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EXCEL - IDEA: XBRL DOCUMENT - SCIQUEST INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - SCIQUEST INC | c24195exv31w1.htm |
EX-32.2 - EX-32.2 - SCIQUEST INC | c24195exv32w2.htm |
EX-31.2 - EX-31.2 - SCIQUEST INC | c24195exv31w2.htm |
EX-32.1 - EX-32.1 - SCIQUEST INC | c24195exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34875
SCIQUEST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 56-2127592 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
6501 Weston Parkway, Suite 200
Cary, North Carolina 27513
(Address of Principal Executive Offices, Including Zip Code)
Cary, North Carolina 27513
(Address of Principal Executive Offices, Including Zip Code)
(919) 659-2100
(Registrants Telephone Number, Including Area Code)
(Registrants 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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 31, 2011, 22,118,534 shares of the registrants outstanding common stock, $0.001 par
value per share, were outstanding.
SCIQUEST, INC.
FORM 10-Q
FOR THE QUARTER ENDED September 30, 2011
TABLE OF CONTENTS
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EX-101 DEFINITION LINKBASE DOCUMENT |
1
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
SciQuest, Inc.
Consolidated Balance Sheets
(in thousands except share and per share amounts)
(in thousands except share and per share amounts)
As of | As of | |||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 28,174 | $ | 17,494 | ||||
Short-term investments |
27,105 | 20,000 | ||||||
Accounts receivable, net |
6,674 | 6,400 | ||||||
Prepaid expenses and other current assets |
1,112 | 1,297 | ||||||
Deferred tax asset |
270 | 207 | ||||||
Total current assets |
63,335 | 45,398 | ||||||
Property and equipment, net |
2,634 | 1,993 | ||||||
Goodwill |
15,719 | 6,765 | ||||||
Intangible assets, net |
5,712 | 1,039 | ||||||
Deferred project costs |
6,327 | 5,667 | ||||||
Deferred tax asset |
13,968 | 15,675 | ||||||
Other |
53 | 150 | ||||||
Total assets |
$ | 107,748 | $ | 76,687 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | | $ | 51 | ||||
Accrued liabilities |
4,907 | 4,200 | ||||||
Deferred revenues |
32,563 | 28,305 | ||||||
Total current liabilities |
37,470 | 32,556 | ||||||
Deferred revenues, less current portion |
11,741 | 9,896 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value; 50,000,000
shares authorized; 22,161,265 and
20,532,443 shares issued and outstanding as
of September 30, 2011 and December 31,
2010, respectively |
22 | 20 | ||||||
Additional paid-in capital |
72,988 | 50,462 | ||||||
Notes receivable from stockholders |
| (15 | ) | |||||
Accumulated deficit |
(14,473 | ) | (16,232 | ) | ||||
Total stockholders equity |
58,537 | 34,235 | ||||||
Total liabilities and stockholders equity |
$ | 107,748 | $ | 76,687 | ||||
The accompanying notes are an integral part of the financial statements.
2
Table of Contents
SciQuest, Inc.
Consolidated Statements of Operations
(in thousands except per share amounts)
(in thousands except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenues |
$ | 13,774 | $ | 10,771 | $ | 39,208 | $ | 31,459 | ||||||||
Cost of revenues |
3,560 | 2,329 | 9,521 | 6,776 | ||||||||||||
Gross profit |
10,214 | 8,442 | 29,687 | 24,683 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
3,001 | 2,173 | 8,670 | 6,092 | ||||||||||||
Sales and marketing |
3,396 | 2,815 | 10,815 | 8,784 | ||||||||||||
General and administrative |
2,107 | 1,471 | 6,220 | 4,106 | ||||||||||||
Management bonus plan associated with initial public offering |
| 5,888 | | 5,888 | ||||||||||||
Amortization of intangible assets |
209 | 75 | 628 | 226 | ||||||||||||
Total operating expenses |
8,713 | 12,422 | 26,333 | 25,096 | ||||||||||||
Income (loss) from operations |
1,501 | (3,980 | ) | 3,354 | (413 | ) | ||||||||||
Other (expense) income: |
||||||||||||||||
Interest income |
23 | 9 | 67 | 22 | ||||||||||||
Other (expense) income, net |
(24 | ) | 20 | (11 | ) | 1,696 | ||||||||||
Total other income, net |
(1 | ) | 29 | 56 | 1,718 | |||||||||||
Income (loss) before income taxes |
1,500 | (3,951 | ) | 3,410 | 1,305 | |||||||||||
Income tax (expense) benefit |
(741 | ) | 1,486 | (1,651 | ) | (566 | ) | |||||||||
Net income (loss) |
759 | (2,465 | ) | 1,759 | 739 | |||||||||||
Dividends on redeemable preferred stock |
| 715 | | 2,079 | ||||||||||||
Net income (loss) attributable to common stockholders |
$ | 759 | $ | (3,180 | ) | $ | 1,759 | $ | (1,340 | ) | ||||||
Net income (loss) attributable to common stockholders per share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | (0.22 | ) | $ | 0.08 | $ | (0.09 | ) | ||||||
Diluted |
$ | 0.03 | $ | (0.22 | ) | $ | 0.08 | $ | (0.09 | ) | ||||||
Weighted average shares outstanding used in computing per share
amounts: |
||||||||||||||||
Basic |
22,012 | 14,558 | 21,549 | 14,241 | ||||||||||||
Diluted |
22,551 | 14,558 | 22,149 | 14,241 |
The accompanying notes are an integral part of the financial statements.
3
Table of Contents
SciQuest, Inc.
Consolidated Statement of Stockholders Equity
(unaudited)
(in thousands except share amounts)
(unaudited)
(in thousands except share amounts)
Total | ||||||||||||||||||||||||
Common Stock | Additional Paid-In | Notes Receivable | Accumulated | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | from Stockholders | Deficit | Equity | |||||||||||||||||||
Balance as of December 31, 2010 |
20,532,443 | $ | 20 | $ | 50,462 | $ | (15 | ) | $ | (16,232 | ) | $ | 34,235 | |||||||||||
Exercise of common stock options |
127,691 | 1 | 128 | | | 129 | ||||||||||||||||||
Proceeds from public offering,
net of underwriting discounts
and offering costs |
1,150,000 | 1 | 14,996 | | | 14,997 | ||||||||||||||||||
Issuance of stock in connection
with business acquisition |
325,203 | | 4,539 | | | 4,539 | ||||||||||||||||||
Exercise of warrants |
25,928 | | | | | | ||||||||||||||||||
Payments on notes receivable
from stockholders |
| | | 15 | | 15 | ||||||||||||||||||
Stock-based compensation |
| | 2,863 | | | 2,863 | ||||||||||||||||||
Net income |
| | | | 1,759 | 1,759 | ||||||||||||||||||
Balance as of September 30, 2011 |
22,161,265 | $ | 22 | $ | 72,988 | $ | | $ | (14,473 | ) | $ | 58,537 | ||||||||||||
The accompanying notes are an integral part of the financial statements.
4
Table of Contents
SciQuest, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(in thousands)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 1,759 | $ | 739 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
1,551 | 800 | ||||||
Gain on sale of investment |
| (1,700 | ) | |||||
Stock-based compensation expense |
2,863 | 905 | ||||||
Contribution of stock to fund a charitable trust established
by the Company |
| 238 | ||||||
Deferred taxes |
947 | 449 | ||||||
Changes in
operating assets and liabilities, net of the effects of the acquisition: |
||||||||
Accounts receivable |
557 | 1,393 | ||||||
Prepaid expenses and other current assets |
359 | (236 | ) | |||||
Deferred project costs and other assets |
(563 | ) | 74 | |||||
Accounts payable |
(51 | ) | (23 | ) | ||||
Accrued liabilities |
183 | 394 | ||||||
Deferred revenues |
3,741 | (200 | ) | |||||
Net cash provided by operating activities |
11,346 | 2,833 | ||||||
Cash flows from investing activities |
||||||||
Business acquisition, net of cash acquired |
(7,346 | ) | | |||||
Addition of capitalized software development costs |
(595 | ) | (521 | ) | ||||
Purchase of property and equipment |
(761 | ) | (482 | ) | ||||
Purchase of available-for-sale short-term investments |
(15,000 | ) | | |||||
Maturities of available-for-sale short-term investments |
7,895 | | ||||||
Proceeds from sale of investment |
| 1,700 | ||||||
Restricted cash |
| 350 | ||||||
Net cash (used in) provided by investing activities |
(15,807 | ) | 1,047 | |||||
Cash flows from financing activities |
||||||||
Proceeds from public offering |
15,405 | 53,010 | ||||||
Public offering costs |
(408 | ) | (1,871 | ) | ||||
Redemption of preferred stock |
| (36,151 | ) | |||||
Issuance of common and restricted stock |
| 39 | ||||||
Repurchases of restricted stock |
| (273 | ) | |||||
Repayment of notes payable |
| (350 | ) | |||||
Collection of notes receivable from stockholders |
15 | 4 | ||||||
Proceeds from exercise of common stock options |
129 | 24 | ||||||
Net cash provided by financing activities |
15,141 | 14,432 | ||||||
Net increase in cash and cash equivalents |
10,680 | 18,312 | ||||||
Cash and cash equivalents at beginning of period |
17,494 | 17,132 | ||||||
Cash and cash equivalents at end of period |
$ | 28,174 | $ | 35,444 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid for interest |
$ | | $ | 2 | ||||
Supplemental disclosure of non-cash flow information |
||||||||
Dividends on redeemable preferred stock |
$ | | $ | 2,079 | ||||
The accompanying notes are an integral part of the financial statements.
5
Table of Contents
SciQuest, Inc.
Notes to Consolidated Financial Statements
(In thousands except share and per share amounts)
(In thousands except share and per share amounts)
1. Description of Business
SciQuest, Inc. (the Company) provides an on-demand strategic procurement and supplier enablement
solution that integrates customers with their suppliers to improve procurement of indirect goods
and services, such as office supplies, laboratory supplies, furniture, MRO (maintenance, repair and
operations) supplies and food and beverages. The Companys on-demand software enables organizations
to more efficiently source indirect goods and services, manage their spend and obtain the benefits
of compliance with purchasing policies and negotiating power with suppliers. The Companys
on-demand strategic procurement software suite coupled with its managed supplier network forms the
Companys integrated solution, which is designed to achieve rapid and sustainable savings. The
Companys solution is designed to optimize 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 organizations buying patterns. The Companys current
primary target markets are higher education, life sciences, healthcare and state and local
governments. The Company is headquartered in Cary, North Carolina.
Secondary Offering
On April 5, 2011, the Company completed a secondary public offering of 1,000,000 shares of common
stock at an offering price of $14.25 per share. On April 13, 2011, the Company completed the
additional sale of 150,000 shares of common stock at an offering price of $14.25 per share pursuant
to the underwriters over-allotment option. The Company received aggregate net proceeds of $14,997,
after payment of underwriting discounts and commissions and 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 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 and nine months ended September 30, 2011 are not
necessarily indicative of the results to be expected for the fiscal year or any future period. The
balance sheet at December 31, 2010 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Companys annual report on Form 10-K for
the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on
March 9, 2011.
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 accounting principles generally accepted
in the United States (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 for its on-demand strategic
procurement and supplier enablement software solution and associated implementation services.
Revenue is generated from subscription agreements and related services permitting customers to
access and utilize the Companys hosted software. Customers may on occasion also purchase a
perpetual license for certain software modules. 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 Companys arrangements do not contain general rights of return.
6
Table of Contents
In October 2009, the FASBs Emerging Issues Task Force amended the accounting standards for
multiple-element revenue arrangements. The Company adopted this accounting guidance on January 1,
2011, for applicable arrangements entered into or materially modified after this date. The adoption
of this guidance did not have a material impact on its financial position, results of operations,
or cash flows.
The Companys contractual agreements generally contain multiple service elements and deliverables.
These elements include access to the hosted software, implementation services and, on a limited
basis, perpetual licenses for certain software modules and related maintenance and support. The
Company evaluates each element in a multiple element arrangement to determine whether it represents
a separate unit of accounting. An element constitutes a separate unit of accounting when the
delivered item has standalone value and delivery of the undelivered element is probable and within
the Companys control.
The Company allocates revenue to each element in an 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. The Company allocates revenue
among deliverables in an arrangement using the relative selling price method. Because the Company
has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on ESPs.
The Companys 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 ESPs 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.
As implementation services do not have stand-alone value to the customer, licenses and related
implementation services are considered a single unit of accounting. 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. The
Company recognizes revenue from any professional services that are sold separately as the services
are performed.
Deferred revenue primarily consists of billings or payments received in advance of revenue
recognition from the Companys software and services described above. For multiple 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 Companys 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 Companys 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 Project Costs
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 subscription agreement. The deferred commission amounts are recoverable from the future
revenue streams under the subscription agreements. The Company believes this is the appropriate
method of accounting, as the commission costs are so closely related to the revenues from the
subscription agreements that they should be recorded as an asset and charged to expense over the
same period that the subscription revenues are recognized. Amortization of deferred commissions is
included in sales and marketing expense in the accompanying consolidated statements of operations.
The deferred commissions are reflected within deferred project costs 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 high credit quality institutions and, as a result, believes credit risk related to its
cash is minimal.
7
Table of Contents
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 Companys investments were
classified as available-for-sale securities and were stated at fair value at September 30, 2011 and
December 31, 2010. Realized gains and losses are included in other income (expense) based on the
specific identification method. There were no realized gains or losses for the three or nine months
ended September 30, 2011 and 2010. Net unrealized gains and losses on available-for-sale securities
are reported as a component of other comprehensive income (loss), net of tax. As of September 30,
2011 and December 31, 2010, there were no unrealized gains or losses on available-for-sale
securities. The Company regularly monitors and evaluates the fair value of its investments to
identify other-than-temporary declines in value. Management believes no such declines in value
existed at September 30, 2011 or December 31, 2010.
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. Any
required provisions for doubtful accounts would be recorded in general and administrative expense.
Based on managements analysis of its outstanding accounts receivable, the Company has recorded an
allowance of $17 and $0 as of September 30, 2011 and December 31, 2010, 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 generally 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 expected term of the leases. 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 on-demand solution, which
are accounted for as internal-use software. Certain qualifying costs incurred during the
application development phase are capitalized and amortized to expense over the estimated useful
life of the related applications, which is generally three years.
Although the Companys development efforts are primarily focused on its hosted, on-demand solution,
the Company also incurs costs in connection with the development of certain of its materials
management software products, which are accounted for as costs of software to be sold, leased or
otherwise marketed. Under this guidance, capitalization of software development costs begins upon
the establishment of technological feasibility (based on a working model approach), subject to net
realizable value considerations. To date, the period between achieving technological feasibility
and the general availability of such software has substantially coincided; therefore, software
development costs for these products that would qualify for capitalization have been immaterial.
Accordingly, the Company has not capitalized any software development costs related to certain
materials management software products and has charged all such costs to research and development
expense.
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 indicated 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.
Stock-Based Compensation
Stock-based payments to employees, including grants of employee stock options, are recognized in
the consolidated statement of operations 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. Determining
the appropriate fair value model and related assumptions requires judgment, including estimating
stock price volatility, forfeiture rates and expected term. The expected volatility rates are
estimated based on the actual volatility of comparable public companies over the expected term. The
expected term for the nine months ended September 30, 2011 and 2010, 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.
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
reporting segment.
Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted-average number of shares of common stock outstanding for the period.
Outstanding unvested restricted stock purchased by employees is subject to repurchase by the
Company and therefore is not included in the calculation of the weighted-average shares outstanding
until vested. Diluted net income (loss) per share is computed giving effect to all potentially
dilutive common stock, including options and restricted stock. The dilutive effect of outstanding
awards is reflected in diluted earnings per share by application of the treasury stock method.
The following summarizes the calculation of basic and diluted net income (loss) attributable to
common stockholders per share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic: |
||||||||||||||||
Net income (loss) |
$ | 759 | $ | (2,465 | ) | $ | 1,759 | $ | 739 | |||||||
Less: Dividends on redeemable preferred stock |
| (715 | ) | | (2,079 | ) | ||||||||||
Net income (loss) attributable to common
stockholders |
$ | 759 | $ | (3,180 | ) | $ | 1,759 | $ | (1,340 | ) | ||||||
Weighted average common shares, basic |
22,012,128 | 14,558,422 | 21,549,012 | 14,240,938 | ||||||||||||
Basic net income (loss) attributable to
common stockholders per share |
$ | 0.03 | $ | (0.22 | ) | $ | 0.08 | $ | (0.09 | ) | ||||||
Diluted: |
||||||||||||||||
Net income (loss) attributable to common
stockholders |
$ | 759 | $ | (3,180 | ) | $ | 1,759 | $ | (1,340 | ) | ||||||
Weighted average common shares, basic |
22,012,128 | 14,558,422 | 21,549,012 | 14,240,938 | ||||||||||||
Dilutive effect of: |
||||||||||||||||
Options to purchase common stock |
428,121 | | 470,383 | | ||||||||||||
Warrants to purchase common stock |
| | | | ||||||||||||
Nonvested shares of restricted stock |
110,602 | | 129,215 | | ||||||||||||
Weighted average common shares, diluted |
22,550,851 | 14,558,422 | 22,148,610 | 14,240,938 | ||||||||||||
Diluted net income (loss) attributable to
common stockholders per share |
$ | 0.03 | $ | (0.22 | ) | $ | 0.08 | $ | (0.09 | ) | ||||||
The following equity instruments have been excluded from diluted net income (loss) per common share
as they would be anti-dilutive.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Common stock options |
322,385 | 44,018 | 259,801 | 48,744 |
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.
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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 authoritys widely understood administrative
practices and precedents. If the recognition threshold is met, only the portion of the tax benefit
that is greater than fifty percent likely 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 September 2011, the FASB issued a revised accounting standard, which is intended to reduce the
cost and complexity of the annual goodwill impairment test by providing entities an option
to perform a qualitative assessment to determine whether further impairment testing is necessary.
Specifically, an entity has the option to first assess qualitative factors to determine whether it
is necessary to perform the current two-step test. If an entity believes, as a result of
its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit
is less than its carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. The Company will adopt this
standard in the first quarter of 2012 and does not expect the adoption will have a material impact
on its financial statements.
3. Business Combinations
On December 21, 2010, the Company entered into a Stock Purchase Agreement to acquire all of the
issued and outstanding shares of capital stock of AECsoft USA, Inc., a Texas corporation, and AEC
Global (Shanghai) Co., Ltd., a Chinese corporation (collectively, AECsoft), which together are a
leading provider of supplier management and sourcing technology.
The Company completed the acquisition of AECsoft, USA, Inc. on January 1, 2011 and the acquisition
of AEC Global (Shanghai) Co., Ltd. on March 31, 2011. The acquisition of AECsoft adds comprehensive
supplier management, sourcing and compliance reporting to the Companys existing strategic
procurement and supplier enablement solutions.
The total purchase price of $13,795 consisted of $9,256 in cash and 350,568 shares of the Companys
common stock at a fair value of $4,539. The issuance of 25,365 of these shares, with an estimated
fair value of $300, 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 the
Companys common stock may be issued under an earn-out arrangement with the other former
shareholders of AECsoft, upon the successful achievement of performance conditions over the next
three fiscal years, including continued employment with the Company. The fair value of these shares
will be recognized as stock-based compensation expense in the consolidated statement of operations
over the requisite service period of the award. During the three and nine months ended September
30, 2011, the Company recognized stock-based compensation expense of $367 and $1,099, respectively,
related to this earn-out arrangement.
The Company incurred acquisition costs of approximately $0 and $134 during the three and nine
months ended September 30, 2011, respectively, which are included in general and administrative
expense in the consolidated statements of operations. The acquisition was accounted for under the
purchase method of accounting. The operating results of AECsoft are included in the accompanying
consolidated financial statements from the date of acquisition.
The purchase consideration consisted of the following:
Cash |
$ | 9,256 | ||
Fair value of common stock |
4,539 | |||
Total purchase consideration |
$ | 13,795 | ||
Cash acquired |
(1,910 | ) | ||
Net purchase consideration |
$ | 11,885 | ||
The purchase price was allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as of the acquisition date. Acquired
technology and the covenant not to compete are amortized on a straight-line basis. Acquired
customer relationships are amortized over a ten-year estimated life in a pattern consistent with
which the economic benefit is expected to be realized. The excess of the purchase price over the
net tangible and identifiable intangible assets acquired was recorded as goodwill which is not
deductible for tax purposes. This asset is attributed to a trained workforce and buyer-specific
value resulting from synergies that are not included in the fair values of assets.
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The allocation of the purchase price as of the acquisition date was as follows:
Estimated | Estimated | |||||||
Useful Life | Fair Value | |||||||
Accounts receivable |
$ | 831 | ||||||
Prepaid expenses and other current assets |
174 | |||||||
Property and equipment |
82 | |||||||
Deferred tax asset |
1,414 | |||||||
Covenant not to compete |
5 years | 51 | ||||||
Acquired technology |
7 years | 1,176 | ||||||
Customer relationships |
10 years | 4,200 | ||||||
Goodwill |
8,954 | |||||||
Accrued expenses |
(524 | ) | ||||||
Deferred tax liability |
(2,111 | ) | ||||||
Deferred revenues |
(2,362 | ) | ||||||
Total purchase consideration |
$ | 11,885 | ||||||
The following unaudited proforma consolidated results of operations for the three and nine months
ended September 30, 2010 assumes that the AECsoft acquisition occurred at the beginning of the
year. The unaudited pro forma information combines the historical results for the Company with the
historical results for AECsoft for the same period. The following unaudited pro forma information
is not intended to be indicative of future operating results.
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2010 | |||||||
Pro forma revenue |
$ | 12,046 | $ | 35,096 | ||||
Pro forma net (loss) income |
$ | (2,754 | ) | $ | 50 | |||
Pro forma net (loss) income per share, basic |
$ | (0.19 | ) | $ | 0.00 | |||
Pro forma net (loss) income per share, diluted |
$ | (0.19 | ) | $ | 0.00 | |||
4. Cash Equivalents and Short-Term Investments
The components of cash equivalents and short-term investments at September 30, 2011 and December
31, 2010 are as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||
Fair Market | Fair Market | |||||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Cash Equivalents: |
||||||||||||||||
Money market accounts |
$ | 22,905 | $ | 22,905 | $ | 8,755 | $ | 8,755 | ||||||||
Short-term investments: |
||||||||||||||||
Variable rate demand notes |
27,105 | 27,105 | 20,000 | 20,000 | ||||||||||||
Total |
$ | 50,010 | $ | 50,010 | $ | 28,755 | $ | 28,755 | ||||||||
There were no unrealized gains or losses as of September 30, 2011 or December 31, 2010.
5. Fair Value Measurements
Under U.S. 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. U.S. GAAP also establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. Observable
inputs are obtained from independent sources and can be validated by a third party, whereas
unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset
or liability. The fair value hierarchy is broken down into three levels based on the reliability of
inputs as follows:
| Level 1 Valuations based on quoted prices in active markets for identical
instruments that the Company is able to access. Since valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these
products does not entail a significant degree of judgment. |
| Level 2 Valuations based on quoted prices in active markets for instruments that
are similar, or quoted prices in markets that are not active for identical or similar
instruments, and model-derived valuations in which all significant input and significant
value drivers are observable in active markets. |
| Level 3 Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. |
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The financial assets for which the Company performs recurring fair value remeasurements are cash
equivalents and short-term investments.
As of September 30, 2011 and December 31, 2010, the Company had cash equivalents of $22,905 and
$8,755, respectively, which consist of money market accounts. As of September 30, 2011 and
December 31, 2010, the Company had short-term investments of $27,105 and $20,000, respectively,
which consist of variable rate demand notes that are invested in corporate and municipal bonds.
These variable rate demand notes have final maturities between 2020 and 2034, but are puttable by
the Company at any time with seven days notice. These cash equivalents and short-term investments
are classified within Level 1 of the fair value hierarchy since they are valued using quoted market
prices. As of September 30, 2011 and December 31, 2010, 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 Companys financial assets at September 30, 2011 are as follows:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash Equivalents |
$ | 22,905 | $ | 22,905 | | | ||||||||||
Short-term investments |
27,105 | 27,105 | | | ||||||||||||
Total |
$ | 50,010 | $ | 50,010 | | | ||||||||||
6. Property and Equipment
Property and equipment consist of the following as of September 30, 2011 and December 31, 2010:
As of | As of | |||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Furniture and equipment |
$ | 930 | $ | 605 | ||||
Computer software and equipment |
5,836 | 4,821 | ||||||
Leasehold improvements |
349 | 251 | ||||||
Total costs |
7,115 | 5,677 | ||||||
Less accumulated depreciation and amortization |
(4,481 | ) | (3,684 | ) | ||||
Property and equipment, net |
$ | 2,634 | $ | 1,993 | ||||
Depreciation expense related to property and equipment (excluding capitalized internal-use
software) for the three months ended September 30, 2011 and 2010 was $188 and $137, respectively,
and was $526 and $407 for the nine months ended September 30, 2011 and 2010, respectively.
Computer software and equipment includes capitalized software development costs incurred during
development of the Companys on-demand solution. The Company capitalized software development costs
of $190 and $99 during the three months ended September 30, 2011 and 2010, respectively, and $595
and $521 during the nine months ended September 30, 2011 and 2010, respectively. Net capitalized
software development costs totaled $1,092 and $740 as of September 30, 2011 and December 31, 2010,
respectively. Amortization expense for the three months ended September 30, 2011 and 2010 related
to capitalized software development costs was $105 and $70, respectively, and was $271 and $167 for
the nine months ended September 30, 2011 and 2010, respectively, which is classified within cost of
revenues in the accompanying consolidated statements of operations.
7. Goodwill and Other Intangible Assets
The Company acquired goodwill and certain identifiable intangible assets as part of the acquisition
in January 2011 and the going private transaction in July 2004.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 were as
follows:
Balance as of December 31, 2010 |
$ | 6,765 | ||
Goodwill acquired |
8,954 | |||
Balance as of September 30, 2011 |
$ | 15,719 | ||
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A summary of intangible assets as of September 30, 2011 and December 31, 2010 follows:
September 30, 2011 | ||||||||||||||||
Weighted Average | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
Amortization Period | Amount | Amortization | Amount | |||||||||||||
Acquired technology |
7 years | $ | 9,276 | $ | (8,226 | ) | $ | 1,050 | ||||||||
Customer relationships |
10 years | 9,400 | (5,212 | ) | 4,188 | |||||||||||
Covenant not to compete |
5 years | 51 | (7 | ) | 44 | |||||||||||
Trademarks |
430 | | 430 | |||||||||||||
Total |
$ | 19,157 | $ | (13,445 | ) | $ | 5,712 | |||||||||
December 31, 2010 | ||||||||||||||||
Weighted Average | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
Amortization Period | Amount | Amortization | Amount | |||||||||||||
Acquired technology |
$ | 8,100 | $ | (8,100 | ) | $ | | |||||||||
Customer relationships |
10 years | 5,200 | (4,591 | ) | 609 | |||||||||||
Covenant not to compete |
| | | |||||||||||||
Trademarks |
430 | | 430 | |||||||||||||
Total |
$ | 13,730 | $ | (12,691 | ) | $ | 1,039 | |||||||||
Amortization expense of intangible assets was $251 and $75 for the three months ended
September 30, 2011 and 2010, respectively, of which $42 and $0 is recorded in cost of revenues in
the accompanying consolidated statements of operations for the three months ended September 30,
2011 and 2010, respectively. Amortization expense of intangible assets was $754 and $226 for the
nine months ended September 30, 2011 and 2010, respectively, of which $126 and $0 is recorded in
cost of revenues in the accompanying consolidated statements of operations for the nine months
ended September 30, 2011 and 2010, respectively.
The Company estimates the following amortization expense related to its intangible assets for the
years ended December 31:
2011 (remaining three months) |
$ | 279 | ||
2012 |
1,005 | |||
2013 |
978 | |||
2014 |
825 | |||
2015 |
634 | |||
Thereafter |
1,561 | |||
$ | 5,282 | |||
8. Debt
On October 30, 2008, the Company entered into a credit agreement with a bank which provides for
borrowings of up to $2,500. Interest accrued on the unpaid principal balance at the LIBOR Market
Index Rate plus 1.5%. In accordance with the terms of the agreement, the Company maintained a
restricted cash balance in the amount equal to the outstanding credit balance. In March 2010, the
Company fully repaid the outstanding balance under its line of credit of $350, plus accrued
interest, and closed the credit agreement. In accordance with the terms of the credit agreement,
the restricted cash balance became unrestricted upon the repayment and closing of the credit
agreement.
9. Stockholders Equity
Stock Incentive Plan
The Company adopted a stock incentive plan (the Plan) August 27, 2004. The Plan, as amended, allows
the Company to grant up to 4,307,736 common stock options, stock appreciation rights (SARs) and
restricted stock awards to employees, board members and others who contribute materially to the
success of the Company. The Companys 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.
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Restricted Stock
As part of the Plan, the Company has issued restricted shares of its common stock to certain
employees. Upon employee termination, the Company has the option to repurchase the shares. The
repurchase price is the original purchase price plus interest for unvested restricted shares and
the current fair value (as determined by the Board of Directors prior to September 24, 2010, and
subsequently as determined by the closing price of the Companys shares of common stock on the
NASDAQ Global Market on the date of termination) for vested restricted shares. The shares generally
vest ratably over four years.
The following summarizes the activity of nonvested shares of restricted stock for the nine months
ended September 30, 2011:
Weighted- | ||||||||
Average Grant | ||||||||
Number of Shares | Date Fair Value | |||||||
Nonvested as of December 31, 2010 |
174,288 | $ | 1.66 | |||||
Issued |
| | ||||||
Vested |
(64,975 | ) | 1.70 | |||||
Nonvested as of September 30, 2011 |
109,313 | $ | 1.65 | |||||
In conjunction with the issuance of these restricted shares, subscription note agreements were
executed for certain employees. The notes are payable in four annual payments due January 1 of each
calendar year and bear interest at 6%. As of September 30, 2011, there was no outstanding balance
for these subscription note agreements.
Restricted stock awards are recognized in the consolidated statement of operations based on their
fair values. As a result of the notes receivable being deemed nonrecourse for accounting purposes
and other contractual provisions in the agreements, the related restricted stock grants are
considered stock options for accounting purposes. Stock-based compensation expense of $36 and $37
was recorded during the three months ended September 30, 2011 and 2010, respectively, and $110 and
$111 was recorded during the nine months ended September 30, 2011 and 2010, respectively, in
connection with these restricted stock awards. The total unrecognized compensation cost related to nonvested shares of restricted stock is
approximately $180 at September 30, 2011. This amount is expected to be recognized over a
weighted-average period of 1.7 years.
On March 20, 2010, the Board of Directors authorized the forgiveness of the outstanding balance of
the subscription note agreements issued by certain employees in connection with their previous
purchases of the Companys restricted stock. A total of $1,016 was forgiven, which included the
outstanding principal note amount plus accrued but unpaid interest. The Company accounted for the
forgiveness of the outstanding note balance as a modification of a stock option for accounting
purposes. Accordingly, the Company measured incremental compensation expense of $746 in connection
with this modification. Incremental compensation expense of $518 related to the vested shares of
restricted stock was recognized immediately at the date of modification. Incremental compensation
expense of $228 related to the unvested shares is recognized as additional compensation
expense over the remaining vesting period. The Company recognized compensation expense of $22 and
$22 during the three months ended September 30, 2011 and 2010, respectively, and recognized $66 and
$562 during the nine months ended September 30, 2011 and 2010, respectively, related to this
modification.
Stock Options
The Company also issues common stock options under the terms of the Plan. The following summarizes
stock option activity for the nine months ended September 30, 2011:
Weighted- | Aggregate | |||||||||||||||
Average | Intrinsic Value | |||||||||||||||
Weighted- | Remaining | as of | ||||||||||||||
Number of Options | Average | Contractual | September 30, | |||||||||||||
Outstanding | Exercise Price | Term (In Years) | 2011 (Unaudited) | |||||||||||||
Balance as of December 31, 2010 |
733,651 | $ | 2.76 | 7.7 | $ | 7,515 | ||||||||||
Options granted |
803,524 | $ | 14.29 | |||||||||||||
Options exercised |
(127,691 | ) | $ | 1.00 | ||||||||||||
Options canceled |
(38,255 | ) | $ | 9.70 | ||||||||||||
Balance as of September 30, 2011 |
1,371,229 | $ | 9.49 | 8.6 | $ | 7,683 | ||||||||||
Vested and expected to vest at September 30, 2011 |
1,180,953 | $ | 9.13 | 8.5 | $ | 7,452 | ||||||||||
Exercisable as of September 30, 2011 |
419,851 | $ | 4.41 | 7.2 | $ | 4,433 | ||||||||||
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 Companys common stock
at September 30, 2011 multiplied by the number of shares that would have been received by the
option holders had all option holders exercised their options on September 30, 2011. The aggregate
intrinsic value of options exercised during the three months ended September 30, 2011 and 2010 was
$233 and $9, respectively. The aggregate intrinsic value of options exercised during the nine
months ended September 30, 2011 and 2010 was $1,698 and $75, respectively.
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The total unrecognized compensation cost related to outstanding stock options is $7,976 at
September 30, 2011. This amount is expected to be recognized over a weighted-average period of
3.3 years.
The following table summarizes information about stock options outstanding and exercisable at
September 30, 2011:
Options Exercisable at | ||||||||||||||||||||
Options Outstanding at September 30, 2011 | September 30, 2011 | |||||||||||||||||||
Weighted-Average | ||||||||||||||||||||
Remaining | Weighted- | Weighted- | ||||||||||||||||||
Range of | Contractual Life | Average | Average | |||||||||||||||||
Exercise Price | Number | (Yrs.) | Exercise Price | Number | Exercise Price | |||||||||||||||
$0.08 $0.14 |
91,207 | 3.8 | $ | 0.10 | 91,207 | $ | 0.10 | |||||||||||||
$0.14 $1.90 |
14,434 | 7.4 | 1.60 | 9,743 | 1.46 | |||||||||||||||
$2.04 $8.18 |
448,618 | 7.9 | 3.09 | 232,874 | 2.77 | |||||||||||||||
$10.99 $16.67 |
789,970 | 9.5 | 14.10 | 86,027 | 13.76 | |||||||||||||||
$16.71 $17.50 |
27,000 | 9.7 | 17.10 | | | |||||||||||||||
Total |
1,371,229 | 8.6 | $ | 9.49 | 419,851 | $ | 4.41 | |||||||||||||
The fair value of common stock options is estimated on the
date of grant using the Black-Scholes option-pricing model with the following assumptions used:
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Estimated dividend yield |
0 | % | 0 | % | ||||
Expected stock price volatility |
80.00 - 90.00 | % | 100.00 | % | ||||
Weighted-average risk-free interest rate |
1.2 - 2.7 | % | 2.6 - 3.0 | % | ||||
Expected life of options (in years) |
6.25 | 6.25 |
Stock-based compensation expense of $730 and $89 was recorded during the three months ended
September 30, 2011 and 2010, respectively, and $1,588 and $232 was recorded during the nine months
ended September 30, 2011 and 2010, respectively, related to the Companys outstanding stock
options. The weighted average grant date fair value per share for stock options granted in the
three months ended September 30, 2011 was $11.21. There were no stock options granted during the
three months ended September 30, 2010. The weighted average grant date fair value per share for
stock options granted in the nine months ended September 30, 2011 and 2010 was $10.71 and $3.08,
respectively.
As discussed in Note 3, the Company recognized stock-based compensation expense of $367 and $1,099
in the accompanying consolidated statement of operations for the three and nine months ended
September 30, 2011, respectively, related to the earn-out arrangement with certain former
shareholders of AECsoft.
Warrants
As of September 30, 2011, there were no outstanding warrants. As of December 31, 2010, the Company
had warrants outstanding representing 26,080 shares of common stock, with all of the warrants being
exercisable as of December 31, 2010 to purchase the Companys common stock at $0.08 per share. The
fair value of each warrant was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: risk free interest rate of 3.47%;
expected lives of five years; dividend yield of 0%; and volatility factor of 80%. All warrants were
issued in conjunction with prior credit agreements that have since terminated and the fair value of
the warrants was recorded as a financing cost and amortized to interest expense over the term of
the related debt. In February 2011, the outstanding warrants
were exercised at a purchase price of
$0.08 per share. The warrant holders utilized a cashless exercise option, resulting in 25,928
shares of common stock issued.
10. Income Taxes
The Company computes its provision for income taxes by applying the estimated annual effective tax
rate, adjusted for any material or discrete items. The Companys effective tax rate of 48.4% and 43.4% for the
nine months ended September 30, 2011 and 2010, respectively, was higher than the federal statutory
rate of 34 percent primarily due to state income taxes and non-deductible expenses. For the nine
months ended September 30, 2011, non-deductible expenses included stock-based compensation,
stock-based compensation associated with the earn-out arrangement and amortization of acquired
intangible assets.
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11. Commitments and Contingencies
Legal Contingencies
In 2001, the Company was named as a defendant in several securities class action complaints filed
in the United States District Court for the Southern District of New York originating from its
December 1999 initial public offering. The complaints alleged, among other things, that the
prospectus used in the Companys initial public offering contained material misstatements or
omissions regarding the underwriters allocation practices and compensation and that the
underwriters manipulated the aftermarket for the Companys stock. These complaints were
consolidated along with similar complaints filed against over 300 other issuers in connection with
their initial public offerings. After several years of litigation and appeals related to the
sufficiency of the pleadings and class certification, the parties agreed to a settlement of the
entire litigation, which was approved by the Court on October 5, 2009. Notices of appeal to the
Courts order have been filed by various appellants. The Company has not incurred significant costs
to date in connection with its defense of these claims since this litigation is covered by its
insurance policy. The Company believes it has sufficient coverage under its insurance policy to
cover its obligations under the settlement agreement. Accordingly, the Company believes the
ultimate resolution of these matters will not have an impact on its financial position and,
therefore, it has not accrued a contingent liability as of September 30, 2011 or December 31, 2010
related to this litigation.
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 does not currently believe the resolution of these actions will have a material adverse
effect upon the Companys financial position, results of operations or cash flows.
Warranties and Indemnification
The Companys 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 Companys
arrangements also include certain provisions for indemnifying customers against liabilities if its
products or services infringe a third partys 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.
12. Subsequent Events
Lease
On October 10, 2011, the Company entered into a lease agreement for additional space of
approximately 12,000 square feet at its home office. The Company is committed to a total of
approximately 61,000 square feet of office space through January 31, 2017.
Earn-Out Arrangement Amendment
On October 25, 2011, the Company entered into an agreement which amended the earn-out provisions
pertaining to certain of the former AECsoft shareholders to remove the revenue-based performance
conditions and add certain other performance conditions.
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SCIQUEST, INC.
ITEM 2. | MANAGEMENTS 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 InformationItem 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 managements 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.
Except as otherwise indicated, all share and per share information referenced in this report
has been adjusted to reflect the one-for-two reverse split of our common stock that occurred on
September 20, 2010.
As used herein, except as otherwise indicated by context, references to we, us, our, or
the Company refer to SciQuest, Inc.
Overview
We provide a leading on-demand strategic procurement and supplier enablement solution that
integrates 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 organizations buying patterns. Using our managed SciQuest Supplier
Network, our customers do business with more than 30,000 unique suppliers and spend billions of
dollars annually.
In the nine months ended September 30, 2011, we acquired all of the capital stock of AECsoft
USA, Inc. and AEC Global (Shanghai) Co., Ltd. (collectively, AECsoft), which is a leading
provider of supplier management and sourcing technology. AECsofts technology has been incorporated
into our product offering as new Total Supplier Manager, Sourcing Director and Supplier Diversity
Manager modules as well as providing increased functionality for some of our preexisting modules.
The purchase price consisted of approximately $9.3 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
conditions over the next three fiscal years and continued employment with us. These shares will be
recognized as stock-based 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 AECsofts products and services during each of 2011, 2012
and 2013. In October 2011, the performance conditions for certain of the former AECsoft
shareholders were amended to remove the revenue-based conditions and add certain other conditions.
If the performance conditions are met in full, we will issue 121,951 shares of common stock on or
about March 31, 2012, 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.
Key Financial Terms and Metrics
We have several key financial terms and metrics. During the nine months ended September 30,
2011, there were no changes in the definitions of our key financial terms and metrics, which are
discussed in more detail under the heading Managements Discussion and Analysis of Financial
Condition and Results of OperationsFinancial Terms and Metrics included in our annual report on
Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange
Commission on March 9, 2011.
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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, 2011, 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 as filed with the Securities and Exchange Commission
for additional information regarding our critical accounting policies, as well as a description of
our other significant accounting policies.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 13,774 | $ | 10,771 | $ | 39,208 | $ | 31,459 | ||||||||
Cost of revenues (1) (2) |
3,560 | 2,329 | 9,521 | 6,776 | ||||||||||||
Gross profit |
10,214 | 8,442 | 29,687 | 24,683 | ||||||||||||
Operating expenses: (1) |
||||||||||||||||
Research and development |
3,001 | 2,173 | 8,670 | 6,092 | ||||||||||||
Sales and marketing |
3,396 | 2,815 | 10,815 | 8,784 | ||||||||||||
General and administrative |
2,107 | 1,471 | 6,220 | 4,106 | ||||||||||||
Management bonus plan associated with initial public offering |
| 5,888 | | 5,888 | ||||||||||||
Amortization of intangible assets |
209 | 75 | 628 | 226 | ||||||||||||
Total operating expenses |
8,713 | 12,422 | 26,333 | 25,096 | ||||||||||||
Income (loss) from operations |
1,501 | (3,980 | ) | 3,354 | (413 | ) | ||||||||||
Interest and other income, net |
(1 | ) | 29 | 56 | 1,718 | |||||||||||
Income (loss) before income taxes |
1,500 | (3,951 | ) | 3,410 | 1,305 | |||||||||||
Income tax (expense) benefit |
(741 | ) | 1,486 | (1,651 | ) | (566 | ) | |||||||||
Net income (loss) |
$ | 759 | $ | (2,465 | ) | $ | 1,759 | $ | 739 | |||||||
(1) | Amounts include stock-based compensation expense, as follows: |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenues |
$ | 105 | $ | 21 | $ | 213 | $ | 52 | ||||||||
Research and development |
279 | 22 | 794 | 197 | ||||||||||||
Sales and marketing |
295 | 21 | 854 | 139 | ||||||||||||
General and administrative |
476 | 85 | 1002 | 517 | ||||||||||||
$ | 1,155 | $ | 149 | $ | 2,863 | $ | 905 | |||||||||
(2) | Cost of revenues includes amortization of capitalized software development costs of: |
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Amortization of capitalized software development costs |
$ | 105 | $ | 70 | $ | 271 | $ | 167 | ||||||||
Amortization of acquired software |
42 | | 126 | | ||||||||||||
$ | 147 | $ | 70 | $ | 397 | $ | 167 | |||||||||
The following table sets forth, for the periods indicated, our results of operations
expressed as a percentage of revenues:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenues |
26 | 22 | 24 | 21 | ||||||||||||
Gross profit |
74 | 78 | 76 | 79 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
22 | 20 | 22 | 19 | ||||||||||||
Sales and marketing |
25 | 26 | 27 | 28 | ||||||||||||
General and administrative |
15 | 13 | 16 | 13 | ||||||||||||
Management bonus plan associated with initial public offering |
| 55 | | 19 | ||||||||||||
Amortization of intangible assets |
1 | 1 | 2 | 1 | ||||||||||||
Total operating expenses |
63 | 115 | 67 | 80 | ||||||||||||
Income (loss) from operations |
11 | (37 | ) | 9 | (1 | ) | ||||||||||
Interest and other income, net |
| | | 5 | ||||||||||||
Income (loss) before income taxes |
11 | (37 | ) | 9 | 4 | |||||||||||
Income tax (expense) benefit |
(5 | ) | 14 | (4 | ) | (2 | ) | |||||||||
Net income (loss) |
6 | % | (23 | )% | 5 | % | 2 | % | ||||||||
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Revenues. Revenues for the three months ended September 30, 2011 were $13.8 million, an
increase of $3.0 million, or 28%, over revenues of $10.8 million for the three months ended
September 30, 2010. The increase in revenues resulted primarily from an increase in the number of
customers from 177 as of September 30, 2010 to 325 as of September 30, 2011, recognition of revenue
for a full three-month period for the new customers added in, and subsequent to, the three months
ended September 30, 2010, as well as new sales resulting from the acquisition of AECsoft in January
2011. We have increased our customer count through our continued efforts to enhance brand
awareness, our sales and marketing efforts, and our AECsoft acquisition in January 2011.
Cost of Revenues. Cost of revenues for the three months ended September 30, 2011 was
$3.6 million, an increase of $1.3 million, or 57%, over cost of revenues of $2.3 million for the
three months ended September 30, 2010. As a percentage of revenues, cost of revenues increased to
26% for the three months ended September 30, 2011 from 21% from the three months ended September
30, 2010. The increase in dollar amount primarily resulted from a $1.0 million increase in
employee-related costs attributable to our existing and additional implementation service
personnel, and a $0.1 million increase in stock-based compensation expense. We had 110 full-time
equivalents in our implementation services, supplier enablement services, customer support, and
client partner organizations at September 30, 2011, of which 16 were added as part of our
acquisition of AECsoft, compared to 70 full-time equivalents at September 30, 2010.
Research and Development Expenses. Research and development expenses for the three months
ended September 30, 2011 were $3.0 million, an increase of $0.8 million, or 36%, from research and
development expenses of $2.2 million for the three months ended September 30, 2010. As a percentage
of revenues, research and development expense increased to 22% for the three months ended September
30, 2011 from 20% for the three months ended September 30, 2010. The increase in dollar amount was
due primarily to a $0.3 million increase in employee-related costs attributable to our existing and
additional research and development personnel, a $0.3 million increase in stock-based compensation
expense, and a $0.2 million increase in other research and development spend. We had 69 full-time
equivalents in our research and development organization at September 30, 2011, of which 2 were
added as part of our acquisition of AECsoft, compared to 60 full-time equivalents at September 30,
2010.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended
September 30, 2011 were $3.4 million, an increase of $0.6 million, or 21%, over sales and marketing
expenses of $2.8 million for the three months ended September 30, 2010. As a percentage of
revenues, sales and marketing expenses decreased to 25% for the three months ended September 30,
2011 from 26% for the three months ended September 30, 2010. The increase in dollar amount was due
primarily to a $0.4 million increase in employee-related costs attributable to our existing and
additional sales and marketing personnel, and a $0.3 million increase in stock-based compensation
expense. We had 51 full-time equivalents in our sales and marketing organization at September 30,
2011, of which 4 were added as part of our acquisition of AECsoft, compared to 46 full-time
equivalents at September 30, 2010.
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General and Administrative Expenses. General and administrative expenses for the three months
ended September 30, 2011 were $2.1 million, an increase of $0.6 million, or 40%, over general and
administrative expenses of $1.5 million for the three months ended September 30, 2010. As a
percentage of revenues, general and administrative expenses increased to 15% for the three months
ended September 30, 2011, from 14% for the three months ended September 30, 2010. The increase was
primarily due to a $0.2 million increase in employee-related costs attributable to our existing and
additional general and administrative personnel, and a $0.4 million increase in stock-based
compensation expense. We had 18 full-time equivalents in our general and administrative
organization at September 30, 2011, compared to 13 full-time equivalents at September 30, 2010.
Management Bonus Plan Associated with Initial Public Offering. The one-time expense from the
management bonus associated with the initial public offering for the three months ended September
30, 2010 was $5.9 million, or 55% of revenues, compared to none for the three months ended
September 30, 2011. In 2010, we paid one-time cash bonuses to certain members of management in
connection with the initial public offering. The total bonus payments of $5.9 million are
recognized as operating expenses in the three months ended September 30, 2010.
Amortization of Intangible Assets. Amortization of intangible assets for the three months
ended September 30, 2011 were $0.2 million, an increase of $0.1 million or 100%, over amortization
of intangible assets of $0.1 million for the three months ended September 30, 2010. As a percentage
of revenues, amortization of intangible assets was 1% for the both the three months ended September
30, 2011 and 2010. The increase in dollar amount was due to amortization attributable to intangible
assets acquired in connection with our acquisition of AECsoft in January 2011.
Income Tax (Expense) Benefit. Income tax expense for the three months ended September 30,
2011 was $0.7 million, compared to a $1.5 million benefit for the three months ended September 30,
2010. The expense for the three months ended September 30, 2011 was based on increases in both our
taxable income and our effective tax rate. The benefit for the three months ended September 30,
2010 resulted from an adjustment to our projected annual pre-tax income due to the additional
expense associated with the management bonus in connection with the initial public offering, which
adjusted our estimated effective tax rate.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Revenues. Revenues for the nine months ended September 30, 2011 were $39.2 million, an
increase of $7.7 million, or 24%, over revenues of $31.5 million for the nine months ended
September 30, 2010. The increase in revenues resulted primarily from an increase in the number of
customers from 177 as of September 30, 2010 to 325 as of September 30, 2011, recognition of revenue
for a full nine-month period for the new customers added in, and subsequent to, the nine months
ended September 30, 2010, as well as new sales resulting from the acquisition of AECsoft in January
2011. We have increased our customer count through our continued efforts to enhance brand
awareness, our sales and marketing efforts, and our AECsoft acquisition in January 2011.
Cost of Revenues. Cost of revenues for the nine months ended September 30, 2011 was
$9.5 million, an increase of $2.7 million, or 40%, over cost of revenues of $6.8 million for the
nine months ended September 30, 2010. As a percentage of revenues, cost of revenues increased to
24% for the nine months ended September 30, 2011 from 22% from the nine months ended September 30,
2010. The increase in dollar amount primarily resulted from a $2.1 million increase in
employee-related costs attributable to our existing and additional implementation service
personnel, a $0.2 million increase in stock-based compensation expense, and a $0.4 million increase
in other spend. We had 110 full-time equivalents in our implementation services, supplier
enablement services, customer support, and client partner organizations at September 30, 2011, of
which 16 were added as part of our acquisition of AECsoft, compared to 70 full-time equivalents at
September 30, 2010.
Research and Development Expenses. Research and development expenses for the nine months
ended September 30, 2011 were $8.7 million, an increase of $2.6 million, or 43%, from research and
development expenses of $6.1 million for the nine months ended September 30, 2010. As a percentage
of revenues, research and development expense increased to 22% for the nine months ended September
30, 2011 from 19% for the nine months ended September 30, 2010. The increase in dollar amount was
due primarily to a $1.3 million increase in employee-related costs attributable to our existing and
additional research and development personnel, a $0.6 million increase in stock-based compensation
expense, and a $0.5 million increase in other research and development spend. We had 69 full-time
equivalents in our research and development organization at September 30, 2011, of which 2 were
added as part of our acquisition of AECsoft, compared to 60 full-time equivalents at September 30,
2010.
Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended
September 30, 2011 were $10.8 million, an increase of $2.0 million, or 23%, over sales and
marketing expenses of $8.8 million for the nine months ended September 30, 2010. As a percentage of
revenues, sales and marketing expenses were 28% for both the nine months ended September 30, 2011
and 2010. The increase in dollar amount was due primarily to a $0.9 million increase in
employee-related costs attributable to our existing and additional sales and marketing personnel, a
$0.7 million increase in stock-based compensation expense, and a $0.4 million increase in other
sales and marketing spend. We had 51 full-time equivalents in our sales and marketing organization
at September 30, 2011, of which 4 were added as part of our acquisition of AECsoft, compared to
46 full-time equivalents at September 30, 2010.
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General and Administrative Expenses. General and administrative expenses for the nine months
ended September 30, 2011 were $6.2 million, an increase of $2.1 million, or 51%, over general and
administrative expenses of $4.1 million for the nine months ended September 30, 2010. As a
percentage of revenues, general and administrative expenses increased to 16% for the nine months
ended September 30, 2011, from 13% for the nine months ended September 30, 2010. The increase was
primarily due to a $0.7 million increase in employee-related costs attributable to our existing and
additional general and administrative personnel, a $0.8 million increase in public company costs, a
$0.5 million increase in stock-based compensation expense, and a $0.1 million increase in
acquisition related costs attributed to our acquisition of AECsoft in January 2011. We had
18 full-time equivalents in our general and administrative organization at September 30, 2011,
compared to 13 full-time equivalents at September 30, 2010.
Management Bonus Plan Associated with Initial Public Offering. The one-time expense from the
management bonus associated with the initial public offering for the nine months ended September
30, 2010 was $5.9 million, or 19% of revenues, compared to none for the nine months ended September
30, 2011. In 2010, we paid one-time cash bonuses to certain members of management in connection
with the initial public offering. The total bonus payments of $5.9 million are recognized as
operating expenses in the nine months ended September 30, 2010.
Amortization of Intangible Assets. Amortization of intangible assets for the nine months
ended September 30, 2011 were $0.6 million, an increase of $0.4 million or 200%, over amortization
of intangible assets of $0.2 million for the nine months ended September 30, 2010. As a percentage
of revenues, amortization of intangible assets increased to 2% for the nine months ended September
30, 2011 from 1% for the nine months ended September 30, 2010. The increase in dollar amount was
due to amortization attributable to intangible assets acquired in connection with our acquisition
of AECsoft in January 2011.
Interest and Other Income. Interest and other income for the nine months ended September 30,
2011 was $0.1 million, a decrease of $1.6 million or 94%, over $1.7 million for the nine months
ended September 30, 2010. As a percentage of revenues, interest and other income was 5% for the
nine months ended September 30, 2010. This decrease was due to a gain on the sale of warrants we
had in an unaffiliated private company during the nine months ended September 30, 2010.
Income Tax Expense. Income tax expense for the nine months ended September 30, 2011 was
$1.7 million, an increase of $1.1 million, or 183%, over income tax expense of $0.6 million for the
nine months ended September 30, 2010. The increase was due to increases in both our taxable income
and our effective tax rate.
Liquidity
Net Cash Flows from Operating Activities
Net cash provided by operating activities was $11.3 million during the nine months ended
September 30, 2011. 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 $44 million during the nine months ended September 30,
2011. 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 $21 million during the nine
months ended September 30, 2011.
For the nine months ended September 30, 2011, net cash provided by operating activities of
$11.3 million was primarily the result of the following, exclusive of acquired assets and
liabilities, $1.8 million of net income plus a $3.7 million increase in deferred revenues, non-cash
stock-based compensation of $2.9 million, non-cash depreciation and amortization of $1.6 million, 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 and
other assets.
For the nine months ended September 30, 2010, net cash provided by operating activities of
$2.8 million was primarily the result of $0.7 million of net income plus a $1.4 million decrease in
accounts receivable, non-cash stock-based compensation of $0.9 million, non-cash depreciation and
amortization of $0.8 million, a $0.4 million decrease in deferred taxes, and a $0.2 million
non-recurring contribution of stock to fund a charitable trust, less a $1.7 million gain on the
sale of warrants. Our accounts receivable typically decrease in our third quarter due to our
historically lower levels of new sales in our third quarter.
As of September 30, 2011, we had net operating loss carryforwards of approximately
$190 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 income tax payments at that
time. In addition, the limitations on utilizing net operating loss carryforwards and other minimum
state taxes may also increase our overall tax obligations. We expect that if we generate taxable
income and/or we are not allowed to use net operating loss carryforwards for federal/state income
tax purposes, our cash generated from operations will be adequate to meet our income tax
obligations.
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Net Cash Flows from Investing Activities
For the nine months ended September 30, 2011, net cash used in investing activities was
$15.8 million, consisting of the acquisition of AECsoft, net of cash acquired, of $7.3 million, the
net purchase of $7.1 million of short-term investments, various capital expenditures of
$0.8 million and capitalization of $0.6 million of software development costs. In general, our
capital expenditures are for our network infrastructure to support our increasing customer base and
growth in new business and for internal use, such as equipment for our increasing employee
headcount.
For the nine months ended September 30, 2010, net cash provided by investing activities was
$1.0 million, consisting of a gain on the sale of warrants of $1.7 million and a decrease in
restricted cash of $0.4 million, offset by various capital expenditures of $0.5 million and
capitalization of $0.5 million of software development costs. The restricted cash collateralized
our line of credit, which was obtained in 2008 and repaid and extinguished in 2010.
Net Cash Flows from Financing Activities
For the nine months ended September 30, 2011, net cash provided by financing activities was
$15.1 million, consisting primarily of $15.4 million in proceeds from our public offering net of
underwriting discounts, offset by $0.4 million expenditures for public offering costs.
For the nine months ended September 30, 2010, net cash provided by financing activities was
$14.4 million, consisting primarily of $53.0 million in proceeds from our public offering net of
underwriting discounts, offset by $1.9 million expenditures for public offering costs, a $36.2
million payment for the redemption of all outstanding preferred stock, and a $0.4 million repayment
of our line of credit.
Off-Balance Sheet Arrangements
As of September 30, 2011, 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, to acquire
new businesses, products or technologies, the sales and marketing resources needed to further
penetrate our targeted vertical markets and gain acceptance of new modules we develop, 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 research and
development, sales and marketing and capital expenditures to decline as a percentage of revenues,
but increase in absolute dollars 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.
On April 5, 2011, the Company completed a secondary public offering of 1,000,000 shares of
common stock at an offering price of $14.25 per share. On April 13, 2011, the Company completed the
additional sale of 150,000 shares of common stock at an offering price of $14.25 per share pursuant
to the underwriters over-allotment option. The Company received aggregate net proceeds of
approximately $15 million, after payment of underwriting discounts and commissions and legal,
accounting and other fees incurred in connection with the offering and the over-allotment option.
We believe our cash and cash equivalents, the proceeds from the public offering that closed in
April, and cash flows from our operations will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months.
During the last three years, inflation and changing prices have not had a material effect on
our business, and we do not expect that inflation or changing prices will materially affect our
business in the foreseeable future.
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Contractual and Commercial Commitment Summary
We have contractual obligations that require us to make future cash payments. On June 6, 2011
and October 10, 2011, the Company entered into lease agreements that increased the amount of leased
space for the Companys headquarters to a total of approximately 61,000 square feet through January
31, 2017. As a result, the contractual and commercial commitments that are discussed under the
heading Managements Discussion and Analysis of Financial Condition and Results of
OperationsContractual and Commercial Commitment Summary included in our annual report on Form
10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange
Commission on March 9, 2011 have been updated as follows:
Payments Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Contractual Obligations | Total | 1 Year | 1 - 3 Years | 3 - 5 Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease commitments |
$ | 7,121 | $ | 668 | $ | 2,539 | $ | 2,479 | $ | 1,435 |
Seasonality
Our new business sales normally fluctuate as a result of seasonal variations in our business,
principally due to the timing of client budget cycles. Historically, we have had lower new sales in
our first and third quarters than in the remainder of our year. Our expenses, however, do not vary
significantly as a result of these factors, but 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 timing of new business and the payment of annual bonuses. Historically, due to
lower new sales 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, and due to
the timing of client budget cycles, 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. This pattern may change, however, as a result of acquisitions, new
market opportunities or new product introductions.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency Exchange Risk.
We bill our customers predominately in U.S. dollars and receive payment predominately in
U.S. dollars. Accordingly, our results of operations and cash flows are not materially subject to
fluctuations due to changes in foreign currency exchange rates. If we grow sales of our solution
outside of the United States, our contracts with foreign customers may be denominated in foreign
currency and may become subject 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, we believe there is no material risk of exposure.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms, and that such information is accumulated and communicated to us, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures, we
recognize that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, as ours are designed to do,
and we necessarily were required to apply our judgment in evaluating whether the benefits of the
controls and procedures that we adopt outweigh their costs.
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an
evaluation as of September 30, 2011 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 September
30, 2011, were effective for the purposes stated above.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection
with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred
during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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SCIQUEST, INC.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
In 2001, we were named as a defendant in several securities class action complaints filed in
the United States District Court for the Southern District of New York originating from our
December 1999 initial public offering. The complaints alleged, among other things, that the
prospectus used in our December 1999 initial public offering contained material misstatements or
omissions regarding the underwriters allocation practices and compensation and that the
underwriters manipulated the aftermarket for our stock. These complaints were consolidated along
with similar complaints filed against over 300 other issuers in connection with their initial
public offerings. After several years of litigation and appeals related to the sufficiency of the
pleadings and class certification, the parties agreed to a settlement of the entire litigation,
which was approved by the Court on October 5, 2009. Notices of appeal to the Courts order have
been filed by various appellants. We have not incurred significant costs to date in connection with
our defense of these claims since this litigation is covered by our insurance policy. We believe we
have sufficient coverage under our insurance policy to cover our obligations under the settlement
agreement. Accordingly, we believe the ultimate resolution of these matters will not have an impact
on our financial position and, therefore, we have not accrued a contingent liability as of
September 30, 2011.
We are not party to any other material legal proceedings at this time. From time to time, we
may be subject to legal proceedings and claims in the ordinary course of business.
ITEM 1A. | RISK FACTORS |
There have been no material changes from the Risk Factors we previously disclosed in our
annual report on Form 10-K for the year ended December 31, 2010, which was filed with the
Securities and Exchange Commission on March 9, 2011.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | (REMOVED AND RESERVED) |
ITEM 5. | OTHER INFORMATION |
Not applicable.
ITEM 6. | EXHIBITS |
Exhibit | |||
Number | Description | ||
31.1 | * | Rule 13a-14(a)/15d-14(a) Certification, executed by Stephen J. Wiehe, President, Chief
Executive Officer and Director of SciQuest. |
|
31.2 | * | Rule 13a-14(a)/15d-14(a) Certification, executed by Rudy C. Howard, Chief Financial Officer
of SciQuest. |
|
32.1 | ** | Section 1350 Certification, executed by Stephen J. Wiehe, President, Chief Executive
Officer and Director of SciQuest. |
|
32.2 | ** | Section 1350 Certification, executed by Rudy C. Howard, Chief Financial Officer of SciQuest. |
* | Filed herewith. |
|
** | Furnished herewith. |
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SCIQUEST, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCIQUEST, INC. (Registrant) |
||||
By: | /s/ Rudy C. Howard | |||
Rudy C. Howard | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 10, 2011 |
||||
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