 2014, from 2% for the three months ended March 31, 2013. The increase in dollar amount was due to amortization attributable to intangible assets acquired in connection with our CombineNet acquisition in August 2013.

Income Tax Benefit. Income tax benefit for the three months ended March 31, 2014 was $0.1 million compared to income tax benefit of $0.7 million for the three months ended March 31, 2013. The change in income tax benefit was due to a difference in our pre-tax net loss for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Liquidity

Net Cash Flows from Operating Activities

Net cash used in operating activities was $1.8 million during the three months ended March 31, 2014. Our cash flow from operations is primarily a result of the timing of cash payments from our customers, offset by the timing of our primary cash expenditures, which are employee salaries. Since annual subscription fees are typically due on each anniversary of contract signing, the amount of cash received for annual subscription fees typically fluctuates on a quarterly basis based on the historical levels of new business sales in that quarter. Due to lower historical sales levels in our first quarter, combined with the payment of annual bonuses from the prior year in our first quarter, our cash flow from operations is typically lowest in our first quarter. Due also to the historical timing of business sales, our cash flow from operations is lower in our second quarter as compared to our third and fourth quarters. The cash payments from customers were approximately $26 million during the three months ended March 31, 2014. The cash expenditures for employee salaries, including incentive payments, were approximately $17 million during the three months ended March 31, 2014.

For the three months ended March 31, 2014, net cash used in operating activities of $1.8 million was primarily the result of $0.1 million of net income plus a $3.0 million decrease in accounts receivable, a $0.8 million decrease in prepaid expenses, $1.5 million of stock-based compensation, and $2.5 million of depreciation and amortization, less a $3.1 million decrease in deferred revenues, and a $6.5 million decrease in accrued liabilities.

For the three months ended March 31, 2013, net cash provided by operating activities of $2.4 million was primarily the result of $0.6 million of net loss plus a $4.3 million decrease in accounts receivable, $1.6 million of stock-based compensation, and $1.6 million of depreciation and amortization, less a $1.8 million decrease in deferred revenues, a $0.8 million decrease in accrued liabilities, a $0.7 million decrease in accounts payable, a $0.6 million increase in deferred taxes, and a $0.7 million increase in prepaid expenses.

As of March 31, 2014, we had net operating loss carryforwards of approximately $204.8 million available to reduce future federal taxable income. Use of these carryforwards is subject to significant limitations. In the future, we may fully utilize our available net operating loss carryforwards and would begin making income tax payments at that time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum state taxes may also increase our overall tax obligations. We expect that if we


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, 2014, net cash used in investing activities was $1.5 million, consisting of various capital expenditures of $0.2 million and capitalization of $1.3 million of software development costs. In general, our capital expenditures are for our network infrastructure to support our increasing customer base and growth in new business and for internal use, such as equipment for our increasing employee headcount.

For the three months ended March 31, 2013, net cash used in investing activities was $7.8 million, consisting of net purchases of $5.9 million of short-term investments, various capital expenditures of $0.9 million and capitalization of $1.1 million of software development costs.

Net Cash Flows from Financing Activities

For the three months ended March 31, 2014, net cash provided by financing activities was $0.3 million, representing proceeds from the exercise of common stock options.

For the three months ended March 31, 2013, net cash provided by financing activities was $0.3 million, representing proceeds from the exercise of common stock options.

Line of Credit

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

Off-Balance Sheet Arrangements

As of March 31, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Capital Resources

Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new products and services, the sales and marketing resources needed to further penetrate our targeted vertical markets as well as the broader commercial market and gain acceptance of new products we develop or acquire, the expansion of our operations in the United States and internationally and the response of competitors to our products and services. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business. We expect our cost of revenues, research and development, sales and marketing, general and administrative and capital expenditures to increase in absolute dollars in the future. As a percentage of revenues, we expect cost of revenues and sales and marketing to remain relatively consistent and research and development, general and administrative and capital expenditures to decline in the future. In the future, we may also acquire complementary businesses, products or technologies. We have no formal agreements or commitments with respect to any acquisitions at this time.

We believe our cash and cash equivalents and our cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

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, 2014, there were no material changes in the contractual and commercial commitments that are discussed in more detail 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, 2013, which was filed with the Securities and Exchange Commission on February 21, 2014.

Seasonality

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

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